A class action lawsuit against the California FAIR Plan Association accuses the state's insurance of last resort program of illegally selling policies with deficient coverage for fire and smoke damage.
The lawsuit was filed Wednesday in Alameda County Superior Court on behalf of four California residents seeking to represent more than 365,000 FAIR Plan policyholders.
Funded by a group of private insurers that issue policies in the state, the FAIR Plan serves as backup insurance for people who cannot obtain coverage from private sources, especially those in high-risk areas where companies are reluctant to provide coverage.
In recent years, the state-run insurer has seen a wave of new policyholders amid extreme and destructive wildfires that have caused insurance companies to leave the state or stop renewing policies.
As of March, the FAIR Plan was exposed to $340 billion in liabilities due to the large number of policies it had issued.
The Department of Insurance requires that fire insurance policies cover “direct physical loss” caused by fire and smoke.
But beginning in 2017, the lawsuit says, the FAIR Plan began limiting coverage after state officials approved a standard policy that, among other provisions, paid for smoke damage only if it was detectable to the naked eye or the average person's eye, rather than requiring lab testing.
Dylan L. Schaffer, the plaintiffs' attorney, said the changes created a policy that is illegal and fails to provide mandatory minimum coverage for losses caused by a fire. It also puts residents at risk of exposure to contaminants that may not be visible to the human eye.
“The unlawful policy gives FAIR Plan and its member companies like State Farm and Nationwide license to refuse to properly investigate and pay claims for damages caused by wildfire smoke,” Schaffer said.
A spokesman for the California FAIR Plan Association said it does not comment on pending litigation.
Because of those changes, Schaffer said, thousands of wildfire claims have been improperly denied.
But the lawsuit also serves as an attempt to hold the Department of Insurance accountable for failing to enforce its own policies.
The lawsuit claims the department wrote a letter to the FAIR Plan in January 2021, saying the amended fire insurance policy was unlawful because it did not provide “the mandatory minimum coverage required by California law.” The letter also told the FAIR Plan that it had obtained approval of its policy based on “misrepresentations” and “concealment of material facts,” according to the lawsuit.
The letter ordered the FAIR Plan to reform its policies, the lawsuit says, and review claims it had rejected.
The lawsuit claims the department’s findings were further confirmed in a May 2022 report on the FAIR Plan’s handling of wildfire claims.
A spokesman for the Department of Insurance did not immediately respond to a request for comment.
Schaffer, who is also litigating a separate lawsuit on behalf of more than 1,000 Los Angeles homeowners who say the FAIR Plan wrongly denied their claims, said the FAIR Plan continues to sell the same policies despite the department's findings.
The lawsuit asks the court to order the association to comply with the law and increase the scope of wildfire coverage on all of its California policies.
“We’re not asking for money, we’re just asking for the California FAIR Plan to come out, to step in where all of its member companies are,” Schaffer said. “They all investigate smoke damage, determine smoke damage, and pay reasonable amounts toward repair.”
