After catastrophic wildfires swept across California in 2017 and 2018, state insurers were hit with record-breaking losses of over $25 billion.1 2 With three million acres burned and over 30,000 structures destroyed, the two years were the deadliest and most destructive wildfire seasons that the state has ever seen.3 In 2018, the number of non-renewals on homeowners insurance policies rose by more than 10% in seven counties across the state, and state insurance carriers paid $1.70 for every $1 in premium collected.4 5 The situation continues to prove challenging in 2020 as those who have lost their homes, and the state regulators, utilities, and insurers charged with serving and protecting them, scramble to find solutions.
Among these solutions was a mandate by the California Department of Insurance Commissioner Ricardo Lara. On November 14th, 2019, the commissioner ordered the FAIR Plan Association, a state-established “insurer of last resort” ran by a pool of private carriers, to offer comprehensive homeowners insurance, adding traditional perils like water damage, theft, and personal liability to their fire coverage.
Established in 1968, the association was established as a means for homeowners to access basic property insurance when they are unable to obtain insurance from a traditional carrier. All insurance carriers authorized to transact basic property insurance operating in the State of California are required by law to participate in the FAIR Plan, and a carrier’s mandated contribution to the FAIR Plan is based upon their share of the insurance market.
What events led to this unprecedented move by the California Department of Insurance? And how are state insurers responding? Here is everything you need to know in order to understand this recent development in California’s insurance regulatory environment.
1. Carriers Reduced Coverage After Wildfires
After extensive wildfires in 2017 and 2018 throughout the state, many traditional carriers reduced or cancelled their insurance coverage in high-risk wildfire zones. This meant that many homeowners had to purchase insurance from the FAIR Plan which has rates that are often 2-3 times the rates of traditional carriers.6
2. CA Mandates Carriers Maintain Coverage
To combat insurers cancelling coverage in high-risk fire zones, The Wildfire Safety and Recovery Act (CA SB-824) of 2019 mandated a one-year moratorium on non-renewal of homeowners insurance for at least 800,000 homes in ZIP codes near recent wildfire disasters. While existing law (enacted after the 2003 southern California wildfires under CA AB-2962 of 2004) prevents carriers from non-renewing homes with a total loss, this new law also includes those living adjacent to a declared wildfire emergency who did not suffer a total loss.7
The moratorium draws parallels to the aftermath of 1992 Hurricane Andrew, where property and casualty insurers in Florida were faced with over $16 billion in losses.8 In 1993, the Department of Insurance imposed a moratorium on non-renewals of residential property coverages in Florida for 90 days. The Department also later issued a moratorium phaseout, where insurers were prohibited from cancelling more than 5% of their homeowner’s policies in the state over a 12-month period and more than 10% of their policies in any given county. This phaseout was set for 3 years until 1996 and was then replaced with a similar law that lasted another 3 years until 1999.9
More recently, in October 2018, the Florida Insurance Commissioner issued a 90-day moratorium for carriers in counties impacted by Hurricane Michael. California’s lengthy one-year moratorium is proving a challenge for state insurers as they work to control losses amidst many years of consistent devastating wildfire events.10
3. CA Orders FAIR to Offer HO-3
In November 2019, the California Department of Insurance ordered the FAIR Plan to (1) offer a comprehensive HO-3 homeowners policy which adds traditional homeowners features like water damage and personal liability, (2) increase the combined dwelling coverage limit from $1.5 million to $3 million, and (3) offer a monthly payment plan and allow policyholders to pay by credit card or electronic funds transfer without any fees. The CDI mandated that this order be completed by June 1st, 2020. The FAIR Plan has publicly stated that it is supportive of increasing coverage limits and offering a monthly payment plan without fees, but it is opposed to offering a comprehensive HO-3 policy.11
4. FAIR Plan Files Writ of Mandate
In December 2019, the FAIR Plan filed a writ of mandate to the Los Angeles Superior Court asking for a withdrawal of the California Department of Insurance’s order. The FAIR Plan argues that the order to offer comprehensive homeowners insurance is outside of the association’s statutory mandate (California Insurance Code §10090 - §10100.2) to provide “basic property insurance” and maintain “actuarially sound rates”, and that the FAIR Plan does not have the resources or expertise to provide HO-3 insurance. They also argue that the order conflicts with the FAIR Plan’s goal of encouraging “maximum use” of the traditional insurance market. FAIR Plan is concerned that the order would increase insurance costs for all policyholders of the Plan and further reduce incentives for traditional carriers to sell insurance in wildfire prone areas.12
5. L.A. Court Issues Preliminary Injunction
In February 2020, the 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. However, the court ruled that raising the dwelling coverage and creating a no-fee monthly payment plan can be upheld.13
6. CA Introduces “Hardened Homes” Bill
The California Insurance Commissioner and state lawmakers introduced Assembly Bill 2367, named “Renew California”. The bill would create a Wildfire Resilience Task Force, which would include the Insurance Commissioner, the Director of the Office of Emergency Services, and the State Fire Marshal, to establish minimum standards for fire-hardened homes and communities. The bill would also require admitted property insurers in the state to write or renew policies when (1) the applicant or insured owns a residence with an estimated replacement cost consistent with the insurer’s underwriting guidelines and (2) the residence and community meet the minimum standards for fire-hardening.14
While mandatory HO-3 coverage for the FAIR Plan is not likely to be upheld in court, coverage limits for the plan will likely indeed be raised from $1.5 million to $3 million. This, combined with an elimination of electronic transfer fees, will likely result in higher FAIR Plan rates. Homeowners in wildfire-prone areas, already unable to obtain coverage from a traditional carrier, may also not be able to afford these higher rates. This could mean a continued lack of sufficient coverage in wildfire zones and could potentially impact current and future development in these areas if insurance coverage is not available.
1. http://www.insurance.ca.gov/0400-news/0100-press-releases/2018/release013-18.cfm2. http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release041-19.cfm3. https://www.fire.ca.gov/incidents/4. http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release063-2019.cfm5. https://www.insurancejournal.com/news/west/2019/12/06/550633.htm6. http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release063-2019.cfm7. http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release092-19.cfm8. https://www.nytimes.com/1996/04/25/us/florida-facing-crisis-in-insurance.html9. https://hazards.colorado.edu/archive/publications/wp/wp96.html10. https://floir.com/sitedocuments/234790-18-EO_Hurricane%20Michael_Suspension_of_Certain_Rules.pdf11. http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release089-19.cfm12. https://www.insurancejournal.com/news/west/2019/12/13/551251.htm13. https://apnews.com/3fc7481609f6158be21b0a32ff1d8d7f14. https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB2367
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