The California FAIR Plan was organized by the state in 1968 as the insurer of last resort for fire insurance when a relatively small number of high-risk homeowners were unable to obtain policies from commercial insurance companies following a series of wildfires. Since 2018, under Governor Gavin Newsom, FAIR plan policyholders have grown from 150,000 to more than 450,000 as commercial insurers have left California due to premium adequacy issues.

While organized by the state, the FAIR Plan has no explicit financial support or guaranty from it. The plan’s financial resources, even before recent events, were measured in hundreds of millions of dollars compared with hundreds of billions in exposures. Even more egregious, FAIR Plan’s exposures are entirely high-risk -- those homes rejected by commercial insurers because they are the most likely to burn. Amazingly, under the guise of ‘improving’ the plan, the state doubled the insurance coverage available from the plan for homes and instituted a program for covering commercial buildings up to an astounding $100 million per location all while completely ignoring basic insurance principles of geographic diversification and concentration of risk.

No commercial insurer with this imbalance of resources to risk would be permitted to operate in California or any other state. Yet during Governor Newsom’s term, the plan became one of the state’s largest residential fire insurers. What is most tragic is most people insured by the plan have no idea how weak it is. As a result of the recent devastating fires, FAIR Plan assets will likely soon be exhausted. The question then becomes, how will its claimants be paid for their losses?

The state may say the plan is protected by reinsurance, but the amount the FAIR Plan must pay on specific losses before the reinsurance kicks in (its ‘retention’) is reportedly more than the plan’s total cash and liquid assets. In addition, once the retention is reached and paid, a very high proportion of those losses subject to reinsurance remain the responsibility of the plan, which has no internal ability to respond. Reinsurers may well take the position that they have no obligation to pay if the plan cannot meet the terms of its reinsurance contracts. Then there is the reality that the plan’s losses on recent fires, which have been reported by at least one source to be $24 billion, would be multiples of its reinsurance.

The state may also say that the plan is backstopped by all the commercial insurers selling homeowner’s insurance in the state, but this also may not be true. A bulletin issued by the State Department of Insurance in September 2024, purportedly to improve the FAIR Plan, gives insurers the right to recoup nearly all such losses from their future state homeowner’s policyholders. Given the predicted size of the recent losses, this pass-through could exceed thousands of dollars for every homeowner in the state.

Under Newsom’s nose, the state and its complicit Department of Insurance covered up its insurance crisis with fake insurance from the FAIR Plan. This has left 450,000 California homeowners in serious jeopardy and all California homeowners on the hook for this catastrophic mistake.

Image: Fair Plan