Californians could face insurance surcharges if Los Angeles fire claims deplete FAIR Plan

By John Ramos

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    California (KPIX) — Changes to the way the insurance industry is regulated in California may mean all of the state’s residents will be paying for at least a part of the cost of rebuilding from the destructive wildfires in Los Angeles County.

One look at the devastation in Pacific Palisades and it’s pretty clear we’re entering a new world when it comes to fire insurance. Huge suburban neighborhoods that are located nowhere near wooded areas have been wiped out.

Karl Susman is an insurance agency owner and industry expert whose office and home are both in one of the evacuation zones.

“This level of devastation is almost…we’re not meant to deal with it as humans,” he said. “To be able to have a city wiped out in a day. It’s almost biblical, you know?”

Many of the homes in the Los Angeles canyons had already been pushed out of private insurance and into the state’s FAIR plan, the insurer of last resort. A FAIR Plan map of Los Angeles shows huge dark spots where enrollment has increased by at least 250% in one year.

On Monday, Governor Newsom said he was well aware of it.

“My dad’s house is under the FAIR Plan, the state’s plan,” he said. “Very expensive and it’s not great coverage.”

The problem is the FAIR Plan was never meant to have so many customers. It’s losses are paid by the insurance companies on a proportional basis, but the plan only has a couple hundred million dollars in reserve and a limited amount of so-called “re-insurance” which is an insurance policy to help pay out insurance policies.

After that’s gone, the new rules that went into effect last month say the insurance companies will only have to pay the first billion dollars out of pocket before they can start adding surcharges to the bills of any and all of their customers in the state.

Steve Young, representing the Independent Insurance Agents and Brokers of California was trying to put a brave face on it.

“It’s gonna be bad. But we don’t know how bad it’s gonna be. So it’s not clear that any assessments will necessarily have to be issued,” Young said. “Because, look, the FAIR Plan has reserves on hand.”

But Susman said the losses were obviously going to be in the billions of dollars.

“The reality of it is that they’re going to have to go to their second and third tiers to get money,” he said. “They’re not going to be in a position to have the money on hand to pay that.”

A group called Consumer Watchdog had been critical of the new regulations as they were being negotiated. They said it was an attempt by companies to force all policy holders in the state to foot the bill for disaster losses. And now, just a month after the rules went into effect, it looks like that could happen.

“If people are on the FAIR Plan, it’s because the private insurance industry put them there by non-renewing or cancelling policies,” said Executive Director Carmen Balber. “If this catastrophe is as bad as it seems to be, and if many of those losses fall to the FAIR Plan, that could be a bill of $1,000 for every homeowner in the state, or more.”

Before any costs can be passed on as surcharges to other customers, the insurance companies must first get permission from State Insurance Commissioner Ricardo Lara. But Susman said he thinks the new rules were necessary.

“If it weren’t for those regulations happening before this loss,” he said, “I think what we’d be seeing is a mass exodus of every carrier from the state because they would have no way of figuring out how to move forward from there.”

Moving forward will invariably mean raising rates. The new rules allow insurers to charge more in fire prone areas. That used to mean homes nestled among the trees. Now it could be a house in the middle of a suburban neighborhood.

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