A consumer advocacy group has filed a lawsuit in Los Angeles seeking to block insurers from charging California customers for $500 million related to the costs incurred from the recent deadly Los Angeles fires.
This legal action follows an order from California’s insurance commissioner in February, which mandated that insurers operating in the state contribute $1 billion to the FAIR Plan—the state’s insurer of last resort—to assist in covering claims linked to the LA wildfires.
The order allows insurers to recoup half of that cost from policyholders through a one-time fee, pending approval from the commissioner.
Consumer Watchdog, the organization behind the lawsuit, argues that Insurance Commissioner Ricardo Lara has overstepped his authority by permitting this cost-shifting without following the appropriate legal procedures.
They claim that such regulations have never been authorized in California and should have been reviewed and approved by the Legislature or other oversight agencies before being enforced.
Consumer Watchdog’s lawsuit seeks to block Lara from endorsing these cost-recovery requests.
As of Tuesday, there were at least three pending applications to implement a surcharge on policyholders, according to the consumer advocacy group.
Ryan Mellino, a staff attorney at Consumer Watchdog, expressed the organization’s determination to protect the financial interests of Californians, saying, “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.”
In response, the California Department of Insurance warned that the lawsuit could worsen the state’s insurance crisis.
Gabriel Sanchez, a spokesperson for the department, stated, “This hurts homeowners, small businesses, and nonprofits who need access to insurance options, while doing nothing to address the insurance crisis.”
He emphasized that the lawsuit undermines efforts to restore competition in the insurance market, which is crucial to help consumers secure coverage outside the FAIR Plan.
The FAIR Plan serves as a last resort for individuals who are unable to obtain private insurance due to their properties being considered too risky to insure.
The plan, characterized by high premiums and minimal coverage, aims to provide temporary relief until homeowners can secure permanent insurance solutions.
However, reliance on the FAIR Plan has surged, with over 555,000 home policies active as of March—more than double the number recorded in 2020.
The FAIR Plan has estimated losses of approximately $4 billion due to the Eaton and Palisades Fires, which began on January 7, resulted in nearly 17,000 structures being destroyed, and claimed the lives of at least 30 individuals.
As of February, the plan had already disbursed over $914 million in claims.
Consumer Watchdog clarified that the ongoing lawsuit will not impede the FAIR Plan’s capacity to process claims.
The American Property Casualty Insurance Association, a major national trade association representing home, auto, and business insurers, criticized the lawsuit as “a reckless and self-serving stunt.”
According to the association, insurers have collectively disbursed tens of billions in claims and contributed more than $500 million to support the FAIR Plan following the LA fires.
Denni Ritter, a representative from the insurance group, stated, “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.”
Ritter emphasized that it is essential for the costs to be distributed fairly among a broader pool of insured consumers to aid in revitalizing California’s insurance market and ensuring coverage remains accessible for all.
The regulation enabling insurers to shift some costs to support the FAIR Plan is part of a series of strategies introduced by Lara last year in response to escalating challenges in California’s insurance landscape.
This year-long effort aims to stabilize the insurance market, exacerbated by major companies either pausing or restricting new business in the state during 2023, resulting in hundreds of thousands of homeowners relying on the FAIR Plan.
Insurers attribute the increasing frequency and intensity of wildfires in California—driven by climate change—as a primary factor complicating the ability to accurately price risk associated with properties.
Of the top 20 most destructive wildfires in California history, 15 have occurred since 2015, according to the California Department of Forestry and Fire Protection.
In an effort to address the crisis, the state is providing insurers with greater flexibility to raise premiums in return for issuing more policies in high-risk regions, including regulations that permit insurers to factor climate change into pricing strategies and shift reinsurance costs onto California consumers.
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