California FAIR Plan Faces Rising Claims and Scrutiny After Los Angeles Wildfires

The California FAIR Plan, the state's insurer of last resort, has experienced a significant influx of policyholders following major wildfires in Los Angeles, particularly in the Pacific Palisades and Eaton fire zones. Since 2020, the number of homes insured by FAIR Plan in these areas has nearly doubled, reflecting a 47% increase last year alone. This surge is largely driven by private insurers withdrawing from high-risk wildfire zones, with State Farm notably exiting many California markets in 2023 and 2024, leaving homeowners with limited options beyond the FAIR Plan.

The FAIR Plan, established in 1968 as a safety net for properties in urban and fire-prone areas where insurance was scarce, was not designed to be a dominant insurer but now covers over half a million homeowner policies statewide because of these market shifts. Following the January 7, 2024 fires, the FAIR Plan has received over 5,280 claims and paid more than $2.5 billion, with estimated total losses around $4 billion. To manage these losses, the Plan has sought a $1 billion assessment from member insurers, half of which could be recouped via surcharges on California homeowners' insurance policies, a move currently facing legal challenges.

Claimants have reported difficulties with claim payments, including delays and disputes over smoke damage remediation standards. For instance, affected homeowners in Topanga Canyon and other fire zones have found settlements insufficient to cover necessary repairs and environmental remediations, with some opting to use SBA loans for out-of-pocket expenses.

Recent lawsuits filed by fire victims against the FAIR Plan and several insurance companies accuse them of inadequate claim investigation and remediation, alleging anti-competitive practices to drive homeowners onto the FAIR Plan.

The California Department of Insurance supervises the FAIR Plan, which aligns its claims processes with approved policy forms and state regulations. However, the recent wildfire incidents have exposed the Plan's limitations in capacity and service efficiency, raising broader concerns over the sustainability of wildfire insurance in California's private market and the financial impact on insured residents statewide.

This evolving situation underscores the challenges insurance regulators face in balancing market stability, insurer capacity, and consumer protection amid increasing wildfire risk in the region.