Calif. DOI, FAIR Plan Association dispute role in homeowners market

"My Department issued this revised plan of operation to show we are moving forward as required by law to protect homeowners throughout the state," Commissioner Lara said in a statement. "The FAIR Plan has become the only permanent option for many homeowners abandoned by the private insurance market. The plan will provide homeowners with the option of basic coverage they deserve in order to feel safe and protect our local economies from the state's growing insurance availability crisis." (Credit: A_stockphoto/Shutterstock)

The California Department of Insurance issued a revised plan of operation for the California FAIR Plan Association (FAIR Plan) as required under California law. The action furthers Insurance Commissioner Ricardo Lara's November 14 order, Order No. 2019-2, which revoked portions of the FAIR Plan's current plan of operation and ordered the insurer to make changes to its plan to better serve California homeowners.

The FAIR Plan was required under Insurance Code section 10095(f) to submit a plan of operation within 30 days of the November 14 order. The FAIR Plan, an association located in Los Angeles comprised of all insurers authorized to transact basic property insurance in California, sued the Department of Insurance last month instead, filing a petition for a writ of mandate asking the Los Angeles Superior Court to direct Commissioner Lara to annul, vacate, or withdraw the Order.

The writ argues that the Commissioner's order violates the law, and would force the FAIR Plan out of compliance with its statutory mandate to provide basic property insurance, serve as a stabilizing force in the insurance marketplace, and to maintain actuarially sound rates. (Michael Soller, deputy insurance commissioner for communications at the California Department of Insurance, says Commissioner Lara's November order spells out his authority under California law to approve the plan of operation.)

"We have a responsibility to protect our policyholders and ensure their continuing access to affordable and reliable basic property coverage," Anneliese Jivan, president of FAIR Plan, said in a statement. "We appreciate the efforts of the Commissioner to address the impact of California's devastating wildfires on homeowners. Unfortunately, this Order, as written, would negatively impact consumers and further destabilize the voluntary insurance marketplace because the Order provides no incentive for the private market to offer insurance in areas at risk of wildfire. We regret having to take this action, but we will do everything we can to protect policyholders and provide stability in the insurance marketplace."

The order from up high

Commissioner Lara's Order directed the FAIR Plan to offer comprehensive homeowners insurance, known as an HO-3 policy, in addition to its current dwelling fire-only coverage by June 1, 2020. The revised plan also requires the FAIR Plan to expand its coverage limits from $1.5 million to $3 million and to offer consumers a monthly payment plan and the ability to pay by credit card or electronic funds transfer all without fees.

The California Department of Insurance says Commissioner Lara is taking this action to help homeowners find adequate coverage to protect their homes. They also added that he is also responding to requests made by wildfire survivors who are finding themselves without comprehensive insurance coverage from the admitted insurance marketplace and who have to instead rely on the FAIR Plan for their only homeowners coverage.

"My Department issued this revised plan of operation to show we are moving forward as required by law to protect homeowners throughout the state," Commissioner Lara said in a statement. "The FAIR Plan has become the only permanent option for many homeowners abandoned by the private insurance market. The plan will provide homeowners with the option of basic coverage they deserve in order to feel safe and protect our local economies from the state's growing insurance availability crisis."

FAIR Plan supports certain provisions of Order

While the FAIR Plan is intended as a temporary solution until consumers can find insurance on the standard market, the Department says it is important that its product mirrors traditional coverage as much as possible.

However, the FAIR Plan says, by law, it is limited to offering basic property coverage and is not to compete with the private market. Because HO-3 coverage covers additional perils like liability, water damage and theft, the FAIR Plan says "processing and claims handling for the different perils is substantially different from what the FAIR Plan is equipped to handle nor does the FAIR Plan have expertise in these coverages."

The association also says that attempting to comply with the HO-3 provision "would divert the FAIR Plan's scarce resources from its core mission and lead to significant new costs absorbed by FAIR Plan policyholders."

A press release from the FAIR Plan states that it remains fully supportive of three provisions of the Order:

Increasing the dwelling policy coverage limits from $1.5 million to $3.0 million
Establishing a credit card payment option
Introducing a monthly payment option

"Although FAIR Plan has publicly stated support for some provisions in the order, FAIR Plan's lawsuit conflicts with this statement. The FAIR Plan lawsuit challenges the Commissioner's order in its entirety," says Soller. "FAIR Plan's argument is that it should be allowed [to] refuse to cover more expensive homes unless every FAIR Plan consumer pays higher rates."

Soller says the premium for all homes is calculated using the approved base, whether the coverage is for a $100,000 home or a $3 million dollar home. He added that FAIR Plan has applied for a base-rate increase, which is under consideration.

"With a deadline of April 1 to increase coverage limits, we continue to work in earnest to assist FAIR Plan with its filings so we can resolve outstanding issues to provide this long-overdue change to consumers," says Soller.

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