The California FAIR plan & wildfires
California Insurance Commissioner Ricardo Lara determined that the FAIR plan terms were insufficient to meet the growing need for coverage.
Fair Access to Insurance Requirements, known as FAIR plans, were developed, in part, because the high frequency of fire losses in urban areas made it difficult for property owners to find insurance coverage. Coverage was also provided for areas where riots were prevalent and carriers were reluctant to provide coverage. Many plans started in 1968 when Congress established the National Insurance Development Program to offer insurance coverage for riots.
Coverages and eligibility requirements vary by state. Coverage can be provided for both personal and commercial lines. The FAIR plan in California was designed not just for urban areas that had experienced riots, but also for areas that had sustained brush fires.
Over the past few years, California has sustained historic and severe wildfires, and carriers have been tightening underwriting requirements and reviewing what areas they are willing to place coverage in, as well as raising rates and canceling or non-renewing policies. The number of policies in the FAIR plan has increased as standard carriers have non-renewed policies exposed to wildfire hazards. Upon review, California Insurance Commissioner Ricardo Lara determined that the FAIR plan coverages were insufficient to meet the growing need for coverage.
Increasing the coverage options
In light of this, in mid-November 2019, Commissioner Lara ordered the FAIR plan to increase available coverage for those who are unable to obtain coverage elsewhere. He ordered the FAIR plan to offer a comprehensive policy in addition to its current dwelling fire only coverage for homeowners by June 1, 2020. He wants the policy to have traditional features of homeowners policies such as coverage for water damage, personal liability and higher coverage limits. The FAIR plan provides coverage for fire or lightning, smoke and internal explosion for both dwelling and contents.
Optional coverages for the dwelling are extended coverages, which are listed as windstorm or hail, explosion, riot, aircraft and vehicles; optional coverages for contents are the same and include vandalism or malicious mischief. All other perils are not covered. There is no liability coverage and no coverage for additional living expenses.
As people are displaced when the property is significantly damaged or destroyed by fire, the lack of additional living expenses coverage can be a real hardship. The FAIR plan policy is restrictive and with so many residents being impacted by the wildfires, Commissioner Lara wants residents to be able to protect their homes like any other California resident.
The FAIR plan limited dwelling coverage to $1.5 million; however, that was increased to $3 million effective April 2020, because housing costs are so high in California that some insureds were carrying two policies to insure their property. Some insureds were forced to go to surplus lines carriers, as coverage was unavailable any other way. Likewise, the ability to make frequent, smaller payments is something the FAIR plan sees as doable.
However, the FAIR plan filed a petition seeking to have a court annul, vacate or withdraw the order requiring the FAIR plan to offer comprehensive HO 03 type coverages. The FAIR plan is arguing that the commissioner’s actions violate the law and exceed the commissioner’s authority. By forcing the FAIR plan to broaden coverage, the voluntary market has no incentive to provide coverage for premises in fire-prone areas and puts the stability of the FAIR plan at risk. The FAIR plan premiums are statutorily required to be actuarially sound; by forcing the plan to extend coverage, this forces premiums to rise, causing a hardship to policyholders.
Revising what’s FAIR
On December 19, 2019, Commissioner Lara issued a revised plan of operation for the FAIR plan. The original order required the FAIR plan to submit a revised plan of operation within 30 days of the November 14 order. The FAIR plan did not submit a revised plan and sued the department.
The revised order from the department requires the plan to file a rate application for the HO 03 coverage option for review and approval by the department. Because the policy maximum limits have not been raised since 1993, and more people need coverage from the FAIR plan because of industry cancellations and nonrenewals, Commissioner Lara revoked the FAIR plan’s strategy where it was inconsistent with an earlier issued order.
Frequent catastrophes of any nature are a significant issue for the insurance industry. Keeping rates actuarially sound is necessary in order for carriers to remain solvent, but increasing premiums makes it harder for the public to afford the coverage they need.
Restrictive policies such as the FAIR plan try to negotiate the situation by providing targeted coverage for specific perils only, which helps to keep coverage affordable albeit basic in nature. Both the insurance department and the FAIR plan have valid points; it will be interesting to see how this develops in the coming months.
Christine G. Barlow, CPCU, (cbarlow@alm.com) is managing editor of FC&S Expert Coverage Interpretation, the authority on insurance coverage interpretation and analysis for the P&C industry.
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