California’s Fire Insurance Program Faces Challenges and Changes in 2022

As this year’s wildfire season gets underway, homeowners across the fire-prone state of California are bracing for what could be another tumultuous year. Currently, an estimated 198,797 acres have already been burned and 503 structures have been damaged or destroyed, according to the California Department of Forestry and Fire Prevention.*

Unfortunately, the growing number of wildfires has made it difficult for homeowners in California to secure affordable fire insurance coverage as more carriers pull out of the state. This, and the fact that many homeowners are being denied coverage after a loss, has triggered policyholders, consumer advocates and public officials to take action.

Seeing this as a growing issue of concern, last fall Insurance Commissioner Ricardo Lara ordered insurance companies to preserve residential insurance coverage for the more than 325,000 policyholders who have been affected by devastating Northern California wildfires. Lara also issued several moratoriums aimed at preventing insurance carriers from issuing cancellations and non-renewals to wildfire survivors.

California’s FAIR Plan under fire

As an insurance professional, you are already familiar with the California FAIR Plan. The plan, often referred to as “the insurer of last resort,” was established so that all California homeowners with high-risk properties have access to basic fire insurance when coverage in the traditional market is unavailable through no fault of the property owner. Today there are approximately 200,000 homeowners in California who have the FAIR Plan for their fire insurance coverage.

Recently, the FAIR Plan has been subject to growing scrutiny by policyholders filing lawsuits against the insurance program. A recent example is the case of Sarah Mapel vs California FAIR Plan Association. In this lawsuit, the plan was accused of wrongly denying a wildfire claim that caused extensive smoke damage to over $200,000 worth of the plaintiff’s personal property inside her home. According to Mapel, when responding to her claim, “[The California FAIR Plan] sent me a check for $1,100 to buy some HEPA filters and told me to Swiffer my house.” According to how the FAIR Plan was written, Mapel apparently had no coverage under her policy as there was no physical change to her home as a result of the wildfire.

Two reports released last month address two ongoing issues of concern regarding the plan. The first issue relates to the Mapel lawsuit wherein the state has accused the plan of misleading homeowners about the details of their policies involving smoke damage. In fact, consumer advocates say that even today the FAIR Plan continues to deny fire smoke claims, despite the demands for coverage by the California Department of Insurance early last year. The second issue involves the lack of transparency and accountability problems, including steps to improve the handling of claims, among other accusations.  

“I’ve heard from business owners and homeowners alike in wildfire-affected areas that need to purchase FAIR Plan policies and yet cannot get the FAIR Plan [office] to even answer their calls,” said Lara.

Possible solutions and changes

Last month, the California Department of Insurance held an investigatory hearing in Oakland to explore concerns about the plan and possible improvements, including asking the plan managers to find ways to bring down the cost of coverage for homeowners.

“Families across our state are already struggling under the exorbitant cost of housing,” said Wendy Thomas, a county supervisor in El Dorado County. “And seniors on fixed incomes are finding it nearly impossible to have adequate insurance that they can actually afford. The alternative is to underinsure your property and pray you never use [your policy].” (Source: The Mercury News.)

As for smoke damage and the plan, 20 private insurers have since deleted what the California Department of Insurance officials refer to as illegal smoke policy provisions, leading to over $166 million being returned to consumers in 2021.

Other recent changes include expanding the FAIR Plan to offer a homeowners policy along with its original dwelling fire coverage, and giving policyholders more coverage, such as loss of use and water damage, making it easier and less expensive to secure the coverages needed to fully protect their homes. Other changes include increasing commercial property program and business owners program coverage limits and expanding coverage under the plan to include commercial entities such as wineries and farms.

Conclusion

Today, California Department of Insurance officials indicate that they are committed to working with the California FAIR Plan administration to help improve the program for homeowners across the state as the threat of wildfires grows.

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*As of 8/20/22.

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