SACRAMENTO, Calif. (AP) — A consumer advocacy group has filed a lawsuit this week to prevent insurers from charging California customers for $500 million in costs related to the deadly Los Angeles fires.
In February, California’s insurance commission ordered insurers operating in the state to provide $1 billion to the FAIR Plan, California’s insurer of last resort, to assist in paying out claims associated with the LA wildfires.
The commission’s order permits insurers to recover half of the cost from policyholders through a one-time fee, pending approval from the commissioner.
The lawsuit, submitted by Consumer Watchdog in Los Angeles, claims Insurance Commissioner Ricardo Lara exceeded his authority and violated state laws by permitting such cost shifting without following the necessary process.
Consumer Watchdog argues that these regulations have never been sanctioned in California, and should have been reviewed and endorsed by the Legislature or other oversight bodies prior to enforcement.
The lawsuit seeks a court order to prevent Lara from approving requests related to the cost recovery. As of Tuesday, Consumer Watchdog noted that there were at least three pending applications to implement a surcharge.
“We look forward to defending the rights and pocketbooks of Californians and stopping this socialization of FAIR Plan losses at the public’s expense, while the FAIR Plan’s profits will wholly remain with the insurance companies,” stated Ryan Mellino, a staff attorney for Consumer Watchdog.
In response, the Department of Insurance indicated that the lawsuit could exacerbate California’s ongoing insurance crisis.
“This hurts homeowners, small businesses, and nonprofits who need access to insurance options, while doing nothing to address the insurance crisis,” said Gabriel Sanchez, a spokesperson for the department.
“It also serves to undermine our efforts to restore competition to all areas of our state, so people can get off the FAIR Plan and back to the regular market.”
The FAIR Plan serves as the last resort for individuals who are unable to obtain private insurance because their properties are classified as too risky to insure.
With high premiums and limited coverage, the plan was designed to be a temporary solution until homeowners could secure permanent insurance, but an increasing number of Californians are relying on it.
As of March, there were over 555,000 home policies in the FAIR Plan, more than double the number recorded in 2020.
The plan estimated a loss of approximately $4 billion from the Eaton and Palisades Fires, which ignited on January 7, destroyed nearly 17,000 structures, and resulted in the deaths of at least 30 individuals.
By February, the FAIR Plan had already issued payments exceeding $914 million.
Consumer Watchdog confirmed that the lawsuit would not impact the FAIR Plan’s capability to pay out claims.
The American Property Casualty Insurance Association, the largest national trade association for home, auto, and business insurers, described the lawsuit as “a reckless and self-serving stunt.”
The group added that insurers have paid tens of billions in claims and contributed over $500 million to sustain the FAIR Plan following the LA fires.
“Blocking recovery of the additional costs insurers have paid to prop up the Fair Plan would jeopardize the last-resort coverage option for homeowners — and push our fragile insurance market closer to total collapse,” warned Denni Ritter, a representative of the group.
“It is critical that the costs be spread equitably across a broader pool of insured customers to help restore California’s insurance market and protect access to coverage for all consumers.”
The regulation permitting insurers to transfer some of the costs used to support the FAIR Plan is part of strategies proposed by Lara last year.
California is currently undergoing a yearlong initiative to stabilize its insurance market, in light of several major insurance companies either pausing or restricting new business in the state during 2023.
As a result, hundreds of thousands of homeowners have been forced onto the FAIR Plan.
Insurers assert that the increasing frequency and severity of wildfires in California due to climate change complicates the accurate assessment of risk for properties.
According to the California Department of Forestry and Fire Protection, 15 of the top 20 most destructive wildfires in state history have taken place since 2015.
The state now provides insurers greater flexibility to raise premiums in exchange for issuing more policies in high-risk regions.
This includes regulations that allow insurers to consider climate change when determining their pricing and permits the passing on of reinsurance costs to California consumers.
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