In a significant ruling for California homeowners, the FAIR Plan, the state’s insurer of last resort, must revise its approach to handling smoke damage claims. This follows a Los Angeles County Superior Court judge’s determination that the FAIR Plan’s coverage does not align with state insurance requirements.
The FAIR Plan operates as a collective of major insurance providers in California, designed to offer basic coverage to homeowners who have been dropped by their insurers or cannot find policies due to a high risk of fire. However, homeowners have long expressed dissatisfaction with the level of coverage provided, particularly about the costs, which tend to be higher than available options in the open market.
One major point of contention has been the FAIR Plan’s treatment of smoke damage. Since 2017, the FAIR Plan has stated that for claims regarding smoke damage to be honored, physical alterations to a property must be permanent. This has resulted in numerous claims being contested or outright denied, as the FAIR Plan often instructed homeowners to undertake cleanup on their own or offered lower settlement amounts.
A group of ten plaintiffs affected by the Palisades and Eaton fires has challenged this approach, taking legal action against the FAIR Plan and ten large insurers for their alleged mishandling of smoke damage claims. In a separate ruling, Judge Stuart Rice ruled in favor of a Mono County plaintiff regarding the 2020 Mountain View fire, determining that the FAIR Plan’s handling of smoke damage claims violated the provisions of the state’s Standard Form Fire Insurance Policy.
Judge Rice stated that the plan’s refusal to pay smoke damage claims contradicts California’s insurance code, which requires comprehensive coverage for all fire-loss damages. Homeowners impacted by recent fires in eastern Ventura and western Los Angeles counties are now eligible for compensation as a result of this ruling.
The FAIR Plan has acknowledged the judge’s ruling and has indicated that it will adjust its handling of smoke damage claims, confirming it will not seek an appeal. This legal setback compounds the challenges faced by the FAIR Plan, which has experienced a surge in enrollments in recent years as more homeowners are unable to secure coverage through traditional markets.
As of March, the number of policies in force under the FAIR Plan has skyrocketed to 573,739, reflecting a 139% increase since September 2021. The total exposure for the FAIR Plan now stands at around $599 billion, a staggering 259% increase in the same period.
While the FAIR Plan funds itself through the premiums it collects, it has been financially strained due to significant payouts following January’s devastating firestorms. Reports suggest that the FAIR Plan is seeking a $1 billion bailout from private insurers, with half of this financial burden potentially being passed on to consumers through increased rates on standard fire insurance policies.
Peter Fehler, president of the Agoura Hills Fire Safe Council, emphasized the significance of fair treatment for smoke damage claims. He argued that addressing smoke damage is essential as it reflects real damage, noting that the current inequities in the FAIR Plan’s handling of such claims highlight broader issues within its scope of coverage.
“The FAIR Plan has become bigger than anybody ever imagined, and it needs to step up and take on the responsibility for those insured, even if it means adding a smoke damage rider to policies,” Fehler stated.
The combined losses from the January 2025 Eaton and Palisades fires are projected to exceed $50 billion, with the FAIR Plan potentially liable for more than $4 billion in losses.
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