California’s "insurer of last resort" has an unlawful smoke damage policy, a Los Angeles judge ruled Tuesday, marking the latest development in the state’s ongoing insurance crisis.
Los Angeles County Superior Court Judge Stuart Rice found that the California FAIR Plan Association violated the state’s insurance code with its coverage for smoke damage.
The statewide code mandates coverage for all “loss by fire” without distinguishing between fire and smoke damage. The FAIR Plan, on the other hand, differentiates between the two and doesn’t provide adequate coverage for smoke damage, Rice said.
It’s a policy that dates to 2017, when, according to court documents, the FAIR Plan revised its coverage. At that time, the association said it was modifying its policy language, redefining “direct physical loss” and requiring evidence of “permanent” damage for coverage.
“These changes are substantive, and in some circumstances, there has been a reduction of limits and elimination of coverage,” the association wrote in a memo. “This limitation on what is considered direct physical loss will result in denial of claims that might have been paid under prior policy wording.”
Hilary McLean, a spokesperson for the FAIR Plan, said the insurer “is reviewing the decision.”
“As the FAIR Plan is in the process of updating its policy language to reflect the manner in which claims have been adjusted since last year, it is unlikely to pursue an appeal,” she added in a statement.
Since the 2017 change, policyholders have raised concerns that the updated policies make it harder to receive compensation for smoke damage, especially because of wildfires. Rice noted in his ruling that there has been a “proliferation” of similar cases.
Now, the FAIR Plan must treat smoke damage as a loss by fire, in accordance with the state insurance code.
Dylan Schaffer, the attorney who represented the plaintiff, called the ruling “completely game changing.”
“It’s by a very significant margin the biggest ruling of its kind in the insurance industry in at least 10 years,” he told Homes.com.
California’s insurer of last resort is becoming homeowners’ first choice
The FAIR Plan was originally established as the insurer of last resort for homeowners who could not obtain insurance elsewhere. It was meant to serve as a temporary backstop while residents sought coverage on the open market.
But as destructive wildfires have become the norm in the state and big-name insurers have exited the California market, that’s changed. “People are coming to us first,” Victoria Roach, president of the FAIR Plan, told the state Assembly Standing Committee on Insurance in May.
“We kind of look at ourselves as, you know, I break my leg, I get crutches. The crutches are supposed to be there till my leg heals. And then, you know, hopefully I'm not on crutches for the rest of my life. That's kind of the FAIR Plan. We're the crutch to get them through the crisis and back into the market today,” she added. “As you'll see by our numbers, that's not what's happening.”
Last year, the plan's policy count grew by 40% on a yearly basis. Its exposure to risk increased by 60%. As of March, the association was on track to hit those same numbers this year with close to 575,000 policies and nearly $600 billion worth of risk associated with them.
At the May meeting, Roach said homeowners are now turning to the FAIR plan “because of price” but “more often because they just can’t get insurance anywhere else.”
The influx of policies has put a financial strain on the FAIR Plan. As of May, Roach said, the association estimated it would pay about $4 billion in claims as a result of January's wildfires.
After Tuesday’s ruling, the association remains focused on the consumer, McLean said.
“As the insurer of last resort, the FAIR Plan remains committed to providing insurance to California homeowners who are unable to find coverage,” she said.