FAIR Plan to assess insurers $1 billion for L.A. fires; consumers may be on the hook for nearly half
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The California FAIR Plan received approval Tuesday from the state’s insurance commissioner to assess its member companies $1 billion to help pay its Los Angeles fire claims — with consumers possibly on the hook for nearly half of that under a new Department of Insurance policy.
The plan said in a letter to Insurance Commissioner Ricardo Lara that it expects losses of roughly $4 billion from the Pacific Palisades, Eaton and Hurst fires.
Established as an insurer of last resort, the plan is backed by California’s licensed property insurers, which are required to pay claims when the plan runs through its funds. However, they can surcharge their own policyholders to recoup some of that assessment under a policy put in place last year by Lara.
Lara claimed that his policy would prevent consumers from having to pay the full cost of any plan assessment on their own insurer. He reiterated that position on Tuesday in announcing approval of the $1-billion carrier assessment — which does not mean that insurers can now assess their own policyholders. That is a separate decision he has yet to make.
“I took this necessary consumer protection action with one goal in mind: The FAIR Plan must pay claims just like any other insurance company. I reject those who are hoping for the failure of our insurance market by spreading fear and doubt. Wildfire survivors can’t cash ‘what ifs’ to pay for food and rent, but they can cash FAIR Plan checks,” he said.
California’s Fair Plan, the state’s insurer of last resort, may be unable to pay billions in claims arising from the Los Angeles fires and may require a bailout that could ultimately be paid by homeowners statewide.
Under Lara’s policy, the plan can assess its member carriers — once it runs through its reserves, reinsurance and catastrophe bonds — up to $1 billion to pay residential claims and $1 billion to pay commercial claims.
The carriers can then surcharge their residential and commercial customers for half of what they are assessed. (Homeowners could not be surcharged for commercial losses.) There are no surcharge limits to any assessments that exceed those totals. The plan said in its letter to Lara that 97% of its L.A. fire claims were residential.
Just two days after the Palisades fire began, legislators introduced a bill that would allow the FAIR Plan to float bonds if the insurer faces “liquidity challenges.” The FAIR Plan said it supports the bill, which has yet to move forward.
Los Angeles advocacy group Consumer Watchdog, which opposed Lara’s allowance of policyholder surcharges last year, said it would seek to block them now. It said the surcharge policy was issued in the form of a “bulletin” and not a regulation subject to typical rulemaking procedures.
“Homeowners across the state shouldn’t be on the hook because insurance companies dumped too many homeowners on the FAIR Plan. We’ll explore every legal option to stop the surcharge if insurers try to make homeowners pay,” said Carmen Balber, executive director of the group.
This is the first time the plan, established in 1968, has assessed its members since a series of fires and separate losses related to the 1994 Northridge earthquake. The assessments totaled $260 million, or $563 million in today’s dollars, according to the Insurance Department. They did not result in policyholder surcharges.
The issue of whether carriers can assess their own policyholders for a FAIR Plan assessment grew in importance amid California’s home insurance crisis, which has seen insurers stop writing new policies and issue nonrenewal notices to existing customers. That has sent desperate homeowners flocking to the FAIR Plan, which offers more limited policies with a $3-million cap on dwelling coverage.
The plan’s rolls have jumped from about 200,000 residential policyholders in 2020 to more than 450,000 as of last September, as its potential liabilities — what it could have to pay out under the worst circumstances — tripled to $458 million.
In its letter to Lara seeking approval for the assessment, the FAIR Plan said it has received 3,485 claims for damage caused by the Palisades fire and about 1,314 claims for damage caused by the Eaton fire, with new claims being reported daily.
The plan has paid $914 million to policyholders, with 45% of the claims reported as total losses, 45% as partial losses and 10% as fair rental value, which covers lost rental income.
That has reduced its cash on hand to $1.2 billion, but the plan said it has other liabilities it needs to pay.
The insurer also has $5.78 billion in reinsurance, which is typically acquired from large multinational firms by front-line insurers to protect themselves in the event of a catastrophe. However, that includes a $900-million deductible and co-payments that raise the plan’s cash payouts to $3.5 billion.
State Farm General asked Monday for an emergency rate increase averaging 22%, saying the Los Angeles County fires have put California’s largest insurer in dire financial straits.
Lara’s directive last year allows for policyholder surcharges, but it is up to insurers to seek them. The insurers are assessed pro rata based on their market share.
State Farm General, the largest home insurer in the state, asked for an emergency 22% rate hike last week due to its L.A. fire losses, which it has yet to disclose but which are believed to be in the multiple billions of dollars.
Jon Farney, chief executive of parent company State Farm Mutual, told The Times last month that the Bloomington, Ill., insurer would recoup what charges it could from its own policyholders as allowed under state law. “If there was a FAIR Plan assessment and the ability to pass that surcharge on, yeah, that’s what we would do,” he said.
Other insurers that have disclosed L.A. fire losses topping $1 billion include Allstate and Chubb.
Travelers Cos. said Tuesday that it expects about $1.7 billion of pretax losses from the wildfires, including from residential and commercial policies, as well as assessments from the FAIR Plan and recoveries from reinsurance.
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