SACRAMENTO, Calif. — The state’s Insurance Commissioner Ricardo Lara announced changes to the California FAIR Plan – the so-called ‘insurer of last resort’ – Friday.
The California FAIR Plan will be expanding the amount of coverage it can offer to large commercial policyholders, including HOAs.
Currently capped at $20 million, Friday’s agreement with the FAIR Plan will allow Division I Commercial Property Insurance policies up to $100 million of coverage - $20 million per building, up to five buildings. The FAIR Plan has up to eight months to make these new limits available for commercial customers, so Friday’s news just gets the ball rolling.
“The FAIR Plan appreciates the Insurance Commissioner’s attempts to seek balance in addressing consumer needs and gaps in the insurance marketplace while protecting the financial stability of the FAIR Plan,” said FAIR Plan spokesperson Jacob Frank.
“The upside is, there's more coverage - right - available for people like homeowners associations,” said insurance expert Karl Susman, with Susman Insurance Agency. “The downside is, we're putting more weight on the California FAIR Plan, which already is so overburdened with exposure.”
The FAIR Plan is where homeowners and commercial properties turn when they can’t find fire insurance on the regular market. State law established it in the late 60s, but it is not funded with taxpayer money. It is, essentially, a fire insurance pool paid into by all insurance companies admitted to do business in the state of California. It has more than 419,500 policies in force with a total risk exposure of more than $392.8 billion as of June 30, making it one of the primary property insurers in the state.
But here’s where the critics of Friday’s announcement come in. In what the agreement calls “the extremely unlikely event” of a major wildfire requiring the FAIR Plan to ask each contributing insurance company to shell out at least a billion dollars in claims, if not more, within a calendar year, the Department of Insurance will now allow insurance companies to charge their policyholders – regardless of whether they’re on the FAIR Plan – a supplemental fee in order to help recoup some or all of the company’s costs.
Advocacy group Consumer Watchdog takes issue with it.
“We think it's outrageous to call a bailout of the insurance industry on the back of home insurance policyholders consumer protection,” said Consumer Watchdog executive director Carmen Balber. “If the FAIR Plan finds itself in financial trouble, that's because the home insurance industry dumped policyholders on the FAIR Plan, and the home insurance industry should be responsible if the FAIR Plan needs help paying its bills.”
Balber questions the legality of that part of the new agreement.
“It's very clear that the statute authorizes the FAIR Plan to assess insurance companies. Nowhere in the law does it say insurance companies can pass that cost on to consumers,” Balber said.
Susman says it would take an exceptionally large disaster to come to that.
“We have to look at the dominoes before it gets to consumers: there has to be a wildfire large enough that the FAIR Plan can't afford it and then an assessment that's done with the admitted insurance carriers, and that's not enough. And then an assessment has to be done on policyholders of the FAIR Plan and that's not enough, so we're way down the line before it would trickle down to consumers,” he said.
Consumer Watchdog isn’t opposed to the entirety of Friday’s agreement, just the part allowing insurers to charge their customers to recoup FAIR Plan costs.
“The plan announced by the insurance commissioner would also direct the FAIR Plan to cover commercial developments worth up to $100 million. That change would improve the safety net for condo owners and renters struggling to find, or pay the extreme cost of, insurance when HOAs and landlords are forced into the less-regulated surplus lines insurance market,” the group wrote in a news release.
This is one part of Lara’s Sustainable Insurance Strategy, an overhaul of California’s insurance regulations meant to help solve the current crisis of affordability and availability of homeowners insurance policies. In recent years, most of California’s major homeowners insurance companies have limited or paused business in the state, citing rising risks due to climate change – including wildfires, the growing costs of building materials and unfavorable regulations.
“It’s critical for Californians to understand that a growing FAIR Plan contributes to our insurance crisis,” Commissioner Lara said in a statement. “By strengthening the FAIR Plan while providing financial stability and solvency protections, we are creating long-term security for consumers, homeowners, and businesses across the state that is long overdue.”
Lara unveiled his Sustainable Insurance Strategy back in September, with a goal of going into effect by the end of this year.
WATCH MORE ON ABC10: Insurance companies request rate hikes | What We Know
