Note: This has been updated with FAIR Plan comments below.
Changes to the insurance plan offered by California’s property insurer of last resort could possibly go into effect as early as the next few months – that is if no legal challenges are offered up by the organization.
California Commissioner Ricardo Lara took a controversial step in ordering California’s FAIR Plan to begin offering a comprehensive homeowners (HO-3) coverage, in addition to its current dwelling fire-only coverage, by June 1, 2020. The comprehensive policy would include traditional homeowner insurance features such as coverage for personal liability, water damage and theft.
The CDI has said a growing lack of availability of homeowners and fire insurance has touched virtually every county in the state and threatens home values, real estate transactions, tax revenues, emergency services, and the integrity of California communities.
Lara also ordered the FAIR Plan to increase coverage limits on its current dwelling policies from $1.5 million to $3 million and allow for policyholders to pay monthly and by credit card.
The insurance industry, including FAIR Plan officials, have not fully embraced Lara’s plan. FAIR Plan officials have warned the move could have unintended consequences and ultimately hurt consumers, while agents say adding the homeowners coverage is unnecessary.
However, there may not be much FAIR Plan officials can do but obey Lara’s directives, according to the California Department of Insurance.
“The FAIR Plan is obligated to act on the changes to the plan as directed by the commissioner,” said Joel Laucher, a senior adviser to the CDI.
Laucher said the commissioner is given the authority to order the changes to the plan as part of California Insurance Code 10095(f), which outlines how the FAIR Plan is subject to the approval of the commissioner.
“The department strongly believes that we have this authority,” Laucher added.
A spokeswoman for the FAIR Plan emailed the following statement in reply to a request for comment for this article:
“Last July, before the Commission(er) issued his order, the FAIR Plan’s Governing Committee approved increasing coverage limits for homeowners from $1.5 million to $3 million and to implement a credit card payment system. Since then, the FAIR Plan team has been working to implement both of these changes with anticipation that they will be options available for policyholders by mid-2020.”
A request for an interview with Anneliese Jivan, president of the California FAIR Plan Association, went unanswered.
The spokeswoman was asked what the FAIR plan board planned to do about Lara’s request on the HO-3 policy, and the emailed reply was:
“The FAIR Plan is still evaluating the order from the Insurance Commissioner and has not yet determined next steps.”
If FAIR Plan officials don’t want to follow Lara’s orders, they can take the matter up with the courts, according to Laucher.
“If they disagree with our authority, it basically can become a legal matter,” Laucher said.
Laucher said the CDI expects the first changes to the FAIR plan to come in February, in the form of giving policyholders the ability to make monthly payments and use credit cards.
And he believes limits could be raised by Spring.
“Our expectation is that the limits will be out there by April 1,” Laucher said.
FAIR Plan officials have already signaled an interest in raising limits from the $1.5 million to $3 million, and enabling people to pay more often and with credit cards isn’t expected to be a point of contention.
The sticking point that separates the CDI and FAIR Plan officials appears to be the HO-3 coverage.
“The commissioner has been visiting with local governments, business owners and homeowners in counties around the state –in Calaveras County and Nevada County and El Dorado County – and everywhere he goes, he hears the same issue about people needing to have two policies, and if they get pushed into the FAIR Plan, they still have to buy a Differences in Conditions policy,” Laucher said.
This requires policyholders to pay an administration cost twice as opposed to buying one policy. He estimates the administration cost is somewhere around 35% to 40% of the premium.
While an increased number of severe wildfires in California has pushed more homeowners into the surplus market and the FAIR Plan, a majority of homeowners can still find insurance in the admitted market.
The most recent figures from the California Department of Insurance as of 2018 show that 1.4% of state’s homeowners market is going to surplus lines, and 1% is going to the FAIR plan. The remainder is in the admitted market.
The Surplus Line Association of California has reported a rise in homeowners premiums and policy counts as more wildfires erupt throughout the state each year. SLA-Cal figures show premiums were $136.9 million as of the first nine months of 2019, up from $97.7 million for the first nine months of 2018. The numbers have been rising steadily in the last few years: $81.8 million in 2017; $76.6 million in 2016; $65.9 million in 2015.
CDI figures over four years show the number of rate increases filed rising from 25 in 2015 to 69 in 2018.
But insurers aren’t just raising rates, some are offering more coverage.
PURE Programs in November announced the launch of a new High Wildfire Risk Homeowners Insurance program, with coverages for retail insurance brokers serving clients that own high value homes in California at greater-risk of loss from wildfire.
The program is offered in partnership with National Fire & Marine Insurance Co., a member of the Berkshire Hathaway group of insurance companies, which will serve as the excess and surplus lines insurer for the new offering.
Sage Insurance Holdings LLC, a California wildfire-focused homeowners insurance provider, also last month announced increased capacity. Sage will now write exposures up to $4 million total insured value, which for a primary home, translates to an allowable Coverage A of $2,100,000.
Jivan, president of the California FAIR Plan Association, has publicly disagreed with Lara’s HO-3 orders for the FAIR Plan. In a statement issued in late November, she said that wraparound coverages such as Difference in Conditions products that complement a FAIR Plan policy are readily available in California from numerous companies.
The CDI publishes a list of insurers that offer these products, so consumers who buy both have the same or similar coverage as a traditional homeowners HO-3 policy, according to Jivan.
“The FAIR Plan has experienced an increase in new policyholders over the last year and is prepared to accept additional customers in need of basic property coverage,” the statement reads.
Jivan said the FAIR Plan has already committed to increase coverage limits and supported legislation to encourage more insurance companies in the voluntary market to provide coverage in the parts of the state most at risk of wildfire.
“Forcing the FAIR Plan to offer comprehensive HO-3 homeowners insurance would not help consumers save money and would be counter to the FAIR Plan’s role as a stabilizing force in the insurance marketplace,” the statement reads.
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