Bay Area homeowners likely to pay forfCalifornia FAIR Plan insurance bailout

Bay Area homeowners will likely be on the hook for a share of a massive bailout of California’s insurer of last resort after it ran out of money to pay claims arising from the devastating Los Angeles wildfires.

State regulators announced this week they will allow the program, known as the FAIR Plan, to collect $1 billion in emergency payments from private insurers — who are expected to pass a significant portion of those costs on to policyholders across the state.

“This is essential to prevent even greater strain on California’s already unbalanced insurance market and avoiding widespread policy cancellations that would jeopardize coverage for millions of Californians,” the American Property Casualty Insurance Association said in a statement.

It’s still unclear how much homeowners would have to pay, which homeowners would be charged, when they would see a new fee, or how long an increase on their premiums could last.

The amount insurance] companies must send to the FAIR Plan will be based on their market share in California. Under state law, insurers can charge their customers up to half of the $1 billion assessment.

The FAIR Plan is a state-mandated high-risk pool of private insurers for homeowners who can’t find traditional coverage. In recent years, the number of policyholders on the plan has ballooned to more than 350,000 as insurers have ended homeowners’ coverage across the state amid worsening climate-driven wildfire seasons.

The insurance industry said any price hikes are necessary to ensure the FAIR Plan remains a viable option for homeowners in fire-prone parts of the state such as the East Bay hills, wine country and the Santa Cruz Mountains.

According to the FAIR Plan, the state approved similar bailouts in 1993 after fires in Altadena and Malibu and again in 1994 and 1995 following the Northridge Earthquake. The total value of those assessments was $260 million, or $563 million adjusted for inflation, well below the current $1 billion requested by the FAIR Plan.

Consumer groups, meanwhile, blasted regulators for approving the assessment.

“The FAIR Plan is in trouble because insurance companies dumped too many homeowners,” Carmen Balber, executive director of Consumer Watchdog, said in a statement. “That’s why insurers are on the hook for FAIR Plan losses. Homeowners across California should not have to pay a penalty to repair the damage from home insurance companies’ predatory behavior.”

State Insurance Commissioner Ricardo Lara pushed back on those arguments, saying in a statement he rejects “those hoping for the failure of our insurance market by spreading fear and doubt.”

“I took this necessary consumer protection action with one goal in mind: the FAIR Plan must pay claims just like any other insurance company,” Lara said.

Lara’s office said the insurers must get approval from the state insurance department before imposing a temporary surcharge to recoup the assessment payments. Providers have six months to seek approval. So far, no insurers have submitted that request to the department.

The move by the commissioner comes as some of the state’s largest insurers, including State Farm and Allstate, have paused writing new policies anywhere in California, citing growing wildfire risks due to climate change and rising rebuilding costs, among other factors.

Earlier this month, State Farm, the largest insurance company in the state, asked state regulators to approve a steep rate hike averaging 22% for homeowners to prevent a “dire situation” for its customers and the broader insurance market in the wake of the disastrous Los Angeles wildfires.

The insurer, which had previously issued warnings about its financial stability, said the increases are necessary to ensure it can continue to pay out claims after covering more than $1 billion in losses due to the blazes.

To steady California’s faltering home insurance market, state regulators recently finalized a plan that includes allowing insurers to raise rates based on the growing threat of climate change — long an industry demand — in exchange for expanding coverage in parts of the state with the greatest wildfire risk.

In the greater Bay Area, insurers who opt into the plan will be required to write more policies in Marin, Napa and Santa Cruz counties, as well as parts of San Mateo and Sonoma counties and a sliver of Santa Clara County. Insurers would also have to offer new policies for fire-risk homes in more urban areas such as the Oakland Hills and Los Gatos.

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