CA Ins Commish can’t expand FAIR Plan basic coverage: Court

A California appeals court has limited the authority of Insurance Commissioner Ricardo Lara to administratively expand the basic coverage provided by the state’s property insurer of last resort, the California FAIR Plan.

The California Court of Appeal’s Second Appellate District in Los Angeles sided with the FAIR Plan, a nonprofit association managed by private insurers operating in the state, on Dec. 5. The appeals court reversed the decision of a trial court that concluded the insurance commissioner’s 2021 decision to authorize the addition of liability coverage for homeowners within the basic FAIR Plan policy was consistent with the state’s Insurance Code and underlying legal definitions.

“... Our review of the statutory scheme and the historical context of the law’s passage compel us to conclude that the Legislature’s intent in enacting the (1968) Basic Property Insurance Law was to ensure that first-party property insurance – not liability coverage – would be available to property owners in this state,” the appeals court said. “We therefore reverse the judgment…”

Lara was the defendant and respondent in the case, while the California FAIR Plan Association was the plaintiff and appellant.

“We appreciate that the court confirmed the California FAIR Plan is designed and intended to operate as California’s insurer of last resort, providing basic property coverage when it cannot be obtained in the voluntary market,” the California FAIR Plan Association said in a statement emailed to the Southern California Record. “We remain committed to ensuring homeowners have access to coverage when they cannot secure it elsewhere.”

The FAIR Plan Association added that it would continue to work with stakeholders within California’s property insurance system to protect the state’s residents.

The legal dispute centered on the statutory definition of “basic property insurance” that the FAIR Plan must provide. The FAIR Plan had sought to overturn Lara’s 2021 order directing the association to submit a plan that provides coverage including “premises liability” and “incidental workers’ compensation.”

The FAIR Plan’s attorneys argued that the commissioner’s authority to expand the coverage of the association’s basic property insurance policies does not go beyond first-party coverage – that is, “insurance against direct loss or real or tangible personal property.”

Adding liability coverage for homeowners would expand protections to third-party claims related to the insured’s conduct, according to the FAIR Plan.

But the commissioner contended that coverage could be added to such policies provided that they were related to an insured’s property. In addition, he pointed out that the state Department of Insurance and the FAIR Plan Association agreed in the 1990s that the association could offer liability coverage to business owners based on the “basic property insurance” definition.

But the appeals court ultimately rejected the department’s 1994 interpretation of section 10091 of the Insurance Code.

“It contradicts the department’s earlier statements to the Legislature and rests on reasoning that fails to engage with the law’s text, structure or purposes,” the court said. “... The historical context of the Basic Property Insurance Law’s enactment, its stated purposes and the overall statutory scheme all favor a construction of section 10091 … that confines the statutory definition of ‘basic property insurance’ to first-party coverages against direct loss or damage to property.”

The state legislature never intended the Basic Property Insurance Law to include a “catchall” mechanism giving the commissioner authority to mandate that the FAIR Plan offer liability insurance coverage, the court concluded.