California FAIR Plan could face $1 million in fines over wildfire claims

Complaints stem from handling of losses tied to Palisades and Eaton fires

California FAIR Plan could face $1 million in fines over wildfire claims

Catastrophe & Flood

By Kenneth Araullo

The California Department of Insurance (CDI) has ordered the California FAIR Plan to appear in a show-cause proceeding over what it describes as a pattern of denying smoke damage claims through the use of policy language that regulators say does not meet state code requirements.

If the state’s insurer of last resort is found to have engaged in willful unfair or deceptive practices, penalties could reach $10,000 per act, or up to $5,000 per non-willful act.

Based on policyholder complaints linked to two major Los Angeles-area fires this year, fines could total $1 million or more.

The Palisades and Eaton wildfires have not only led to an influx of complaints but have also placed significant financial strain on the FAIR Plan. According to market data, the association faces approximately $4.8 billion in exposure from these two events alone – more than $4 billion tied to the Palisades fire and about $775 million from the Eaton fire.

In an order, CDI Commissioner Ricardo Lara alleged that the FAIR Plan has engaged, or is engaging, in systemic unfair competition and unlawful conduct. The department has accused the association of misrepresenting policy terms, failing to promptly investigate and process smoke-related claims, and is requiring a hearing on the matter.

Complaints reportedly increased following the Palisades and Eaton wildfires, with the department receiving more than 220 smoke damage-related grievances alleging denied or reduced payments. CDI said it continues to receive such complaints despite assurances from the FAIR Plan in May that its handling of smoke claims aligns with state law.

Wording contentions for the FAIR Plan

Under California Insurance Code, fire insurance policies must follow a standard form or provide equivalent or broader coverage. CDI said the FAIR Plan altered the “all loss by fire” standard form to “direct physical loss,” which it defined as actual loss or damage evidenced by permanent physical changes to the property. The department contends this wording, in place since 2017, violates the law.

According to CDI, the FAIR Plan told the department in 2017 that the definition would either expand coverage or leave it unchanged. The department approved the change in January of that year. However, months later, the FAIR Plan sent a notice to brokers stating the limitation on what constitutes direct physical loss would result in claim denials that may have been paid under prior wording

The department said it became aware of the issue in January 2021 and issued a cease-and-desist letter warning that limiting smoke damage coverage to cases involving permanent physical changes contravenes state law.

In a random sample of 259 claims, the review found 118 violations tied to the permanent damage requirement, part of a total of 418 violations of the state’s Unfair Practices Act and Fair Claims Settlement Practices Regulations, according to the July 31 order.

Pressures on California’s FAIR Plan

The FAIR Plan has been under pressure to expand its coverage capacity. Earlier this year, the CDI approved a significant increase in commercial coverage limits, raising the cap to $20 million per building and $100 million per location.

The move more than doubled prior limits and was intended to better reflect the replacement costs in high-value commercial areas affected by wildfire risks.

Financial sustainability has also emerged as a concern. A $1 billion assessment intended to fund the FAIR Plan is under legal review, with insurers seeking to recover up to half the amount through a temporary fee tied to premiums. Because base rates cannot incorporate these costs, funding pressures have mounted.

The FAIR Plan’s reserves are also lower than those of traditional carriers, prompting questions over whether it can maintain claims-paying capacity if another catastrophic wildfire season occurs.

Regulators said they have worked with the FAIR Plan to address operational issues, but noted that coverage of smoke-related claims remains one of several concerns under review.

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