California’s insurer of last resort was meant to cover ‘riot-prone areas,’ not climate disasters

Today, most think of the California FAIR plan as a safeguard against wildfire risk. Few are aware that the state's insurance provider of last resort was created as a band-aid response to a very different L.A. conflagration: the Watts uprising of 1965.

Sixty years later, as climate change triggers a new crisis for insurance markets, firms and policymakers can draw an important lesson from the program's first decades, when it not only allowed the wounds of injustice to fester, but ultimately stood in the way of transformative change.

By continuing to lean on insurance-based solutions to deep-seated societal problems, California has put itself on a path toward repeating the mistakes of the past.

The proximate spark for the Watts rebellion, which began on Aug. 11, 1965, was the violent arrest of a Black motorist. But the kindling for the six days of unrest had been laid by decades of racist policing and discrimination in housing, employment and education. Despite the tangible victories of the civil rights movement — the Voting Rights Act had been signed just a week earlier — white supremacy remained regnant in South Central.

As Watts burned, insurance men beat the National Guard to the scene by a full day. Entering the still-smoldering Los Angeles neighborhood to gauge the insurable damages, these were capitalism's first responders.

After tallying the $40 million in losses, the industry sharply reduced the supply of insurance in Watts and other neighborhoods of color. In those areas, many property owners could no longer access insurance, and even when they did manage to find coverage, premiums were at least double — and often many times more — what they had been a short while before.

Two years later, amid unrelenting rebellion across American cities, President Lyndon B. Johnson convened the National Advisory Commission on Civil Disorders, better known as the Kerner Commission, to propose nationwide remedies for the unrest. An insurance-related offshoot of the Kerner Commission saw the Watts pool as an important prototype for what became the FAIR plan, a government-organized pool of all property insurers operating in a given state. Established on a state-by-state basis beginning in 1968, the FAIR plan was Washington's answer to the deepening crisis of insurance redlining.

By increasing access to property insurance in "riot-prone areas," federal policymakers hoped the FAIR plan would help douse the flames engulfing American cities. Instead, the program merely protected the real estate and insurance industries from the risks posed by those systemic problems. As American cities entered the 1970s, the FAIR plan buffered landlords and insurers from the growing urban crisis, introducing perverse incentives that led landlords to burn down their own buildings for insurance payouts.

Blazes tore across Los Angeles' rental stock as the city experienced a 500% increase in arson during the second half of the 1970s. But the epicenter of the arson wave was in the Bronx and elsewhere in New York City, where tens of thousands of apartment units — most insured by the New York FAIR plan — were torched by landlords or their hired lackeys. Insurers, for their part, were able to absorb the resulting losses through a number of arcane industry techniques, all legal, including simply passing along the losses to every policyholder in the state.

In the 2000s, as the costs of climate change became less and less possible to ignore, statewide FAIR plans began shifting their focus from the urban crisis to the climate crisis, increasingly issuing policies to wealthier homeowners at risk of fires or flooding. In Los Angeles, the plan's "high-risk" policyholders are now just as likely to reside in Santa Monica as in South Central.

But the industry's favored mechanism for offloading these hazards is effectively the same as it was in the 1960s: hike prices on consumers and devise sophisticated financial instruments for transferring the losses elsewhere. Should the regulators at the California Department of Insurance stand in their way with muscular consumer protections, insurance companies can leave the state, or merely threaten to, until their underwriting autonomy is restored.

What this means is that we have a property insurance program first designed for so-called "riot-prone areas" now standing as the only source of indemnity for the vast geographies of fire and flood that seem to grow vaster with every passing year.

With all eyes on California's insurance market, the country stands at a crossroads. Because property insurance offers a potent tool for absorbing economic shocks, it remains the economic order's first line of defense against unexpected ills. But in the absence of further-reaching transformation, property insurance can merely bandage over the root causes of the present crisis, making them harder to see.

Bench Ansfield is an assistant professor of history at Temple University and author of "Born in Flames: The Business of Arson and the Remaking of the American City."