A recent investigation by CBS News found that since many private insurance companies in California have stopped issuing new policies, homeowners are being forced into the state’s insurance plan, the FAIR plan, despite living in low fire risk areas.
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The only other option they have is purchasing a policy from unregulated out-of-state insurers.
While it doesn’t sound that bad on the surface — homeowners can still purchase policies — it appears as though having more homeowners on the FAIR plan can cause far more issues.
What is the FAIR plan and what’s going in?
The FAIR plan was established in California around 60 years ago and is a state-run insurance option for homeowners who can’t find options elsewhere for fire coverage. This usually means homes classified as being at high risk of wildfires. It has been called "bare-bones" and is said to provide less coverage for more money than many traditional policies, according to SiliconValley.com.
The California Department of Insurance says that in 2023, only 3.7% of residents were covered through this plan, with the vast majority having more choices with private insurers.
However, that may not be the case anymore, as more private companies announced they would limit coverage in the state in recent years. In 2023, State Farm, the biggest insurer in the state, said that it would no longer write new policies.
CBS data analysis reveals that more and more homes in low-risk areas are being forced into the FAIR plan. In fact, there are 10 times as many low-risk homes on the FAIR plan as homes in the highest risk locations. Reporters spoke to Ken Cavalli and Lisa Fine-Cavalli who applied for a new policy for their new home and were denied despite their ZIP code being assigned an average risk class of "negligible."
And a large FAIR plan is a “dangerous liability,” noted CBS. “The Los Angeles wildfires quickly drained the plan’s surplus funds, leading to a $1 billion assessment on the rest of the state’s insurers, at least half of which will be passed on to the people with regular insurance polices.”
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Will insurance premiums go up even more?
They could if it means more companies can stay solvent and keep providing policies.
Rex Frazier, president of the Personal Insurance Federation of California, told CBS News that home insurance rates are objectively underpriced and private insurance companies will only start writing new plans if they’re allowed to charge higher premiums.
State Farm is currently seeking approval to raise premiums for California homeowners by an average of 17%. The Los Angeles wildfires after reinsurance will cost it over $600 million, and its reserves have dropped from $4 billion in 2016 to $1 billion last year.
In a move to expand the market and alleviate the current crisis, California Department of Insurance Commissioner Ricardo Lara created a “Sustainable Insurance Strategy” that will require private insurance companies by law to provide policies for homeowners in higher-risk areas. The goal is for insurers to have at least 85% of their policies issued to homeowners in “distressed areas” so they no longer need to be under the FAIR plan.
In exchange, insurance companies may be able to pass on FAIR assessments (additional charges) to their customers. They can also use new models to assess premiums.
However, CBS News noted that there may be a catch, which lies in how the term “high risk” is defined. For instance, private insurers may have their own criteria as to what constitutes a home being in a distressed or high-risk area.
The FAIR Plan, which is funded by insurance companies, is itself fighting the commissioner’s order to offer more comprehensive coverage saying it would need approval to increase rates.
What can I do?
Your best bet is to do as much research as possible to find private insurers who offer plans in your area.
You can also take steps to see if you can qualify for a discount, whether you end up on the FAIR plan or not.
Insurance companies are required by California law to give homeowners a “risk score” when they apply for a policy, or if they send a renewal or non-renewal notice. The notice should explain ways you can lower that score.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
