California FAIR Plan Association Takes Legal Action to Protect California Homeowners
LOS ANGELES – The California FAIR Plan Association (FAIR Plan) today filed a notice of appeal challenging portions of a ruling by the Los Angeles Superior Court to prevent unnecessary rate increases for all FAIR Plan policyholders and to safeguard the role of the FAIR Plan in the voluntary insurance marketplace. The FAIR Plan is also planning to request a stay of the California Insurance Commissioner’s order issued September 24, 2021. The FAIR Plan is taking both steps to ensure property owners have basic insurance coverage to protect against fire damage without placing further burdens on the Californians most in need.
The FAIR Plan prevailed in July 2021 when the Los Angeles Superior Court ruled that the California Department of Insurance (CDI) exceeded its legal authority in 2019 when it ordered the FAIR Plan to provide comprehensive homeowners insurance, known as an HO-3 policy. As part of the ruling, however, the court left the door open for the CDI to order the FAIR Plan to provide other new coverages. Subsequently, CDI issued Order No. 2021-2 requiring the FAIR Plan to provide a quasi-HO-3 policy that would provide less coverage than comprehensive homeowners insurance yet would still force the FAIR Plan to offer new types of coverage.
The FAIR Plan is appealing the portion of the ruling holding that the CDI has the authority to order the FAIR Plan to provide new coverages that are already available to consumers from other insurance providers in the voluntary market.
“Forcing the costly buildup and creation of completely new insurance products through the FAIR Plan, the cost of which must be passed on to existing FAIR Plan customers, is not an effective solution to the insurance crisis,” said Anneliese Jivan, president of the California FAIR Plan. “Ultimately, the California Department of Insurance’s order would place more financial burden on existing FAIR Plan customers – whether they can afford it or not. The FAIR Plan was created to provide California property owners with the basic fire insurance coverage they need, when they need it most. The FAIR Plan was never meant to compete with traditional insurance carriers that already provide these coverage options. We are appealing the ruling and contesting the latest CDI order to protect consumers from unnecessary rate increases.”
California law requires the FAIR Plan to provide basic property insurance for property owners who cannot get insurance through the voluntary market, serve as a stabilizing force in the insurance marketplace and maintain actuarially sound rates. The FAIR Plan’s unique role as a last resort for fire insurance is analogous to the California Earthquake Authority, which exists to meet consumers’ need for a specific line of insurance when the voluntary market cannot or will not provide it.
Requiring the FAIR Plan to expand into coverages that are readily available would put the FAIR Plan in direct competition with the voluntary market, which is illegal. In addition, forcing the FAIR Plan to offer new coverages would lead to higher rates for existing FAIR Plan policyholders and a significantly more expensive product than what’s available from traditional insurers.
“California’s insurance availability crisis caused by worsening wildfires in the state has created a lose-lose scenario for California property owners,” said the FAIR Plan’s legal counsel Spencer Kook. “Requiring the FAIR Plan to provide a stripped-down quasi-HO-3 policy, which the Commissioner confusingly dubs a “homeowners policy,” would provide less coverage than would be expected in a comprehensive homeowners policy that is traditionally sold in the marketplace. Commissioner Lara is trying to place an even bigger burden on property owners by forcing the FAIR Plan to provide high-cost comprehensive policies, rather than trusting in Californians to secure the best deal on the coverages they need through available products in the voluntary insurance market.”
In 2019, the FAIR Plan filed a legal complaint in Los Angeles Superior Court to challenge the California Insurance Commissioner’s order earlier that year to provide comprehensive homeowners insurance, known as an HO-3 policy. The FAIR Plan argued that offering an HO-3 policy would be outside its statutory mandate to provide basic property insurance, and because it would increase rates for current FAIR Plan policyholders and put the FAIR Plan in direct competition with the voluntary insurance market. The court issued a stay of the order until it considered the case. After several rounds of oral arguments and briefings, the court ruled in July that the order requiring the FAIR Plan to offer an HO-3 policy was unlawful.
In addition to unnecessarily increasing rates for FAIR Plan policyholders, the CDI’s September 24 order attempting to compel the FAIR Plan to offer a quasi-HO-3 policy would still result in customers needing additional coverage to have the equivalent of a comprehensive homeowners policy, or the equivalent of a FAIR Plan policy plus a Difference in Conditions policy. Specifically, the quasi-HO-3 policy ordered by the CDI would leave policyholders without certain types of important liability coverage found in a comprehensive policy, necessitating a second policy outside the FAIR Plan.
Coverage options referred to as Difference in Conditions policies are readily available within the voluntary market, as indicated on the CDI’s website. A FAIR Plan policy accompanied by a Difference in Conditions policy offers the equivalent of an HO-3 policy. Any homeowner can work with their insurance broker to secure these coverages. Forcing the FAIR Plan to expand lines of coverage would not benefit Californians seeking insurance coverage options at competitive rates, and it would deter competition within the voluntary market, hurting consumers and the insurance industry.
Further, the FAIR Plan does not have the staffing infrastructure or expertise to offer lines of insurance outside basic property coverage. Broadening the scope of the FAIR Plan’s mission and core operations would involve an expensive and time-consuming scaling of personnel with expertise in different lines of insurance, all while the FAIR Plan faces its biggest claims volume ever due to losses incurred in recent record-breaking wildfires. If forced to shift its focus to build new lines of insurance, the FAIR Plan would have to divert resources from its core services, thus slowing aid to victims of devastating fires across the state.
The CDI’s September 24 order also bears unintended consequences for FAIR Plan customers, including the loss of multiline discounts if they drop Difference in Conditions coverage. As a result, a customer with a Difference in Conditions policy that has an auto home discount would see their auto insurance rates increase if they purchase a quasi-HO-3 policy from the FAIR Plan.
“The FAIR Plan remains focused on working with California leaders and policymakers to ensure that property owners have the basic insurance coverage needed to protect against fire damage without compromising the role of the voluntary insurance market or unnecessarily driving up rates,” Jivan added.
About the California FAIR Plan
The California Fair Access to Insurance Requirements (FAIR) Plan is an insurance pool established by law to assure the availability of basic property insurance to people who own insurable property in the State of California and who, beyond their control, have been unable to obtain insurance in the voluntary insurance market. The FAIR Plan provides stability in California’s insurance marketplace. It is committed to strengthening consumer choices in the voluntary insurance market, while ensuring that all homeowners, including those who live in areas threatened by wildfires, have access to basic property coverage and the peace of mind they deserve. For more information, visit www.CFPnet.com.