California condo owners to get expanded FAIR plan fire insurance

More than 419,000 properties are currently insured by the FAIR plan, which has ballooned to become one of the state’s primary insurers.

By Nadia Lopez | Bloomberg

California plans to extend its last-resort insurance program to cover higher-value properties in areas prone to wildfire, adding new potential liabilities for the already stressed plan.

The FAIR plan, which provides coverage to customers who can’t find it elsewhere, will raise limits for commercial properties such as condominiums, the California Department of Insurance said Friday in outlining an agreement with the program. The deal also mapped out how losses will be shared in a catastrophe and beefed up the plan’s public reporting requirements.

Also see: California homeowners sue FAIR Plan, insurer of last resort, over smoke damage coverage

The changes open the door to a short-term expansion in FAIR plan coverage, even as regulators work on an industry overhaul they say will bring private insurers back to the state and reduce reliance on last-resort insurance in the long run. Citing growing risks of wildfires and the inability to raise premiums, insurance companies have dramatically cut back on coverage. Homeowners’ costs have spiked; others have been unable to get coverage at all.

“My action today is intended to close coverage gaps in the short term for many homeowners’ associations, housing construction projects, and larger businesses, so they aren’t forced to pay even higher costs or go without insurance,” Insurance Commissioner Ricardo Lara said in a statement.

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More than 419,000 properties are currently insured by the FAIR plan, which has ballooned to become one of the state’s primary insurers. Its risk exposure approached $400 billion as of June 30, up 26% in six months.

Beyond the FAIR plan, Lara has been developing comprehensive new rules for the industry that would enable insurers in California to propose rate increases based on forward-looking climate change data and reinsurance costs, changes he says will stabilize the market.

In a reminder of the stakes, the FAIR plan agreement was unveiled as the state battles its largest wildfire of the year so far. The Park Fire in Northern California has scorched more than 164,000 acres (66,000 hectares), prompting widespread evacuations and destroying almost 135 structures.

Firefighters are struggling to control the rapidly spreading fire, which remained at 0% containment Friday morning.

In a statement, the FAIR plan said it was working with the insurance department on a “rate filing for the increased commercial policy limit.” It has 120 days to submit the filing and another 120 days after it’s approved to make the policy available to customers.

The planned changes raise the coverage available from $20 million per location to $20 million per building, up to a total of $100 million per location, an effort to ease the strain on homeowners associations and other commercial property owners. The higher limits will be available for three years — enough time for the state’s new regulations to take effect.

While enrollment in the plan will grow and its liabilities will increase in the short-term, the state is responding to “an immediate need,” said Michael Soller, a spokesperson for the insurance department.

The agreement also defines how losses will be shared if the program exhausts its own reserves. In that scenario, the companies will be liable for half the cost of losses of up to $2 billion in total claims — $1 billion for residential and $1 billion for commercial. The other half can be recouped from policyholders if the insurance commissioner approves.

While Lara said the changes would protect policyholders from “an escalating spiral of uncertainty and negative consequences,” critics said the arrangement puts insurance customers at risk of bailing out companies.

“If the FAIR Plan gets into trouble it will be because insurance companies dumped too many Californians onto its books,” said Carmen Balber, executive director of Consumer Watchdog. “Those companies should be on the hook for the fallout, not every consumer in the state.”

The American Property Casualty Insurance Association, a trade group, called the deal “an important step toward restoring the FAIR plan’s financial stability and ensuring consumers have access to the coverage they need.”

Rising risks

In the four months since a Bloomberg Green investigation revealed how California’s FAIR plan was largely unprepared for the rising risks and costs of wildfires, the state has proposed a slew of changes designed to lure private insurers back to the market in an attempt to reduce the number of homeowners relying on the last-resort program.

The FAIR plan is being sued by residents across the state who allege the coverage provided fails to meet minimum legal requirements, leaving them uncompensated for smoke and fire damage. The FAIR plan declined to comment on pending litigation.

Homeowners and policymakers in other states, including Florida, Louisiana and Colorado, are grappling with similar dynamics. US Representative Adam Schiff, a California Democrat who’s running for the Senate, has proposed a federal reinsurance program to stifle soaring home insurance rates.

While insurance companies are nervous over the expanded liability for the California plan, the proposal creates a structure that allows them to spread their risk, said Rex Frazier, president of the Personal Insurance Federation of California, an industry trade group.

“Having a short term expansion where we know that there’s a source of revenue that exists to pay those claims, we understand that and and at this point, we’re certainly open to anything that increases the sustainability of the market,” he said. “It provides a way where we can have some stability instead of right now, which is a very chaotic system.”

The proposed changes also require the plan to report more regularly on its financial status and claims. Currently, the FAIR plan is required to provide a progress report to the state annually.

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