Californians Made to Pay More for Coverage to Help Bail Out Insurers

California homeowners will be asked to shoulder temporarily higher fees in order to bail out the state's insurer of last resort, the FAIR Plan, after the Los Angeles wildfires caused enormous losses last month.

Newsweek contacted the California Department of Insurance (CDI) for comment by email on Thursday morning.

Why It Matters

The blazes that ravaged Los Angeles County in January are estimated to be the largest wildfire insured loss in American history, having caused billions in damages. According to official data, the wildfires damaged or destroyed more than 17,000 structures, including thousands of homes.

Many of the properties belonged to homeowners who had recently been dropped by their long-term insurers because of rising costs and higher catastrophe exposure, and have found fire coverage only with the FAIR Plan, which acts as the Golden State's insurer of last resort. This type of insurer offers coverage to homeowners who aren't able to find it on the traditional market.

The FAIR Plan was not prepared to face the deluge of enormous damage claims made by Californians who lost their homes to the fires. According to Evercore ISI data reported by Fitch Ratings, the FAIR Plan's estimated losses from the fires are about $6 billion, but the insurer had only $2.6 billion in reinsurance and roughly $200 million in surplus capital as of the most recent March 2024 FAIR plan disclosures.

What To Know

Earlier this week, California Insurance Commissioner Ricardo Lara approved a request for $1 billion in additional funding for the FAIR Plan from its member companies—an action that will temporarily increase costs for most California homeowners. The move, Lara said, was necessary to maintain the "financial solid footing" of the state's insurer of last resort and ensure it will continue paying claims from the wildfires.

Californians will be asked to shoulder only half of the cost of the bailout, while the other half will be taken on by insurance companies under an agreement reached last year. Companies will have to submit filings with the insurance department before collecting the one-time fees from their customers, according to department spokesperson Michael Soller. It's not yet known how high the fees will be.

The action taken by the commissioner also direct the FAIR Plan to hire additional staff to process and pay claims "fairly, fully, and quickly," to use all available funds, including reserves and reinsurance funds, to pay the wildfire survivors' claims; and build up reserves ahead of wildfire season in the summer.

As per the latest CDI estimates, the FAIR Plan had about 451,000 policies in the state. According to the insurer of last resort's latest update, the FAIR Plan received 3,469 claims for damage caused by the Palisades fire and 1,325 claims for damage caused by the Eaton fire as of last Sunday.

During the same period, the FAIR Plan received more than 500 claims that were not related to the Los Angeles County wildfires, including windstorm and other fire claims. New claims, including total-loss claims, continue to be reported daily.

Roughly 45 percent of the wildfire claims received by the insurer were total losses, 45 percent were partial losses and 10 percent were Fair Rental Value only, which covers lost rental income due to a covered peril, including fires.

The FAIR Plan said that it has already paid more than $914 million to policyholders, including advance payments, to cover claims related to the Palisades and Eaton fires. But it was not going to be able to pay the remaining claims without extra funding.

The company's risk exposure has ballooned in recent years: in 2018, it was $50 billion, while last year it had risen to $458 billion.

What People Are Saying

California Insurance Commissioner Ricardo Lara, in a statement released on Tuesday: "I took this necessary consumer protection action with one goal in mind: the FAIR Plan must pay claims just like any other insurance company. [...] Wildfire survivors can't cash 'what ifs' to pay for food and rent, but they can cash FAIR Plan checks.

"The fact that we are once again facing this issue 30 years after wildfires devastated these same communities highlights the need for change. Thirty years of stagnant regulations have placed more people at risk. We will move people away from the FAIR Plan, and insurance companies will write more policies under the Sustainable Insurance Strategy I finalized last year. We must rebuild stronger and be better prepared for future wildfires through common-sense mitigation."

The FAIR Plan, in a recent update: "The FAIR Plan continues to work with lenders and the California Department of Insurance to procure a line of credit so the FAIR Plan can be prepared to pay claims that may result from future catastrophes. The FAIR Plan further supports Assembly Bill 226, which would provide possible future funding opportunities through catastrophe bonds."

What Happens Next

Lara said on Tuesday that he "strongly" supports the passing of legislation this year "that would allow the FAIR Plan to access credit lines and catastrophe bonds to help pay claims in worst-case scenarios." He then urged the California Legislature to "act quickly" and send this legislation to Governor Gavin Newsom's desk.

Are you a California homeowner? We would like to know how you feel about paying higher fees to bail out the California FAIR Plan. Do you think it's right? Who do you think should shoulder the cost of the L.A. wildfires? Contact g.carbonaro@newsweek.com