California homeowners sue FAIR Plan, insurer of last resort, over smoke damage coverage

Ethan Varian, Bay Area News GroupSan Jose Mercury News

California homeowners are suing the FAIR Plan, the state’s last option for those needing fire insurance, accusing it of failing to provide the legally required coverage for smoke damage.

The class action case, filed Wednesday in Alameda County court, is being brought on behalf of the more than 350,000 policyholders on the FAIR Plan — a state-created pool of private insurers required to provide fire coverage to homeowners who can’t find it elsewhere.

Dylan Schaffer, an attorney representing the plaintiffs, said the goal is to force the FAIR Plan to cover the full costs of cleaning homes inundated by smoke during a wildfire, a process he said can cost tens of thousands of dollars. He said without that coverage, homeowners are sometimes left with no choice but to scrub homes themselves.

“This is really a health and safety question,” Schaffer said. “These people are being told to go back into homes that are unsanitary and unsafe.”

Schaffer, who’s represented homeowners in other FAIR Plan cases, maintains the suit is not seeking monetary damages. “I just want to change the policy,” he said.

An Oakland homeowner is a plaintiff in the case. Other plaintiffs live in Fresno and Los Angeles counties.

In response to complaints of denied smoke claims, the California Department of Insurance determined in a May 2022 report that FAIR Plan policies didn’t meet state coverage requirements. After reviewing 259 randomly selected claims submitted to the FAIR Plan, regulators identified 418 violations of the insurance code, according to the report.

In court filings, plaintiffs in the class action suit cite the report as evidence to support their claim that the FAIR Plan is breaking the law. Moreover, they argue the FAIR Plan misled regulators when it got approval in 2017 to update its policies to cover only “direct physical damage” caused by smoke, such as charred curtains or permanently ash-stained walls.

The FAIR Plan “intentionally misrepresented and concealed the true impact of the proposed modifications to its policy form and withheld the true facts from (regulators), for the purpose of maximizing the profits,” according to the civil complaint.

FAIR Plan officials declined to comment on the case.

The state insurance department also declined to comment and said it would review the complaint.

Edan Cassidy, an insurance broker in the fire-prone Santa Cruz Mountains, said it’s unreasonable to expect that the basic protection offered by the FAIR Plan would cover every type of damage that might be caused by a wildfire.

“The FAIR Plan is not a homeowner’s policy,” Cassidy said.

He added FAIR Plan policyholders can buy additional “difference in conditions” insurance to ensure they’re fully covered for smoke damage.

The state created the FAIR Plan in 1968 to provide fire coverage for only the very riskiest homes that insurers wouldn’t touch. But following a string of destructive fires starting in 2017, providers ended coverage for hundreds of thousands of California policyholders in fire-risk areas, causing the number of homeowners forced onto the exorbitantly expensive FAIR Plan to more than double.

Meanwhile, some of the largest insurers, including State Farm and Allstate, stopped writing new policies anywhere in the state, even as they’ve hiked rates for current policyholders and are seeking to raise premiums even more.

That should allow FAIR Plan customers to buy cheaper and more comprehensive policies from traditional insurers. Consumer advocates, however, worry the new regulations would also mean steep rate hikes for others.

In the greater Bay Area, the state would require insurers 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.

The insurance department aims to finalize the new regulations by the end of the year.