California homeowners are suing dozens of insurance companies, claiming they devised an “illegal scheme” to boost profits by dropping customers and reducing coverage across the state.
By shrinking their presence in California, the class action lawsuit contends, insurers conspired to force homeowners onto the state’s FAIR Plan, an expensive last-resort insurance program. In turn, the private insurance companies, which each own a piece of the high-risk plan, have been able to charge higher prices while offering less comprehensive coverage, the lawsuit claims.
“By colluding to push plaintiffs and so many like them to the FAIR Plan, the defendants have reaped the benefits of high premiums while depriving homeowners of coverage that they were ready, willing and able to purchase to ensure that they could recover after a disaster,” said Michael Bidart, an attorney for the homeowners, in a statement.
The class action lawsuit, filed last week in Los Angeles County, seeks unspecified damages for hundreds of thousands of homeowners statewide. The state’s largest insurers, including State Farm, Allstate, Farmers, Liberty Mutual and CSAA, are listed as defendants.
A separate lawsuit filed by the same attorneys on behalf of victims of the Los Angeles wildfires earlier this year makes similar claims. It alleges that FAIR Plan policies are inadequate to cover the costs of rebuilding the burned homes.
In response, Rex Frazier, president of the Personal Insurance Federation of California, an industry group, described the lawsuits’ claims as an “outrageous lie” that ignores the underlying issues of the insurance crisis. State Farm, the largest insurer in California, did not respond to a request for comment.
The FAIR Plan is a state-mandated, high-risk pool of private insurers for homeowners and other property owners who can’t find traditional coverage. It offers bare-bones fire damage protection at two or three times the cost of standard insurance options.
Over the past decade, the number of policyholders on the FAIR Plan has ballooned to more than 500,000 as insurers have dropped hundreds of thousands of homeowners in fire-risk areas across the state. Making matters worse, some of the largest companies, including State Farm and Allstate, have also paused writing new homeowner policies anywhere in California.
Insurers say shrinking their footprint in the state is a necessary response to what they describe as California’s failure to update its insurance regulations in the face of rising building costs and the growing threat of climate change. The state is now phasing in new rules that would make it easier for companies to raise rates, with the hope of convincing them to write more policies and drop fewer homeowners.
According to the personal finance site Bankrate, the average annual cost of a typical home insurance policy in California is $1,439, well under the nationwide average of $2,267. However, individual premiums can vary widely based on factors such as location, home size and amount of coverage purchased.
Frazier, with the industry group, pushed back against the lawsuits’ claims that the insurers have an incentive to force people onto the FAIR Plan. As the number of policyholders on the plan has grown in recent years, so too have concerns about its ability to pay out claims after a destructive wildfire, meaning increased liability for insurers, Frazier said.
Case in point: Earlier this year, state regulators allowed the FAIR Plan to begin collecting $1 billion in emergency payments from member insurers after it reported it didn’t have the cash to cover claims arising from the Los Angeles fires. While companies are expected to pass on a significant portion of the cost to policyholders, insurers must pay at least $500 million themselves.
“We have been highlighting, for years, the existential threat of continued FAIR Plan growth that could collapse the entire insurance industry and urging the adoption of state policies that reduce, not increase, FAIR Plan policy count,” Frazier said in an email.
The FAIR Plan, which is not party to the lawsuits, declined to provide a statement on the cases.
The cases aren’t the only legal disputes that could throw the state’s insurance market into flux.
Earlier this month, consumer advocates sued the California Department of Insurance to stop insurers from charging homeowners a fee to cover the emergency payments related to the Los Angeles fires. The insurance department declined to comment on the case in detail but said it could make it more difficult for homeowners to find coverage.