Consumer Group Sues to Stop California Insurers from Charging Customers for FAIR Plan Losses
A consumer group has filed a lawsuit against California Insurance Commissioner Ricardo Lara and his department to prevent insurers from passing on $500 million in losses from the Los Angeles wildfires to policyholders. The lawsuit, filed on Tuesday in Los Angeles Superior Court, challenges Lara’s authority to approve insurance companies’ requests to pass on these costs.
The California FAIR Plan, the state’s insurer of last resort, warned regulators in February that it was running out of money to pay claims stemming from the destructive wildfires in Los Angeles County. The California Department of Insurance authorized the FAIR Plan to charge private insurance companies $1 billion to cover claims payments. Under an agreement brokered by Lara and the FAIR Plan last summer, private insurers are allowed to pass on $500 million of that payment to policyholders.
Consumer Watchdog, the group behind the lawsuit, argues that Lara did not follow state law requiring public participation when negotiating the agreement. They also claim that the statutes creating the FAIR Plan in the 1960s require insurance companies, not their policyholders, to bear the burden of FAIR Plan losses.
The Department of Insurance declined to comment directly on the allegations, citing active litigation. However, Gabriel Sanchez, spokesperson for the department, stated that blocking insurers from passing on costs would negatively impact consumers if it makes private insurers take on fewer customers.
“It undermines our efforts to enhance competitiveness across the market, which would allow people to transition from the costly and limited FAIR Plan back to the standard insurance market,” Sanchez wrote in a statement.
Divided among the more than 8 million privately insured homes in California, the $500 million payment would result in a one-time charge of about $60 per household. However, if the FAIR Plan were to run out of money again this year due to another wildfire, private insurers would be able to pass on 100% of those costs to consumers under Lara’s agreement.
The FAIR Plan has grown significantly in recent years, covering a disproportionately large number of homes in wildfire-prone areas like Los Angeles County. Ryan Mellino, staff attorney for Consumer Watchdog, said, “We recognize that the FAIR Plan has dramatically grown, and agree with the Commissioner that something must be done. But the answer is not a unilateral bailout of hundreds of millions of dollars for insurance companies at the expense of their policyholders.”
The lawsuit highlights the ongoing challenges in California’s insurance market, particularly in areas prone to wildfires. The issue has significant implications for homeowners and insurance companies alike, as the state grapples with the consequences of increasingly severe wildfires.
