California's FAIR Plan Policy Isn't So Fair
June 5, 2017
This week a California Court of Appeals overturned the District courts' decision that California FAIR Plan's policy of providing the cost of repairing a lower income fire-damaged home wasn't required, even though a similar loss in a wealthy neighborhood would have been covered. The case is California Fair Plan Association v. Garnes, No. 16-cv-280 T (W.D.N.Y. May 7, 2017).
In 2011, the Garnes' home in Richmond, CA was seriously damaged by a fire. Marlene Garnes had purchased a fire insurance policy for the property with a policy limit of $425,000 from the California FAIR Plan Association. The FAIR Plan Association is California's insurer of last resort. The disputed issue is how much coverage Garnes is entitled to under her fire insurance policy. The insured argues that she should receive the amount that it would take to repair her house, minus depreciation. The parties agreed the net amount of cost to repair would be $320,000. FAIR contends in the case at hand that the policy they had issued to the insured, as well as the Insurance Code, allow it to pay the insured the lesser of that amount or the fair market value of the house, which at the time of the fire was $75,000.
The California Insurance Commissioner, Dave Jones, submitted an amicus brief in support of the insured, referencing section 2501 of the Insurance Code, which provides that under an open fire insurance policy that pays "actual cash value" (like the Garnes policy) the loss can be determined to be a "partial loss to the structure" the measure for which is "the amount it would cost to repair, rebuild, or replace the thing lost or injured" minus depreciation, or the "policy limit, whichever is less". Although FAIR put in policy provisions that changed the terms to limit payments for repairs to the fair market value of the house, they failed to have these changes approved by the Insurance Commissioner before using the terms in their policies.
Since the changed policy language was not approved by the Insurance Commissioner, provisions in the Insurance Code will be followed. The Court of Appeals relied upon the Insurance Commissioner's analysis of the Insurance Code language to determine that only paying out the fair market value of the home would be bad policy. If payments for repairs was limited to the fair market value of the home, it would reduce payments for homeowners in low income neighborhoods where home values are low, in effect discriminating against homeowners in lower income neighborhoods.
Editor's Note: It has also been noted that this claim occurred during the middle of the housing crisis. While the home was worth around $75,000 at the time of the fire, in the current market it would be worth nearly $400,000. Paying the fair market value of the home at the time of the incident would have resulted in the insurer benefiting from taking unfair advantage of market conditions in order to underpay claims.