Newsom: FAIR Plan must pay smoke claims

Gov. Gavin Newsom sent a harshly worded letter to the California FAIR Plan on Friday accusing the insurer of flouting two court decisions by denying smoke damage claims. The letter repeated directives from the state's insurance commissioner to change its policy to align with industry standards.

Newsom lambasted the FAIR Plan's handling of the smoke claims as "unscrupulous and unfair," calling for the insurer to correct course and begin making payouts to wildfire survivors "expeditiously."

Since 2017, the FAIR Plan has had a carve-out in its policy limiting coverage for smoke damage. The insurer's policy covers only what it calls "permanent physical changes," leading it to deny a wide range of smoke-related claims on the basis that such damage can simply be cleaned.

The FAIR Plan was created by the legislature in the 1960s to be the state's insurer of last resort, but it is run as a private organization with a board populated by representatives of some of California's largest insurers. Unlike most insurance companies, the FAIR Plan provides coverage only for damage from fire, lightning or explosions; it does not cover losses from routine problems like broken pipes or liability.

The FAIR Plan's exemption for non-permanent damage has long frustrated policyholder advocates, who argue it illegally shortchanges fire survivors, particularly those with invisible yet toxic contamination pervading their homes. An investigation by the California Department of Insurance published in 2022 found 59 cases where the FAIR Plan allegedly improperly denied or limited coverage for smoke damage it didn't consider permanent.

The issue became especially salient for survivors of the Los Angeles fire, who have found their homes contaminated with lead and asbestos on top of metals such as beryllium and chromium -- much of which is not visible without testing.

"The FAIR Plan understands the heavy toll wildfires have on families and communities, which extends far beyond the loss of property, and we remain focused on helping our customers recover and rebuild," a FAIR Plan spokesperson said in a statement. "Thousands of policyholders impacted by the Palisades and Eaton fires have already received payments and are on the path to recovery."

In June, a Los Angeles Superior Court judge ruled the FAIR Plan's policy carve-out violated California law because it fell short of the state's standard fire insurance policy, which requires coverage for "all loss by fire, without any distinction between that and smoke or smoke damage," the judge wrote. California Insurance Commissioner Ricardo Lara followed up in August by filing a rare enforcement action against the insurer for allegedly violating the Fair Claims Settlements Practices Act.

The FAIR Plan previously told the Chronicle it had no plans to appeal the judge's decision and that it would fully participate in Lara's probe. On Friday, a spokesperson added the insurer had responded to the department's enforcement action and has been working with regulators since last year to update and clarify its policy language related to smoke damage "so the language reflects the manner in which these claims are being adjusted."

"Our goal is and continues to be to provide coverage consistent with California law for wildfire-related losses while maintaining the financial integrity of the FAIR Plan for policyholders," the spokesperson wrote.

But in his letter, Newsom insinuated that the FAIR Plan has yet to change its behavior.

"The Department (of Insurance) continues to receive complaints, and its recent Cease and Desist Order cites roughly a dozen examples of claims denials that suggest the FAIR Plan may be continuing to apply an illegal standard to determine whether a home sustained physical damage," Newsom wrote. "Meanwhile, I continue to hear from survivors of one of the worst disasters in California history who are angry and frustrated by the delay and denial of their claims."

The Los Angeles wildfires were the costliest wildfire event in history, with insurers expected to pay up to $40 billion in claims. More than 13,000 homes were destroyed and thousands more were impacted by toxic smoke and ash propelled by extreme winds. As of May, more than 38,000 claims have been filed and insurers, including the FAIR Plan, have paid $17.1 billion to policyholders, according to the Department of Insurance.

Newsom has made response to the wildfires in Los Angeles a top priority for his administration, spending much of the start of the year on the ground in Southern California meeting with local officials and holding news conferences amid the rubble. He has touted efforts by his administration to accelerate debris removal and has suspended some environmental regulations in the region to speed home rebuilding. But the massive disaster has still provided fodder for his critics and residents frustrated with bureaucratic delays.

Sophia Bollag contributed to this report.