Residential policyholders across California could be paying several hundred million dollars to help cover the costs of claims arising out of the January firestorms in Los Angeles County.
Multiple insurers, including State Farm General, the largest in California, have received approval from the Department of Insurance to charge their customers for a portion of a $1-billion assessment they were hit with due to the financial problems of the state’s insurer of last resort.
Surcharges that have been approved for some large insurers so far total more than $150 million, with the average surcharge for a standard homeowner’s policy (HO-3) around $50, depending on the carrier. The charge can be more or less according to the size of the premium and is split into monthly payments that can be spread over two years.
The California FAIR Plan Assn., operated and backed by the state’s licensed home insurers, was overwhelmed with an estimated $4 billion in residential and commercial claims stemming largely from the Palisades and Eaton fires that damaged or destroyed nearly 13,000 homes.
Unable to pay those claims, it assessed its member carriers the $1-billion charge in February, half of which they could seek to recoup from their residential and business customers across the state under regulations enacted last year by Insurance Commissioner Ricardo Lara.
The FAIR Plan’s members were assessed by their pro-rata share of the state’s insurance market, with State Farm General experiencing the largest assessment at more than $165 million. The vast majority was due to residential losses and it is seeking to recoup $81.5 million from those policyholders.
It received approval from regulators to temporarily charge customers with a standard homeowner’s policy a 1.13% fee for two renewal periods. Condo owners and renters face a 2.25% surcharge, but for just one renewal period. The fees will be assessed starting Dec. 1.
Homeowners with a standard policy will pay on average a total of $58, varying by the amount of coverage, according to the company’s filing. As is typical, condo charges are less, averaging $25, with renters paying around $4. Commercial customers are being charged a 0.26% fee for one renewal period starting Jan. 1, reflecting the lower fire losses for those policies.
“Recouping the costs associated with the FAIR Plan assessment helps State Farm General continue to serve California customers and that’s our ultimate goal,” company spokesperson Bob Devereux said.
The insurance department has received nearly 190 applications for surcharges to various residential and commercial lines from carriers. The department said it is not keeping a tally of how many carriers have received approvals, but multiple large insurers have, according to records reviewed by The Times.
Mercury is seeking to recoup $24.9 million in residential surcharges over a two-year period, charging 0.95% of premium. The first year surcharge is estimated to average $21.03 for a standard homeowner’s policy, $10.66 for condo owners and $1.90 for renters.
Second-year surcharges could be lower, but the final numbers will depend upon the number of active policies Mercury has at that time, a company spokesperson said.
Farmers Insurance, seeking to recoup $46.7 million from its residential policyholders, will charge homeowners with a standard policy a 1.02% fee, collecting an average of $51.64 over two years.
The FAIR Plan, established in 1968 to offer insurance to state residents and business owners who could not get or afford it elsewhere, has previously assessed its member carriers a total of $260 million.
In 1993, it assessed carriers following fires in Altadena and Malibu, and in 1994 it did so following the Northridge earthquake. At the time, carriers were not allowed to charge policyholders to recoup those expenses.
However, over the last several years the FAIR Plan’s rolls have risen sharply as insurers have pulled out of fire-prone neighborhoods, leaving residents little choice but to sign up with the plan. The plan had 625,000 residential policies in force as of Sept. 25, a 169% increase since September 2021.
That surge left the FAIR Plan with a dramatically higher financial exposure, and prompted Lara to push through regulations last year that allowed for the policyholder surcharges. The plan also recently sought a 36% rate hike.
Consumer Watchdog, a Los Angeles advocacy group, has called the surcharges an illegal industry bailout. It sued Lara in April, alleging that nothing in the statute creating the FAIR Plan contemplated a policyholder surcharge.
It also contended the regulation was approved by “administrative fiat,” rather than through the proper rule-making procedure. The group calculates that insurers have sought to recoup about $425 million from residential and commercial customers due to this year’s assessment.
A spokesperson for Lara has said that the ongoing lawsuit could reduce access to insurance by undermining efforts to restore competition “so people can get off the FAIR Plan and back to the regular market.”
Another lawsuit accuses the state’s licensed insurers of colluding to drop homeowners from their rolls and force them onto the plan, where policies cost more and offer less, reducing the carriers’ liabilities as backers of the plan.
The assessments also come as the FAIR Plan has been criticized over its handling of Eaton and Palisades smoke-damage claims. It has been sued multiple times by policyholders who allege the plan is offering low-ball settlements or denying claims outright by relying on illegal policy language.
The Department of Insurance also has accused the plan of improperly handling the claims and has launched a probe into the insurer. Last month, Gov. Gavin Newsom called on the plan to “expeditiously and fairly” handle the claims.
The FAIR Plan denies any wrongdoing. It also says it has no authority over how its member carriers manage costs associated with its assessment.
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