California Court Limits Insurance Commissioner's Authority on FAIR Plan Coverage

An appeal decision by a California court has curtailed the authority of Insurance Commissioner Ricardo Lara to unilaterally extend the coverage offered by the California FAIR Plan, the state's last-resort property insurer. The Second Appellate District Court in Los Angeles ruled in favor of the FAIR Plan on December 5, overturning a previous trial court decision supporting Lara's 2021 directive to incorporate liability coverage into the FAIR Plan's basic policy packages. This update aligns with the interpretation of the state’s Insurance Code, which has traditionally focused on first-party property insurance.

This appellate court decision emphasizes that the 1968 Basic Property Insurance Law was primarily intended to provide first-party property insurance rather than liability coverage. The California FAIR Plan Association initiated the appeal, disputing the commissioner’s order requiring them to submit a proposal including “premises liability” and “incidental workers’ compensation” in the basic plan. The association argued that the legislative framework restricts its policies to first-party coverages, covering direct loss to tangible property without extending to third-party claims.

Implications for Regulatory Compliance

While Commissioner Lara asserted that liability coverage could align with property-related policies, the FAIR Plan maintained that such an addition would go beyond the fundamental scope envisioned by the legislation. The appellate court dismissed the historical interpretation from 1994 by the Department of Insurance that allowed for liability coverage in specific circumstances, stating that it did not align with the legislative intent or legal structure of the law.

In response to the ruling, the California FAIR Plan Association has reiterated its role in providing high-risk policyholders access to essential property insurance, emphasizing its commitment to collaborating with stakeholders to safeguard California residents. This decision underscores the limitations on extending the FAIR Plan’s coverage, reaffirming its function as a provider of basic property insurance rather than multi-faceted liability policies.