California policyholders could be in trouble for wildfire losses

California homeowners could be forced to pay a surcharge if the state’s insurer of last resort cannot cover losses caused by a catastrophic fire.

The California Department of Insurance sent a bulletin to insurance companies this week outlining how the FAIR Plan, which offers coverage to homeowners who can’t find it elsewhere, can shift the costs incurred in “extreme loss scenarios” to consumers.

The state-created insurer is backed by all major companies licensed in California, including State Farm General Insurance Co. and Allstate Corp., which are responsible for paying claims if the plan runs out of funds.

Under new details of a plan first announced in July, insurance companies would be required to cover half the cost of losses of up to $2 billion in total claims — $1 billion for residential and $1 billion for commercial . But the other half can be recovered from consumers through a surcharge if the insurance commissioner gives approval.

The announcement comes as California faces a deepening home insurance crisis. Major insurers have cut coverage, citing increased fire risk and state-imposed limits on premium increases. For some, home insurance premiums have skyrocketed, while others have been unable to find coverage at all.

More than 419,000 properties are now covered by the FAIR plan, which has grown to become one of the state’s leading insurers. Its risk exposure is nearly $400 billion as of June 30, up 26 percent in six months.

“Although the FAIR plan has not had a solvency crisis in 30 years, we are not taking any risks,” Insurance Commissioner Ricardo Lara said in a statement. “The changes will strengthen the financial reserves and guarantees in the FAIR Plan so that it can fully and quickly pay all future claims from consumers.”

Costs can be passed on to consumers only after the FAIR plan has exhausted all its reserves, reinsurance and catastrophe bonds, according to the department.

Consumer advocates attacked the plan.

“It is outrageous and illegal for the insurance commissioner to force consumers to bail out home insurance companies and then call it consumer protection,” said Carmen Balber, executive director of Consumer Watchdog. “If the FAIR Plan is going to be in trouble, it will be because insurance companies have dumped too many Californians on its books. Those companies should be on the path of consequences, not all homeowners in the state.”

In the six months since a Bloomberg Green investigation revealed how California’s insurer of last resort was largely unprepared for the financial toll of a major fire, the state has proposed sweeping changes to stabilize the home insurance market and reduce the number of FAIR policies.

Under Lara’s proposal, California insurers would be allowed to raise premiums based on future climate change data and reinsurance costs. Existing rules require insurance companies to use only historical data and prevent them from basing rates on reinsurance.

Top photo: A firefighter puts out flames while battling the Highland Fire in Aguanga, California on October 31.

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California Catastrophe Natural Disasters Loss of Profit Fire