Sacramento, California
AP
—

According to California’s Insurance Department, the state’s initiative designed to provide insurance coverage for homeowners unable to secure private insurance requires an additional $1 billion to settle claims from the Los Angeles wildfires, as announced on Tuesday.

The FAIR Plan is a cooperative insurance model funded by contributions from major private insurers. It issues policies to homeowners whose properties are classified as too high-risk for conventional coverage. Although it comes with high premiums and basic protections, the plan acts as a stopgap measure until homeowners can find sustainable alternatives. The reliance on this plan has surged, with over 452,000 policies active in 2024, a stark increase from just two years prior when numbers were below 200,000.

The FAIR Plan anticipates facing losses of approximately $4 billion due to the Eaton and Palisades Fires, which ignited on January 7, devastating nearly 17,000 structures and resulting in at least 29 fatalities. As of this week, around 4,700 claims have been lodged, leading to payouts exceeding $914 million.

Following the state’s approval of a request from the FAIR Plan on Tuesday, insurance companies operating in California will collectively cover half of the costs and may pass the remaining expenses onto policyholders through a one-time fee. Insurers are allowed to recover this amount over the next two years, pending approval from the state Insurance Department.

Specific details regarding the magnitude of the fee have not yet been disclosed by state officials. However, the approval permits the FAIR Plan to dispatch notices and begin collecting funds from marketplace insurers within the forthcoming month.

This marks the first instance in over three decades that the FAIR Plan has sought additional financial support, according to remarks from the insurance department.

“I took this essential consumer protection step with one primary objective: the FAIR Plan must fulfill claims just as any other insurance provider would,” stated Insurance Commissioner Ricardo Lara.

“I reject those attempting to undermine our insurance market by fostering fear and uncertainty,” Lara emphasized. “Survivors of wildfires can’t utilize ‘what ifs’ to cover essentials like food and rent, but they can use checks from the FAIR Plan.”

Additionally, the FAIR Plan is set to receive $1.45 billion in reinsurance to assist in managing claim payouts, estimating a remaining balance of around $400 million by July.

Data indicates that of the wildfire claims submitted thus far, 45% have been classified as total losses, another 45% as partial losses, and 10% as fair rental value claims.

Insurers communicated their dedication to supporting the recovery efforts following the fires, stating that sharing the financial burden with policyholders will help prevent companies from exiting the state.

“This measure is crucial to alleviate the pressures on California’s already strained insurance market and to prevent widespread cancellations of policies that would risk coverage for millions of residents,” remarked Mark Sektnan of the American Property Casualty Insurance Association, the leading national organization representing home, auto, and business insurers.

Meanwhile, a consumer advocacy group that opposed the regulation enabling insurers to transfer costs to policyholders declared its intention to challenge this initiative.

“Consumer Watchdog is currently exploring all available legal options to thwart any attempt at a bailout that may require consumers to shoulder costs,” stated Carmen Balber, the executive director of Consumer Watchdog.

California has been engaged in a prolonged initiative to stabilize its insurance market, particularly after multiple major insurers paused or limited new policies throughout 2023. This situation has shuffled hundreds of thousands of homeowners onto the FAIR Plan. The escalating frequency and severity of wildfires in California, exacerbated by climate change, has made it increasingly challenging for insurers to accurately assess the risks associated with insuring properties.

Of the 20 most catastrophic wildfires recorded in California history, 15 have occurred since 2015, as per data from the California Department of Forestry and Fire Protection.

The state is now offering insurers increased flexibility to raise premiums in exchange for the ability to issue more policies in high-risk areas. This includes regulations that permit insurers to factor climate change into their pricing strategies and allow them to pass on reinsurance costs to consumers in California.