California
FAIR Plan’s First Assessment in Over 30 Years
Stephanie Duchene, Esq.
Willkie Farr & Gallagher LLP
(310)
855-3066
sduchene@willkie.com
The unprecedentedly
destructive fires in the Los Angeles area in January are reported to have
caused total property losses in the hundreds of billions, with insured losses reportedly
estimated as high as $75 billion.[1] The California Fair Access to Insurance
Requirements Plan (the “FAIR Plan”) has reported receiving approximately
5,000 claims and paying more than $1.2 billion to policyholders.[2]
The FAIR plan,
established pursuant to Section 10090 et seq. of the California
Insurance Code (the “CIC”), is an independent, not-for-profit
catastrophe insurer, formed in joint association by insurance carriers licensed
to write and engaged in writing basic property insurance in California.[3] Although intended to be an insurer of last
resort, it has taken an outsized role in insuring residential and commercial
properties in California that have been increasingly unable to obtain coverage
on the admitted market. Many admitted
carriers have recently limited new business or sought to non-renew existing
property business in California and some attribute that, at least in part, to
difficulties in obtaining rate increases reflecting current risks. As the
admitted market has shrunk, FAIR Plan exposure has grown significantly. As of September 2024, FAIR Plan exposure
totaled $458 billion, including $5.9 billion in wildfire exposure in Pacific
Palisades alone.[4]
The FAIR Plan
is administered in accordance with a plan of operation approved by the
California Insurance Commissioner (the “Commissioner”), most recently
amended in August 2024.[5] Member insurers
participate in the writing, expenses, profits and losses of the FAIR plan in
proportion to their premiums written as compared to aggregate premiums written
by all insurers in the program.[6] Funds for potential
payment of claims are obtained through FAIR Plan policyholder premiums, as well
as substantial reinsurance coverage purchased by the FAIR Plan under its
statutory authorization. The FAIR Plan
may, with the Commissioner’s authorization, levy assessments against member
insurers to fund claims and expenses. [7]
Although
characterized by the Commissioner as “highly unlikely” as recently as September
2024,[8] on February 11, 2025 the
Commissioner approved, through Order 2025-1, the first FAIR Plan assessment on
members since 1994.[9] The FAIR Plan immediately notified each
admitted market insurer of their assessment responsibility, funds for which
must be remitted within 30 days of the date of notice.[10] Assessments accrue
interest (at the federal reserve discount rate plus 250 basis points) if unpaid
within thirty days of notice, and an insurer that fails to pay may have its
certificate of authority suspended or revoked unless granted an exemption or deferment
by the Commissioner on the basis that payment would bring it below statutory
minimum capital and surplus requirements.[11] Where affiliated insurers
are impacted, the insurance group may designate a carrier to pay the assessment
on behalf of the group.[12]
Recent
guidance allows insurers to recoup the cost of assessments from policyholders
under certain circumstances, but only if the insurer confirms that its
assessment payment was not covered by reinsurance or reimbursed through other
means.[13] Requests to recoup
assessment amounts are subject in all instances to the filing and prior
approval requirements of California’s Proposition 103 and must be made within
six months of the FAIR Plan’s assessment notice,[14] which would likely delay
the immediate impact on insurer policyholders of such recoupment. This recoupment process is unprecedented and
it remains to be seen how the California Department of Insurance will address
such requests.
[1]
UCLA Newsroom, February 4, 2025 regarding the UCLA Anderson Forecast economist
report. https://newsroom.ucla.edu/releases/los-angeles-wildfires-caused-up-to-164-billion-in-property-capital-losses#:~:text=A%20new%20report%20from%20the,losses%20estimated%20at%20%2475%20billion.
[2]
Update From the California FAIR Plan, February 21, 2025: https://www.cfpnet.com/update-from-the-california-fair-plan-6/
[3]
California FAIR Plan Association Plan of Operation dated August 27, 2024
§ III (the “Plan of Operation”). Basic Property Insurance is defined as:
insurance against direct
loss to real or tangible personal property at a fixed location in those
geographic or urban areas, as designated by the commissioner, from perils
insured under the standard fire policy and extended coverage endorsement, from
vandalism and malicious mischief, and includes other insurance coverages as may
be added with respect to that property . . . with the approval of the
commissioner or by the commissioner, but shall not include insurance on
automobile risks, commercial agricultural commodities or livestock, or
equipment used to cultivate or transport agricultural commodities or livestock.
Cal. Ins. Code § 10091(c)(1).
[6]
Plan of Operation § XXI.
[7]
CIC § 10094(c); Plan of Operation § XXI.
[8]
California Department of Insurance Bulletin 2024-8, September 3, 2024, “Insurer
Recoupment Procedures in the Highly Unlikely Event of Assessment by the FAIR
Plan” https://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/BULLETIN_2024-8__RE_INSURER_RECOUPMENT_PROCEDURES_IN_THE_HIGHLY_UNLIKELY_EVENT_OF_ASSESSMENT_BY_THE_FAIR_PLAN.pdf.
[9]
ORDER NO. 2025-1 APPROVING THE CALIFORNIA FAIR PLAN ASSOCIATION’S REQUEST TO
ISSUE ASSESSMENT, February 11, 2025, https://www.insurance.ca.gov/0250-insurers/0500-legal-info/0700-commissioners-orders/upload/Order-No-2025-1-Approving-the-California-FAIR-Plan-Association-s-Request-to-Issue-Assessment.pdf.
[10] The
assessment amount is “based on the proportion that the insurer’s premiums
written during the second preceding calendar year for that line of business
bear to the aggregate premiums written by all insurers in the program for that
line of business, excluding that portion of the premiums written attributable
to the operation of the association,” bifurcated between Dwelling and
Commercial Property Policies (Division I policies) and multiperil
Businessowners’ policies (Division II policies) to reflect losses proportionate
to that line of business. Plan of Operation § VII.D.
[13]
Bulletin 2024-8 pp. 2–3; California Department of Insurance Bulletin 2025-4,
February 11, 2025, pp. 2-5 https://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/Bulletin-2025-4-Updated-Guidance-regarding-Insurer-Recoupment-Procedures-in-Response-to-Assessment-by-the-FAIR-Plan.pdf.
[14] Id.;
Cal. Ins. Code § 1861.01 et seq.