IIABCal Urges Lara to Restore the State's Property Insurance Market

OAKLAND, CA, July 13, 2022 - The single most important step California Insurance Commissioner Ricardo Lara can do to improve the California FAIR Plan is to take actions within his power to restore the standard property insurance markets in California, IIABCal General Counsel Steve Young said Wednesday.

In testimony at a California Department of Insurance investigatory hearing into FAIR Plan operations, Young said the Commissioner should focus his efforts on incentivizing insurers to return to the marketplace, increasing consumer choice and lowering insurance prices—thereby permitting the Plan to depopulate and return to its intended use as a market of last resort for basic property coverage. 

“The unfortunate reality is that property insurance rates—because of the confluence of severe draught and global warming, significant forest mismanagement, utility company negligence, massive population growth in WUI areas, escalation in property values, and now inflationary pressure—are never going to be as low as they once were,” Young said.  “The current crisis in availability and affordability is likely to continue indefinitely if regulators suppress rate adequacy.” 

IIABCal urged Lara to take two immediate steps:

  1. Support creation of a new Joint Underwriting Authority that would allow for catastrophic wildfire surcharges, where actuarially supported, in the Wildland Urban Interface (WUI) areas, where the risk of wildfire catastrophe is highest; and
  2. Permit insurers to include reinsurance costs and prospective loss modelling tools in their rate filings—just as the FAIR Plan and California Earthquake Authority, and insurers in other states, are now allowed to do.

Young said the FAIR Plan has been a godsend—as the only market for basic property insurance for many of their customers.  But because of extreme coverage limitations and other structural deficiencies in FAIR Plan policies and procedures, the FAIR Plan is also a mechanism that leaves consumers insufficiently protected in far too many cases, and exposes brokers to significant errors-and-omissions liabilities.

IIABCal has great confidence in Victoria Roach, the new California FAIR Plan President, and brokers recognize the tremendous difficulty of the workload the FAIR Plan now faces, Young said.  But brokers consistently voice complaints surrounding broker service, and the need for greater efficiency through e-technologies.

“The most frequent complaint we hear is that brokers cannot get timely answers to their questions or solutions to their problems.  More often than not, time is of the essence when coverage is needed, so anything short of contemporaneous response can be a problem,” Young said. “We respectfully urge the FAIR Plan to upgrade broker service capability and expedite the introduction of software technology to permit electronic interface with agency management systems.”

IIABCal encouraged Commissioner Lara to require the FAIR Plan to eliminate or modify two clauses in its dwelling and commercial property contracts that do not serve consumers well, and that create a potential barrier for other insurance companies to fill gaps in FAIR Plan policies:  The co-insurance clause on replacement cost policies, and the “Other Insurance” clause.

At present, the Plan insures “Coverage A” exposures on either:

  1. An Actual Cash Value basis, which subjects claim payments (on partial and total losses) to reductions for depreciation; or 
  2. A Replacement Cost Value basis, which is subject to a “co-insurance” clause that is triggered if the Coverage A-Dwelling limit is less than 80 percent of “the full cost to reconstruct or replace the building immediately before the loss.”  Both are also subject to the maximum cap of $3 million on all covered claims.

Because many residential properties exceed $3 million in replacement value, homeowners purchasing replacement cost policies are frequently penalized because the FAIR Plan does not recognize replacement cost estimates higher than its combined $3 million limit.  For example, the FAIR Plan would pay only 50 percent of a covered claim in the event a $6 million house was a total loss, solely because the FAIR Plan itself recognizes no valuations above $3 million.

“The co-insurance clause should be eliminated, at least in cases where the replacement cost is at or above the FAIR Plan’s combined coverage limits,” Young said.  “And on properties where the estimated replaced cost falls below the combined limit—as determined at the time of policy application, not covered loss--we believe the FAIR Plan should be required to ratify the homeowner’s estimate and delete the co-insurance clause, or notify the homeowner that the FAIR Plan will provide only an ACV policy.  It is critical for homeowners to know at policy inception what they are buying, and what level of protection they are receiving.”

The other problematic clause in FAIR Plan contracts concerns “Other Insurance.”

“There should be no ambiguity, in cases where a homeowner has a basic property insurance policy from FAIR Plan, and supplemental coverages or higher limits from one or more other insurance companies, as to which policy is “primary,” i.e., which insurer is on the hook for the first-dollar of insured losses,” Young testified.

“We believe [subsection b of the clause] should be deleted, and new language added to make it absolutely clear that the FAIR Plan policy is primary, to the extent of its combined limits and covered exposures.  We believe these changes would make admitted and non-admitted companies far more willing to supplement the basic FAIR Plan policy, and at substantially lower rates.”  

For a copy of IIABCal's written testimony.