A lawsuit filed on July 24 in the Alameda County Superior Court of California states that the California FAIR Plan's standard policies break state law by offering coverage below mandatory minimums for fire losses.
The firm that filed the suit, Kerley Schaffer LLP, sent an emailed statement that said the alleged illegal policies allow the FAIR plan and its member companies to “refuse to properly investigate and pay wildfire smoke damage claims.” The potential class size is nearly 400,000 policyholders.
From 2017 to today, the FAIR Plan denied or partially denied hundreds of fire claims that should have been covered, the lawsuit claims. During those years, the California FAIR Plan's homeowners insurance market grew from 1.6% to 3.1% in 2022.
According to the lawsuit, California code demands standard form fire policies “provide coverage for ‘all loss by fire’ to an insured property, without limitation or restriction on the scope of the covered losses.”
The lawsuit claims that the FAIR Plan unlawfully limits fire coverage by defining “direct physical loss” as only permanent changes. Additionally, the policy restricts smoke damage coverage to losses visible to the unaided eye or detectable by the average person's nose, excluding subjective or lab-detected issues.
The complaint pointed to a California Department of Insurance investigation into the FAIR Plan's policies, which eventually found they broke California statute.
In 2016, the FAIR Plan got approval to change its definition of direct physical loss and smoke damage coverage, misrepresenting the changes as minor or beneficial. However, in April 2017, the FAIR Plan informed agents and policyholders that the changes reduced coverage, leading to denied claims that would have been covered under the previous policy. From 2017 onward, hundreds of fire claims were denied. In January 2021, the CDI demanded corrective actions, including reviewing denied claims and submitting a revised policy form, after finding the policies didn't meet mandatory standards.
According to Dylan Schaffer, a partner of Kerley Schaffer, the FAIR Plan failed to comply with the regulator's demands and is still selling the policies.
“We are disappointed that (Insurance) Commissioner (Ricardo) Lara has failed to follow through on the findings that are now two years old and allowed this company to continue conduct that puts both the health and safety of Californians at risk,” Schaffer said.
The lawsuit seeks to enforce the CDI's 2021 findings and corrective actions, not damages. Schaffer said the class size ranges from 350,000 to 400,000 policyholders. If Lara were to act independently to enforce the 2021 investigation findings, Schaffer said he would drop the suit.
The case’s next hearing is scheduled for Aug. 8.
