Group Sues California Department of Insurance Over FAIR Plan Surcharges

A consumer advocacy group has sued the California Department of Insurance and Commissioner Ricardo Lara to block hundreds of millions of dollars in surcharges that could soon appear on California homeowners’ insurance bills.

Consumer Watchdog said in a press release that those surcharges come from a decision reached by the commissioner last summer to allow the insurance companies that comprise and operate the California FAIR Plan, the state’s insurer of last resort, to pass through costs to policyholders when the FAIR Plan is forced to assess those companies for funds after a catastrophe.

Consumer Watchdog said that because of that decision, homeowners across the Golden State are on the hook to pay up to $500 million of the $1 billion FAIR Plan assessment approved on Feb. 11 after the Palisades and Eaton Canyon wildfires ravaged parts of Southern California.

“The commissioner’s decision to allow pass-throughs is unjustified on multiple levels,” said Consumer Watchdog staff attorney Ryan Mellino. “Homeowners and renters across the state will be charged more and the FAIR Plan won’t be depopulated. The real beneficiaries of this decision are the insurance companies that make up the FAIR Plan. We look forward to defending the rights and pocketbooks of Californians and stopping this socialization of FAIR Plan losses at the public’s expense, while the FAIR Plan’s profits will wholly remain with the insurance companies.”

In a statement responding to the announced litigation, a spokesperson from the American Property Casualty Insurance Association (APCIA) called the lawsuit “a reckless and self-serving stunt that threatens to make California’s insurance crisis even worse and harm the consumers Consumer Watchdog purports to represent.”

“Blocking recovery of the costs insurers have paid to safeguard the FAIR Plan would jeopardize the last-resort coverage option for homeowners—and push our fragile insurance market closer to total collapse,” said Denni Ritter, APCIA department vice president of state government relations. “It is critical that recovery costs be spread equitably across a broader pool of insured customers to help restore California’s insurance market and protect access to coverage for all consumers.”

Gabriel Sanchez, press secretary at the California Department of Insurance, said in an emailed statement the litigation negatively impacts homeowners, small businesses, and nonprofits that require access to genuine insurance options, while failing to address the ongoing insurance crisis.

“Additionally, 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,” he said.

Consumer Watchdog’s petition alleges the commissioner’s decision to allow insurance companies to shift costs to homeowners was reached without any public input or participation, in violation of the Administrative Procedure Act.

The petition also alleges that the pass-throughs directly violate the FAIR Plan statutes, “which contain no authorization for pass-throughs and require insurance companies to proportionally share in both the profits and losses of the FAIR Plan, and that the commissioner lacks any discretion to permit insurance companies to shift assessment costs onto homeowners,” Consumer Watchdog said.

“We recognize that the FAIR Plan has dramatically grown in recent years and agree with the commissioner that something must be done to address the situation,” Mellino said. “But the answer is not a unilateral bailout of hundreds of millions – and in the future, potentially billions – of dollars for insurance companies at the expense of their policyholders. California homeowners have suffered enough, and unlawful pass-throughs are just another insult on top of the significant injuries they’ve already faced.”

In the APCIA’s response, Ritter said that insurers are “committed to helping Californians recover and rebuild from the devastating Southern California wildfires. Insurers have already paid tens of billions in claims and contributed more than $500 million to support the FAIR Plan’s solvency—even though they do not collect premiums from FAIR Plan policyholders.”

Consumer Watchdog’s petition can be found here.

Topics Lawsuits California