How Will the California FAIR Plan Fare?

What’s Next for Independent Agents?

If there is a single bright spot to be found in the aftermath of the costliest wildfire in California’s history, it is that both the property/casualty insurance industry and the independent agents who serve as its personal point of contact with insureds now have a golden opportunity to remind consumers just how effective they can be when disasters occur.

In the weeks and months to come, claims adjusters will be tasked with assessing insured losses among more than 18,000 structures destroyed or damaged in the Eaton and Palisades fires. Each case requires the same degree of professionalism and care.

While it’s often tempting to paint a catastrophe of such magnitude in broader strokes (for example, insured losses likely ranging between $20 and $45 billion, the destruction spanning acreage three times the size of Manhattan), our focus must remain on serving those who put their trust in our hands.

Insureds need our industry to respond quickly and efficiently, and independent agents must once again rise to the challenge.

Call to Action

Independent agents face an enormous call to service at a time when the state’s insurance market faces great uncertainty. The latest wildfires could not have come at a worse time for California, which has been beset by an insurance availability crisis as multiple carriers with considerable market share in the state have exited–in large part due to their inability to achieve rate adequacy through the state’s department of insurance.

Now, however, is neither the time for semantics nor for pointing fingers. Rather, it is a time for solutions–and a new way forward.

Most recently, California Insurance Commissioner Ricardo Lara issued an emergency declaration allowing unlicensed claims adjusters to work–overseen by a qualified licensed adjuster, qualified manager, or insurer–to share the load in expediting the claims process. Carriers will still use their own adjusters or even contract with independent adjusters in handling the deluge of claims.

In the aftermath of any wildfire declaration of emergency by the governor, the commissioner is permitted to impose a one-year moratorium on non-renewals and cancellations in affected areas. For 2025, the department has already issued nonrenewal bans on more than 100 ZIP codes. The California Department of Insurance is also urging consumers to begin the claims process by contacting their insurer or agent to try and settle claims before contacting a public adjuster or an attorney.

The need for patience and empathy among independent agencies and their customer-service reps must be kept top of mind as the claims process mounts. Sincere empathy is the hallmark of any successful agency, but it must be consistently maintained–and members of those agencies, from the principal to the CSRs, must be cognizant of their own emotional well-being under tense conditions as the claims count grows, and agency staff have multiple conversations with insureds on one of the worst days of their lives.

Agency owners would do well to discuss this challenge with team members and keep an open dialogue with their agency-owner contemporaries to share best practices in claims handling.

Fate of the FAIR Plan

A large percentage of the insured losses from the Palisades and Eaton fires will be in homeowners. It’s estimated that roughly 22% and 12% of the structures destroyed in the Palisades and Eaton fires respectively are covered under the FAIR Plan.

Bear in mind that because FAIR Plan policies are limited to $3 million in coverage for dwellings, some homeowners will discover how much they might end up paying out of pocket when increased demand causes rebuilding costs for labor and materials to skyrocket. What’s more, the FAIR plan’s standard policy language limits coverage to actual cash value–basically, the depreciated value of the home.

Delays in rebuilding will also cause payouts to rise for displaced residents forced into long-term housing arrangements. Increased demand for such housing is already causing rental prices to swell, which will lead to higher additional living-expense claims for carriers–some of which may be limited by policy contractual language.

Yet, the larger question remains: What happens if the insured losses exceed the FAIR Plan’s resources?

It’s worth noting that the FAIR Plan was never intended to be a state-sponsored insurance fund. Firas Saleh, director of product management at Moody’s, noted in a blog the plan’s exposure in L.A. County was $112.2 billion with year-over-year growth of 53%, and that L.A. County exposure represents about 23% of the plan’s portfolio.

FAIR Plan President Victoria Roach recently reported that the plan has a surplus of nearly $377 million available for claims and expenses not yet incurred. Its total cash on hand is $1.4 billion, with the approximate $1 billion difference reserved for current outstanding liabilities such as loss reserves and expenses, commissions payable, and other incurred expenses. The plan does have reinsurance treaties in place, with payouts tied to losses exceeding the first $900 million.

Should the FAIR Plan prove unable to meet its compensatory obligations, California insurers are required to help pay those losses through assessments proportionate to their prior market shares, going back two years.

For the first $1 billion in personal lines and $1 billion in commercial lines assessments, insurers could seek to recoup half their share of the assessments through fees billed to policyholders. At the moment, it remains uncertain just what the plan’s total financial responsibility will be. While the plan has nearly $6 billion in exposure to potential loss from the Palisades Fire, for example, the plan recently estimated that its total losses might be closer to $3.75 billion–not a small number, but within its current ability pay, Roach has stated.

Balancing Act

Speculation also continues as to whether the insured losses incurred from the wildfires will put more pressure on an insurance market with coverage-availability issues. Without substantial regulatory actions, insurers will require incentives to write more property in the state. In 2023 and early 2024, major homeowners insurers including State Farm Mutual Insurance Co., Allstate, and Farmers either pulled back on or limited new business in California, raising questions about insurance availability for property–particularly in areas at high risk for wildfire, such as the wildland urban interface.

As 2024 ended, Lara announced a catastrophe modeling and ratemaking regulation to enable insurers to employ the models in their rate formulations. In return, carriers must increase their number of policies in wildfire-exposed areas equivalent to no less than 85% of their statewide market share.

If insurers can both utilize catastrophe models and pass along the cost of reinsurance, in theory it will make it easier for them to write more business in risk-prone areas. Plus, if insurers can recoup some or all of the cost of purchasing reinsurance, they could then buy more of it, enabling them to assume more wildfire exposures. Which, admittedly, is a lot of “if”s.

Time will tell if insurer appetite and legislative or regulatory action can be brought into balance over the next several years. If they cannot, it will prove increasingly difficult–and expensive–to obtain coverage in California.

Sparking Subrogation

While the causes of the fires have not yet been determined, those answers will help insurers determine whether they can subrogate claims.

Southern California Edison, which was found at fault for both the 2017 Thomas fire and Woolsey fire in 2018, is under scrutiny for its possible involvement in sparking the Eaton fire. Reports show residents saw flames at the base of a tower perched above Eaton Canyon, visible in photos and videos shared online. If the utility’s equipment is found to have caused the blaze, California law requires that the utility pay for the wildfire damages and recover its costs through a regulatory process.

On the Front Lines

In the meantime, California’s independent agents will continue to serve as the human face and friendly ear of our industry to those who have lost so much. Agencies that are members of a network have a competitive advantage in this area, as they have more opportunities to communicate across ZIP codes and learn what’s working for their fellow members in serving clients affected by this unfolding tragedy.

All agents with insureds affected by the devastation, however, have one thing in common: in the months to come, they have the opportunity to show just how compassionate and effective they can be in helping families navigate the slow road to resuming a life of relative normalcy.

And that is no small thing.

Swan is regional executive vice president/West for Renaissance, a network of independent insurance agencies.

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California