California Home Insurers Face Lawsuits Over Alleged Collusion
Two recent lawsuits filed in Los Angeles County Superior Court have accused dozens of California home insurers of colluding to drop policyholders and force them onto the California FAIR Plan Association, the state’s insurer of last resort. The lawsuits, which name over 200 insurers and affiliates as defendants, including major players like State Farm, Farmers, and Mercury, allege unfair competition and violations of the Cartwright Act, a state law that prohibits agreements to restrain trade, fix prices, or reduce competition.
The lawsuits claim that insurers engaged in a “group boycott” to terminate policies in fire-prone neighborhoods like Pacific Palisades, Malibu, and Altadena in early 2023, then refused to write new policies, leaving homeowners with no choice but to join the FAIR Plan. This plan offers limited coverage, including a $3-million coverage cap on dwellings, but at higher premiums. The insurers allegedly profited from these higher premiums while reducing their liabilities in the event of a catastrophe.
The FAIR Plan, established by the Legislature in 1968, is operated by the state’s licensed home insurers, who share in its profits and losses. By moving homeowners onto this plan, insurers could effectively increase rates without undergoing state review, according to the lawsuits. One lawsuit seeks compensation for policyholders who paid allegedly higher premiums, while the other seeks damages for homeowners who experienced losses during fires and suffered further due to inadequate FAIR Plan coverage. Both lawsuits seek treble damages.
The litigation cites meetings of the FAIR Plan’s governing committee and subcommittees, as well as weekly meetings of industry trade groups like the Personal Insurance Federation of California and the American Property Casualty Insurance Association (APCIA), as evidence of collusion. However, the lawsuits do not provide written documentation from these meetings. APCIA has stated that it complies with all applicable antitrust laws and has a legal right to voice industry concerns to the government.
Legal experts say proving collusion will be challenging. Donald Pepperman, an antitrust litigation specialist, notes that insurers may have acted in their own economic self-interest by dropping policyholders in unprofitable markets. Tom Baker, an insurance expert at the University of Pennsylvania Law School, agrees that the plaintiffs will need to show that insurers acted in a more “extreme” manner than supported by their actuarial data.
The plaintiffs’ attorneys, however, are confident that the discovery process will uncover evidence to support their claims. They plan to rely on accumulated evidence, including potential testimony from industry insiders, to demonstrate how insurers allegedly conspired to move policyholders to the FAIR Plan for their own benefit.
This litigation has the potential to shake up California’s home insurance industry, although its outcome remains uncertain. As the case progresses, it may reveal whether insurers have indeed engaged in anticompetitive practices or if their actions were simply a response to increasing wildfire risks and costs.
