Staggering losses from the Los Angeles wildfires could raise rates for homeowners throughout California, even if they aren’t in the California FAIR plan, the state’s high risk insurance pool, consumer groups warned.
Catastrophic fires in Pacific Palisades and Altadena, torched more than 12,000 homes and killed two dozen people, according to CalFire, causing up to $30 billion in losses. The fires leveled entire neighborhoods, leaving smoking rubble that looks like fire-bombed wreckage.
Some of that damage will fall under private insurance policies, but at least $6 billion will likely fall to the FAIR Plan, the Wall Street Journal reported. Those claims could swamp the plan, which has just about $200 million in cash and $2.5 billion in reinsurance coverage.
To cover the losses, state insurance regulators may require private insurers to make up the balance. That could cost policy holders on private plans $1,000 to $3,700, Fortune magazine reported.
To be clear, it’s not a done deal whether the state will make commercial insurers share the costs of L.A. claims.
How We Got Here
California established the FAIR Plan in 1968 as an insurer of last resort for properties in high fire risk areas that private insurers won’t cover.
“While we will support homeowners regardless of a property’s fire risk, unlike traditional insurers, our goal is attrition,” the site states. “For most homeowners, the FAIR Plan is a temporary safety net – here to support them until coverage offered by a traditional carrier becomes available.”
It hasn’t worked out that way. Over the years it has become the only option for many more homeowners. The number of FAIR Plan policies more than doubled from 202,897 in 2020 to 451,799 in 2024, as private insurers, reeling from previous fires, cancelled or declined to renew policies. In April we looked at State Farm’s decision to cut 72,000 properties throughout the state, including more than 2,000 in San Diego County.
With commercial insurers retreating, more policies are spread across the high-risk pool, leaving resources thin in the case of catastrophe. If there’s a shortfall, California can require commercial home insurers to pay the rest of the claims, divvying up the liability based on their shares of the home insurance market and charging their policyholders for part of that expense.
Passing the Hat
This isn’t a new concept, Rex Frazier, president of the Personal Insurance Federation of California, told me. A similar process takes place if a commercial insurer goes bankrupt; other California insurance companies are on the hook to pay the outstanding claims.
“In essence, the entire state of policyholders passes the hat to help the claimants of the bankrupt insurer,” Frazier said.
The remaining insurers then recoup those dollars from their policyholders, so that they don’t in turn go bankrupt, he said.
The FAIR Plan, “CANNOT go bankrupt,” Frazier said, so other insurers must pick up the cost of claims it can’t cover. Private companies can pass up to 50 percent of those costs onto their policyholders for the first billion dollars, and 100 percent of costs beyond $1 billion.
Frazier and other insurance industry experts I contacted said they’re not sure how likely it is that private policyholders will have to kick in for L.A. fire damages. A spokesperson for the FAIR Plan said in a statement that it’s still assessing losses and the full scope of L.A. claims is unknown.
“The FAIR Plan cannot speculate about the future impact of this disaster on California policyholders,” said Hilary McLean, a spokesperson for the plan.
Could the state help out? Assemblymember David Alvarez thinks there’s another way to pay those claims.
He introduced a bill last week to authorize the California Infrastructure and Economic Development Bank Fund, or iBank, which funds public infrastructure and development, to issue bonds and then loan those funds to the FAIR Plan.
The idea is to let insurers spread the cost of claims over a longer time period, “because we want consumers to get their money as soon as possible ,and use the iBank to borrow over a long period of time so there’s not a big hit all at once,” he said.
Alvarez said private insurers may also be able to borrow against state bonds issued by the iBank. Having a financing option for catastrophic claims could persuade commercial insurers to stay in the state and help keep people off the FAIR Plan, he said.
“We’re all in this together and the more we stabilize the market, the less expensive it’s going to be to get adequate insurance to cover our households for all of the catastrophes that will occur,” he told me.
Special Legislative Session Offers Patchwork of Wildfire Options
In the middle of a special legislative session to “Trump-proof” California against unwanted federal policies, state lawmakers added wildfire relief to the agenda.
They’ve floated a lot of ideas, but provided little detail, about how to expedite insurance claims, fast-track rebuilds, provide fire aid to undocumented immigrants and boost penalties for arson, CalMatters writer Yue Stella Yu reported yesterday.
Here’s What Some San Diego Lawmakers Have in Mind:
Alvarez also wants to find ways to rebuild quickly and prevent future fires: “Can we provide insurance discounts for those who are doing (wildfire) hardening? Just generally, how do we make it easier to build housing?”
Sen. Brian Jones calls for increasing prescribed burns to reduce fire risk, and getting more Californians back onto commercial insurance policies: “We have to get the insurance market back to where companies who have left can come back, and the ones that are here can start writing policies again.”
State Sen. Catherine Blakespear wants to see anti-price gouging measures for the insurance industry, and protections to keep insurance companies from dropping policies.
Assemblymember Chris Ward: said he’ll watch to make sure that San Diegans are treated fairly as the bill comes due for rebuilding Los Angeles: “What I don’t want to do – as sympathetic as I am to Angelenos – is to approve anything casually, because this is coming off of the taxpayers of San Diego.”
The Sacramento Report runs every Friday. Do you have tips, ideas or questions? Send them to me at deborah@voiceofsandiego.org.
The terms “exposure” and “claims” and “losses” are being conflated here. The FAIR Plan estimates it has $4 billion of potential exposure for the Pacific Palisades fire and $775 million in potential exposure. However, according to the FAIR Plan, “actual claims following a fire have historically represented, on average, about 31% of the total exposure in that area”, noting some fires are substantially higher or substantially lower than this historical benchmark.
So it is not accurate to say “$6 billion in losses will likely fall to the FAIR Plan.”
I am the CEO of the Independent Insurance Agents and Brokers of California (IIABCal) and based in San Diego. I am always available to answer questions about property insurance. Thank you for covering this important topic.