New insurance rules mean homeowners throughout California are likely to pay more after fires
New York
CNN
—
A recent rule change could cause insurance premiums to spike for homeowners across California, as the costs of the Los Angeles area wildfires are passed onto them in a way that was not allowed in the past.
The hikes would come from a potential assessment likely to be levied by California FAIR, the program set up by the state as the insurer of last resort for homeowners whose fire insurance has been canceled by companies seeking to limit their risks.
In the past, assessments to cover claims from large events, such as the costly wildfires in 2017 and 2018, ended up coming out of the insurance industry's bottom line. And those big events could not be used as a justification to raise premiums for other policyholders around the state. The industry reported large losses in those two years from wildfires that essentially wiped out a decade worth of profits.
But last July, State Insurance Commissioner Ricardo Lara announced a little noticed change in the state's rules governing insurance rates that allows much of that potential cost to be passed onto homeowners throughout California in the form of higher premiums.
The final cost of insured losses from the fires, both from California FAIR and private insurers, is not yet known, but it's estimated to be in the tens of billions of dollars. And it appears that this rule change, along with another rule change announced in December, will allow insurers to raise premiums throughout California, even on those living in areas with little or no risk of wildfires.
The July rule change allows insurers to cover the costs that California FAIR passes onto them to recoup 50% of the first $1 billion in assessments they are hit with and 100% of all assessments above that level. The December rule change, announced just days before the fires in Southern California started, allows insurers to include the cost of reinsurance policies, insurance companies' own insurance, they purchase when calculating homeowners' premiums. Neither cost had been allowed when calculating premiums before.
Some of the areas suffering the worst damage from these wildfires already had seen massive cancellations of private insurance in the last year, leading to huge increases in the percent of homeowners forced to turn to California FAIR, a pricey program that only protects from fire loss but not from other potential claims typically covered by homeowners' insurance, such as burglary, flooding caused by broken pipes or liability claims.
California FAIR has its fifth greatest exposure, with $5.9 billion according to the program, in the Pacific Palisades, a community virtually destroyed by one of the costliest fires. The number of policies California FAIR has written in that community's zip code increased 84% in the 12 months ending in September, according to the program's database. Its exposure in that zip code has more than doubled over the same period.
FAIR's exposure also increased 41% and 26% in the 91001 and 91103 zip codes in Altadena, another community hard hit by a separate fire. FAIR has $1.3 billion of exposure in those two zip codes as of September.
In March, Victoria Roach, the president of California FAIR, testified to the state legislature that it had about $700 million in cash on hand at that time. The program does not disclose its finances on an ongoing basis, but it issued a statement earlier this week saying that it has "payment mechanisms in place, including reinsurance, to ensure all covered claims are paid." But part of those mechanism is the ability to demand payments from the private insurers in the state.
Commissioner Lara heralded July's change in rules as part of an overdue modernization of California FAIR.
"It's critical for Californians to understand that a growing FAIR Plan contributes to our insurance crisis," he said at that time. "By strengthening the FAIR Plan while providing financial stability and solvency protections, we are creating long-term security for consumers, homeowners, and businesses across the state that is long overdue."
But consumer advocates said it was an unneeded and illegal bailout of the insurance industry that had left thousands of homeowners with no alternative than to use FAIR to protect themselves from catastrophe. They vowed legal challenges once the rate increases are announced.
"This new rule really goes against the statute enacting the FAIR plan that the insurance companies operating in the state must share in FAIR plan losses," said Carmen Balber, executive director of Consumer Watchdog, a nonprofit, nonpartisan consumer advocacy group that focuses on the insurance market in California. "There's nothing in that original law about allowing those insurers being able to pass losses onto homeowners."
A member of a search-and-rescue team inspects a burned house in the Pacific Palisades neighborhood of Los Angeles on Thursday, January 16.
Apu Gomes/Getty Images
Members of Calvary Disaster Relief pray with a resident in Altadena, which suffered extensive damage from the Eaton Fire, on Wednesday, January 15.
John Locher/AP
The remains of beachside homes are seen along Pacific Coast Highway in Malibu.
Jeff Gritchen/MediaNews Group/Orange County Register/Getty Images
Jaclyn Senis and Laura Shockley, both displaced because of the Palisades Fire, embrace after dropping their children off at a new school in the Brentwood neighborhood of Los Angeles.
David Ryder/Reuters
Eliot Arts Magnet Academy, a middle school in Altadena, is seen burned on Tuesday, January 14.
Jason Armond/Los Angeles Times/Getty Images
The sun rises behind a burned car in the Santa Monica Mountains.
Loren Elliott/The New York Times/Redux
A Mexican search-and-rescue team walks alongside a road overlooking burned homes in Malibu.
Caroline Brehman/EPA-EFE/Shutterstock
Firefighter Tristan Rios uses his bare hand to gauge the temperature of the ground while extinguishing hot spots in the Fernwood area of Topanga on Monday, January 13.
Max Whittaker/The New York Times/Redux
This aerial photo shows homes destroyed in Pacific Palisades.
Mario Tama/Getty Images
People sing at the Love and Unity Christian Fellowship church in Compton. A worship night of healing and restoration was held for families affected by the fires.
Michael Tullberg/Getty Images
Smoke from the Eaton Fire lingers above the mountains of the Angeles National Forest, north of Altadena.
Etienne Laurent/AFP/Getty Images
Firefighters battle the Palisades Fire in the Mandeville Canyon neighborhood of Los Angeles on Sunday, January 12.
Ringo Chiu/Reuters
A utilities worker views damage in Pacific Palisades.
David Ryder/Reuters
A firefighter works to extinguish lingering fires in Malibu.
Jason Ryan/NurPhoto/Getty Images
Charred backpacks are seen in the rubble of Marquez Charter Elementary, which was destroyed in Pacific Palisades.
Jason Armond/Los Angeles Times/Getty Images
Wildfire smoke covers downtown Los Angeles.
Apu Gomes/Getty Images
People affected by the wildfires visit the LILA (Lycée International de Los Angeles) relief center for needed supplies.
Valerie Macon/AFP/Getty Images
A firefighter stands guard near a home as the Palisades Fire spreads toward the Encino neighborhood of Los Angeles on Saturday, January 11.
Jason Armond/Los Angeles Times/Getty Images
Kids skate at the Venice Skatepark as smoke from the Palisades Fire can be seen in the background.
Apu Gomes/Getty Images
A girl sleeps on her mom's shoulder at a distribution center that was set up for people affected by the Eaton Fire.
Mario Anzuoni/Reuters
Fire retardant covers the backyard of a home in Mandeville Canyon.
Eric Thayer/AP
Firefighters pull a hose as they battle the Palisades Fire.
Justin Sullivan/Getty Images
The Palisades Fire burns near a house in Mandeville Canyon.
Shannon Stapleton/Reuters
Ella Venne searches through the remnants of her family's home in Altadena after it was destroyed by the Eaton Fire.
Mark J. Terrill/AP
Smoke rises from the Palisades Fire.
Myung J. Chun/Los Angeles Times/Getty Images
Alec Miller from the Torrance Fire Department looks at smoke billowing from the Palisades Fire in the Brentwood area of Los Angeles.
Shannon Stapleton/Reuters
Firefighters watch as water is dropped on the Palisades Fire.
Justin Sullivan/Getty Images
A statue stands amid damage from the Palisades Fire in Malibu on Friday, January 10.
Eric Thayer/AP
Volunteers help unload supplies to be distributed to people in Pasadena.
Mario Anzuoni/Reuters
A burned fire extinguisher sits in the auditorium at the Eliot Arts Magnet Academy, which was destroyed by the Eaton Fire in Altadena.
Justin Sullivan/Getty Images
Paula Tapia hugs Katja Schmolka, who lost her home in Pacific Palisades.
David Ryder/Reuters
Smoke from the Palisades Fire rises over the hills near Santa Monica.
Carlos Barria/Reuters
Citrus fruit is burnt in Altadena.
Nic Coury/AP
Members of the National Guard block entrances along New York Drive in Altadena.
Jill Connelly/Bloomberg via Getty Images
Vehicles charred by the Eaton Fire sit inside a dealership in Altadena.
Jae C. Hong/AP
A firefighter surveys a hotspot in Altadena.
Maria Alejandra Cardona/Reuters
A retro Volkswagen bus sits among burned-out homes in Malibu on January 9. The vehicle stood out among a sea of destruction as it sustained minimal damage. "I'm speechless to see all the houses burnt, and I can't believe that Azul the bus, that's what we named it, survived," the van's owner, Megan Krystle Weinraub, told CNN's Erin Burnett.
Mark J. Terrill/AP
A lone tree, burnt from the Kenneth Fire, remains on a hill in the West Hills section of Los Angeles.
Etienne Laurent/AP
A man comforts his daughter on the charred ruins of their family home in Altadena.
Zoë Meyers/AFP/Getty Images
The Palisades Fire is the most destructive in the history of Los Angeles County.
Maria Alejandra Cardona/Reuters
Fire crews battle the Kenneth Fire.
Ethan Swope/AP
A person walks amid destruction in the Pacific Palisades neighborhood.
Jae C. Hong/AP
Desiree Johnson is embraced by her neighbor after her home was destroyed by the Eaton Fire.
Zaydee Sanchez/Reuters
A group rescues horses in Atladena on January 8.
Michael Nigro/Bloomberg/Getty Images
Juan Munoz pours water on the fire-ravaged remains of his home in Atladena. He has lived there for more than 39 years.
Jason Armond/Los Angeles Times/Getty Images
An apartment building lit by the Eaton Fire collapses in Altadena.
Jon Putman/NurPhoto/AP
California Gov. Gavin Newsom, right, tours the downtown business district of Pacific Palisades.
Eric Thayer/Getty Images
Firefighters work from a deck as the Palisades Fire burns a beachfront property in Malibu.
Etienne Laurent/AP
People embrace outside of a burning property in Altadena.
Ethan Swope/AP
A firefighter is seen through the window of a damaged property while battling the Eaton Fire in Altadena.
Nic Coury/AP
Megan Mantia and her boyfriend, Thomas, return to Mantia's fire-damaged home after the Eaton Fire swept through Altadena.
Ethan Swope/AP
CNN's Anderson Cooper reports from the Eaton Fire in Altadena.
Jason Armond/Los Angeles Times/Getty Images
Edgar Hernandez waits outside the Pasadena Humane Society to shelter his cat after evacuating his home in Altadena.
Zaydee Sanchez/Reuters
An Altadena home is engulfed in flames.
Josh Edelson/AFP/Getty Images
A firefighter battles a house fire from a residence next door as the Palisades Fire burns in Malibu.
Wally Skalij/Los Angeles Times/Getty Images
Wildfire smoke covers parts of Los Angeles.
mpi34/MediaPunch/IPX/AP
A man walks past an Altadena business ravaged by the Eaton Fire.
Ethan Swope/AP
A dog barks as the Eaton Fire destroys part of Altadena.
Ethan Swope/AP
A senior living facility is evacuated as the Eaton Fire approaches in Altadena.
Ethan Swope/AP
Palm trees are burned from the Palisades Fire in Malibu.
Eric Thayer/Getty Images
A firefighter battles the Eaton Fire in Altadena.
Ethan Swope/AP
Charlotte, 11, sits inside a car outside the Pasadena Humane Society. Her family planned to shelter their dog, Sid, after they left because of the Eaton Fire.
Zaydee Sanchez/Reuters
Smoke from multiple fires covers the skyline in Los Angeles.
Carlin Stiehl/Reuters
Fire crews begin to clear a toppled tree in Pacific Palisades.
Etienne Laurent/AP
A woman reacts to the Eaton Fire in Altadena.
David Swanson/Reuters
Water is dropped over Pacific Palisades by a firefighting helicopter, on January 7.
Etienne Laurent/AP
Firefighters kick down a fence as they battle a fire approaching homes in Pasadena.
David McNew/Getty Images
The Palisades Fire is seen from a plane.
Mark Viniello via Reuters
A Pacific Palisades resident stands in front of a garage.
Ethan Swope/AP
Firefighters do not know what caused the Palisades Fire.
Ethan Swope/AP
Firefighters work to put out the wildfire in Pacific Palisades.
Philip Cheung/The New York Times/Redux
A surfer takes off on a wave in Santa Monica as the sky is blackened from the Palisades Fire.
Richard Vogel/AP
A person uses clothing to partially cover their face near Pacific Palisades.
Mike Blake/Reuters
A home burns in Pacific Palisades.
Ethan Swope/AP
People watch from the Santa Monica Pier as smoke grows from the Palisades Fire.
Anna Sophia Moltke/SOPA Images/Sipa
Will Adams watches as flames from the Palisades Fire close in on his property.
Ethan Swope/AP
A man in a wheelchair is evacuated from Pacific Palisades.
Caroline Brehman/EPA-EFE/Shutterstock
The Palisades Fire burns a Christmas tree inside a home.
Ethan Swope/AP
A firefighter battles an advancing wildfire in Pacific Palisades.
Etienne Laurent/AP
A view of the Palisades Fire from Venice.
Karen Ballard
A woman cries as a fire advances in Pacific Palisades.
Etienne Laurent/AP
The Palisades Fire burns several miles behind the Santa Monica Pier.
Genaro Molina/Los Angeles Times/Getty Images
In pictures: Deadly wildfires in Los Angeles County
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Lara's office did not return a request for comment on the July change in rules. But he told CNN last week when discussing the December rule change that the best way to protect homeowners is to get insurers more willing to write homeowners policies themselves in areas at the greatest risk of wildfires, rather than forcing those homeowners to turn to California FAIR.
"We are being realistic about the risks in California," Lara told CNN last week. "We can never get to affordability unless we address the availability."
Balber said it's way too soon to project how much homeowner policy costs might increase with insurers able to pass on any assessment they receive from California FAIR. But it could be substantial, she said.
"We estimated If the FAIR plan needs to assess insurance companies $10 billion for its costs that aren't covered by reinsurance, and there are about 9 million homeowners in the state, that's about $1,100 on every homeowner's bill," she said.
