California Fair Plan Surcharges Homeowners to Offset $1 Billion Fire Losses

Following the devastating January 7 fires in Los Angeles County, the California FAIR Plan Association, the state’s insurer of last resort, has faced significant financial burdens. To manage these costs, the FAIR Plan, with approval from California Insurance Commissioner Ricardo Lara, assessed its member insurers $1 billion.

These insurers, in turn, are seeking approval to surcharge their policyholders across California to recover half of this assessment cost. This policy could impact homeowners statewide, regardless of their proximity to the fire zones, adding surcharges ranging from approximately $6 to $60 annually based on the type of policy. The surcharges are proposed to begin in the current year, with some insurers spreading charges over two billing periods.

Major insurers including affiliates of AAA, Mercury, Amica, and Western Mutual have filed for these surcharges, which are subject to final regulatory approval. This surcharge policy was established under Lara's Sustainable Insurance Strategy designed to stabilize California’s troubled home insurance market and was approved last year but is currently facing legal challenges claiming it exceeds statutory authority.

The FAIR Plan has paid out $2.75 billion in claims related to these fires and anticipates total costs of about $4 billion, exceeding its limited reserves and reinsurance protection. Concurrently, the number of homeowners covered by the FAIR Plan has surged, especially in high-risk fire zones where traditional insurers have withdrawn.

This growth increased FAIR Plan exposure, contributing to the current financial strain. Critics argue that while average surcharge costs appear modest, they may escalate substantially for homeowners with larger policies, compounding affordability issues amid already steep premium increases in the state. The state Department of Insurance is reviewing surcharge applications to ensure fairness, transparency, and adherence to legal limits.

Additionally, a legislative bill is progressing that would allow the California Infrastructure and Economic Development Bank to issue bonds to support FAIR Plan liquidity and claims payments. Legal disputes are ongoing, with lawsuits filed against Commissioner Lara over the surcharge approval process and against insurers alleging collusive actions to offload high-risk policyholders to the FAIR Plan. These developments underscore regulatory, financial, and legal complexities in managing wildfire-related insurance liabilities in California, highlighting the challenges of market stability, risk distribution, and consumer impact within the state’s homeowners insurance sector.