Well-intended legislation won’t solve California’s insurance woes

By Michael Coffey

The fundamental basis of insurance — pooling risk as a safety net for communities and industries alike — has been around for thousands of years. Since the days of ancient Babylon, policyholders pay a fractional cost of the value of their business or home to a third party, insulating themselves in the rare instance of a claim.

Even the American insurance market predates the Revolutionary War. Founding Father Benjamin Franklin created the colonies’ first fire insurer in 1752, and its first life insurer in 1759, both using inspection and mutual principles.

However, three bills introduced in California’s legislature look to rewire the equations and calculus of risk, rates and payouts determined. This proposed legislation risks the solvency of the Golden State’s already-battered insurance industry and further limits the number of firms able to continue underwriting sector and customer policies in the most populous state in the nation.

The January 2025 Southern California Wildfires were among the costliest disasters in U.S. history, creating a significant “stress event” for the state’s insurance sector. More than 13,000 homes were destroyed, affecting roughly 100,000 people. The estimated insurance loss was estimated to be at least $40 billion.

As of January 2026, 94% of the 42,121 claims have been fully or partially paid, but the deep, decades-old cracks in the foundation of California’s insurance market are now fully exposed.

Insurers had already been fleeing the state since the passage of Prop. 103, the 1988 law that empowered the state’s Department of Insurance to approve or even reduce insurance rates, rather than let the rates be determined by actuaries and traditional risk factors.

Amid growing inflation and increasingly destructive wildfires and other weather-related events, the statistically reliant insurance marketplace has become fractured by government bureaucracy and red tape. In California, adjusting rates in response to a clearly increased risk portfolio is now a months-long process for insurers looking to issue policies.

Unable to respond to changing market conditions in a dynamic manner, many of the country’s largest insurers, have either ceased or severely limited writing new policies in California.

As insurers departed the California marketplace, state residents became increasingly reliant on the California FAIR Plan, established in 1968 as an insurer of last resort. In September 2025, the FAIR Plan reported 645,987 policies in force with more than $696 billion in exposure, a 319% increase since 2021.

Legislators take aim at California insurance woes

The legislative thumb already on the scale for setting rates is now aimed at the other side of the equation — insurance payouts — despite the abundance of evidence that state intervention in the insurance market has only added to Californians’ woes.

State Sen. Steve Padilla (D-San Diego), Chair of the Senate Insurance Committee, has proposed SB 876, which would expand upfront payments by mandating that actual cash value and structure replacement costs be paid quickly, and with interest, following a total loss. It would further double the cost to be paid for the living expenses of policyholders whose homes were destroyed during a disaster during the rebuilding process.

Additional clauses include applying mandatory building code upgrade coverage at the time of rebuild, rather than the time of loss, and requiring insurers submit “disaster recovery plans” to the Department of Insurance.

Meanwhile, Sen. Sasha Renée Pérez (D-Alhambra) has proposed SB 877 and SB 878. The former requires insurers to fully disclose all loss estimate documents and revisions to policyholders, along with explanations of the changes, while the latter imposes automatic 20% interest penalties when insurers delay payments required by law, including stringent 30-day deadlines to pay any undisputed parts of a claim.

If passed, these heavy-handed bills might just serve as the final nails in the coffin of California having a truly independent, free market insurance industry.

By creating these onerous mandates, California continues to try to make insurance a guarantee, instead of a pooled risk.

Losing your home is an unimaginable tragedy, but expecting to pay the bare minimum in underwriting premiums in return for a greater than maximum payout is not fair; it’s a punitive action against an entire industry.

These bills are irresponsibly superimposing unreasonable deadlines and penalties on insurers no longer granted the tools to operate their businesses effectively.

The insurance industry simply isn’t designed for such frequent natural disasters of this kind, year after year. Risks such as fires, floods and earthquakes are supposed to be rare events. As certain risks increase in a particular state or county, so would actuarial risk assumptions that determine insurance rates.

The risk of wildfire has increased incrementally in California, and now one in eight properties across the state face “very high” fire risk. As state and municipal agencies themselves confront a wide class action lawsuit for their own alleged actions and misdeeds exacerbating January’s wildfires, the state of California should focus on creating programs to help mitigate disasters, protect property and business owners rather than make a villain out of the entire insurance industry.

Michael Coffey is an American Board of Trial Advocates attorney and founding partner of insurance litigation firm Coffey Modica, with offices across five states. Contact him at [email protected].