California's insurance regulator can order the state's insurer of last resort to expand its wildfire coverage, but how and to what degree remain uncertain.
Superior Court Judge Mary Strobel ruled in July that Insurance Commissioner Ricardo Lara did not exceed his authority in November 2019 when he ordered the California FAIR Plan Association to offer a comprehensive policy known as HO-3 coverage in addition to its current dwelling fire-only coverage.
Fair Access to Insurance Requirements Plans, or FAIR Plans, were established in the 1960s to provide coverage to people who cannot get insurance through the traditional marketplace. The California FAIR Plan Association, a pool of all insurers that are allowed to sell basic property insurance, also provides fire insurance to homeowners who have either lost coverage or are unable to find insurance in the voluntary market.
The devastating fire seasons in 2017 and 2018 led to a surge in new FAIR Plan policies as insurers in the voluntary market nonrenewed policyholders in fire-prone areas, according to the California Department of Insurance. Homeowners who have turned to the FAIR Plan Association for wildfire coverage have had to purchase difference-in-conditions policies from carriers in the voluntary market to cover liabilities not addressed in the plan's wildfire-only policies.
In the lawsuit, the FAIR Plan Association contended that Lara's directive violated state law and would force the insurer out of compliance with its statutory mandate "to provide basic property insurance, serve as a stabilizing force in the insurance marketplace, and to maintain actuarially sound rates."
The FAIR Plan Association "drives up the price for consumers" by forcing policyholders to purchase separate insurance policies for liability and contents on top of its "fire-only" policy, Lara said in a statement emailed to S&P Global Market Intelligence. Such action "only benefits the insurance companies that profit from this unfair and costly arrangement," according to the commissioner.
"The FAIR Plan and the insurance companies who control it need to move forward to implement this needed coverage option as soon as possible," Lara said.
However, those companies cannot move forward until the department addresses a key point in Strobel's ruling that limits the scope of liability coverage it can require.
A skinny policy
Strobel said in her ruling that Lara has the authority to require the FAIR Plan Association to offer insurance that includes liability coverage, but only for the property the home is on. That would entail a "skinny" HO-3 policy rather than the comprehensive policy that the California Department of Insurance was seeking.
The judge directed Lara to remove from his order the coverages that are not connected to the insured property and resubmit it for review. Michael Soller, deputy insurance commissioner for Northern California, said the department hopes to submit the revised plan to Strobel by Aug. 6.
Other than submitting and implementing "a slightly revised plan," the commissioner can order the association to "stop doing this runaround where you have an insurance company nonrenew [a policyholder], sends you to the FAIR Plan, then writes you a difference-in-conditions policy," Soller said in an interview.
The association said in an emailed statement that it challenged that aspect of Lara's order because "it would have led to unnecessarily increased rates and disruption in the voluntary insurance market."
Additional coverages typically found in a homeowners policy, such as for water damage and for damages arising out of an injury on the insured's property, are readily available to FAIR Plan customers in the form of a difference-in-conditions policy, which insures some perils not covered by standard insurance policies, according to the association.
When asked if there is a plan to appeal Strobel's ruling, Natalie Haskell, spokeswoman for the FAIR Plan Association, said in an email that the insurer is "waiting for Strobel to issue her final judgment and will determine at that time whether to appeal."
Lengthy
Even without an appeal, Personal Insurance Federation of California President Rex Frazier said it would take "many months or, possibly, years" for the FAIR Plan Association to comply with the changes in Lara's order.
The association will have to develop rates for the additional coverages, build out a new infrastructure for writing the new coverages, such as water losses and on-premises liability, and increase personnel to adjust the new claims, Frazier said.
Frazier could see the insurance department ordering the FAIR Plan to turn such a filing around in as little as 60 days. However, he said it is not clear how the insurer could do so "without disrupting their operations or incurring substantial consulting actuary or legal fees."
Frazier said one of the logistical issues to overcome is that the Insurance Services Office, which develops and publishes policy language that insurers use as the basis for their products, does not have a form that fits with what the court seems to be allowing the insurance department to order.
FAIR fee plans upheld
Lara had also ordered an increase in the coverage limit to $3 million from $1.5 million, the option of no-fee monthly payment plans, and the ability for consumers to pay premiums by credit card or a transfer of electronic funds without incurring fees.
The FAIR Plan Association did not dispute the changes in coverage limits but did contest the no-fee requirement. Strobel sided with the FAIR Plan Association and ordered Lara to amend his report to reflect that.
"The court clearly determined that Commissioner Lara must set aside those aspects of his 2019 orders requiring the FAIR Plan to offer an HO-3 policy as well as his attempt to prohibit the FAIR Plan from charging fees to cover the cost of payment options," said Hinshaw & Culbertson LLP Partner Spencer Kook, who represented the FAIR Plan Association in the litigation.