December 17, 2019

The Great FAIR Debate

In November and December of 2019 a great debate about the future of the California FAIR plan, which serves as the home insurer of last resort, began.

The California FAIR plan is the home insurer for people that cannot find home insurance through any other means. It is ruled and regulated via the California Insurance statute. There are numerous issues with the current setup of the FAIR plan. In recent years the demand for the FAIR plan has grown as insurers have issued non renewals and refused to write new home insurance policies in certain zip codes, generally due to wildfire risk.

In short- the California FAIR plan is an extremely limited named peril property insurance policy with a low amount of overall Total Insurance Value of coverage. It is NOT the same as a typical HO3 policy. Because of these and other related issues with the plan, consumers are not happy. The department of Insurance has been fielding thousands of calls about the issue. I have personally been contacted by reporters covering this very issue.

The Source of the California FAIR Issue:

In general consumers are not happy with the FAIR plan for numerous reasons. Among these reasons are:

A limited Total Insurance Value of around $1,500,000 in coverage.
The inability to pay via Credit Card
The exceptionally limited nature of the policy form (Essentially a DP1 policy.)
The slow and agonizing process to procure these policies.

Currently the FAIR plan is usually sold alongside of a Differences in Condition Policy (DI) or Wrap policies. The second home insurance policies can pick up where the FAIR plan ends, to some extent.

FAIR Changes Are a Coming, Maybe…

On November 14th, 2019, Ricardo Lara, the California Insurance Commissioner: ordered “the FAIR Plan to offer a comprehensive policy in addition to its current dwelling fire-only coverage by June 1, 2020,” This policy would be similar to a” comprehensive homeowners’ policy, known as HO-3 coverage .”

In addition he required the “FAIR Plan (to) increase the combined dwelling coverage limit from $1.5 million to $3 million. ” On top of these two historic changes he also”ordered the FAIR Plan to offer consumers a monthly payment plan and to be able to pay by credit card or electronic funds transfer–all without fees. ” Source: The California Department of Insurance.

Rome Shall Be Built in a Day:

These historic changes to the Insurer of Last resort, at first appearance seemed as an incredible ask in my professional opinion. However to require them to do in about six full months seemed almost unbelievable. Most insurers tend to move at a slow pace and there is solid underwriting reasoning behind this. This almost seems to amount to asking the insurer to start a whole new business model and launch it in just six months. And in the insurance world nonetheless!

Push Back from FAIR:

Having been asked to completely rebuild their insurance model the FAIR plan responded about twenty days later. See the response here. While stating that they (FAIR) “appreciate your (Ricardo Lara’s) efforts to address the impact of California’s devastating wildfires on homeowners,” the insurer said in no uncertain terms: “that we could not comply with the HO3 policy by June of 2020” for operational reasons. They also believe that creating a true HO3 insurance policy through the insurer of last resort would create “adverse unintended consequences” and that the new policy would inevitably be “more expensive for homeowners.”

FAIR did also state they do support some of the other changes such as “the increase in coverage limits.” They were also mostly OK with the credit card requirement but stated that the required date for (February 1st) would also “not be operationally feasible.”

The Great FAIR Debate Heads to the Courts:

Then the FAIR plan took to the courts to file “a petition for a writ of mandate seeking to have a court annul, vacate, or withdraw an order issued last month by the California insurance commissioner…” says the Insurance Journal. The writ, titled: California FAIR Plan Association Vs. Ricardo Lara, in His Official Capacity as Insurance Commissioner of the State of California is in a Los Angeles Court. The journal states that “It argues that Lara’s order violates the law and it exceeds the commissioner’s authority.”

Did Lara Exceed His Commissioner’s Authority?

I express no opinions on this matter.

What will Happen to the FAIR plan Now?

My professional opinion has always been that there is no way a functioning HO3 properly priced policy could be created in such a short time. Nor would the system be able to handle it. Let alone take credit card payments by February 1st.

Will the FAIR plan become a $3MM HO3 Policy that takes credit cards by February and June 2020? I seriously doubt it, but only time will tell.

Feb 2020 – FAIR Insurance Update:

According to CoreLogic: A “Los Angeles Superior Court imposed a preliminary injunction against the California Department of Insurance commissioner Ricardo Lara, ruling that the FAIR Plan cannot be compelled to issue a HO-3 policy. ” CoreLogic Source. What this means is that for now the California FAIR plan is NOT offering an HO3 otherwise known as a Homeowners Insurance Policy.

April/May/June 2020 – California FAIR Insurance Update on Max Coverage:

The California FAIR plan raises its total insurance coverage amounts to $3,000,000. They also now allow for Credit Card Payments. However the policy is still, currently, a limited fire only policy.

It is still suggested that consumers pair the FAIR plan with at least a CPL or better still a DIC policy. Speak with your insurance agent for more details.

September 2021 FAIR Update on HO3:

The LA Superior Court decided that “that the California Department of Insurance exceeded its legal authority in 2019 when it ordered the FAIR Plan to provide comprehensive homeowners insurance, known as an HO-3 policy. That ruling left the door open for the CDI to order the FAIR Plan to provide other new coverages, however.” The article goes onto to say: “CDI issued Order No. 2021-2 requiring the FAIR Plan to provide a quasi-HO-3 policy that would provide less coverage than comprehensive homeowners insurance yet would still force the FAIR Plan to offer new types of coverage.” The CDI likely stands for the California Department of Insurance.

Update Novemenber 2023:

Potentially big changes with the following ruling in November of 2023: “Calif. Court OKs Expanded Coverages For Last Resort Insurer”, per Law360. According to the California DOI – the “ruling is a win for homeowners…” And ” The sooner that the FAIR Plan can offer a more comprehensive policy option, the better for many Californians.” In comprehense they are referring to a potential HO3 policy. With this ruling its possible the matter is settled and its possible the matter is not settled. We shall see what the future of a potential FAIR HO3 policy.