The California FAIR Plan and the Unfair Reality of Obtaining Insurance Coverage

By Leena Danpour, Esq.

The California FAIR Plan was enacted into law in 1968, as “an insurer of last resort” in order to provide basic insurance coverage for properties (including condominiums) in areas of increased risk of fire, lightning, internal explosion, and smoke. Insurance under the FAIR Plan is offered by a group of insurers authorized to provide property insurance to California homeowners. For condominium homeowners to be eligible under the FAIR Plan, they must prove they suffered a denial of insurance coverage on the standard, primary, insurance market leading them to seek coverage in the secondary market. This is because the purpose of the FAIR Plan is to offer homeowners insurance coverage not otherwise available to them in the traditional insurance marketplace. While this establishes a temporary option for those otherwise unable to obtain adequate insurance, unlike traditional policies, the FAIR Plan is more limited in the types of insurance it offers (e.g., covered losses and policy options).

Since the time that the FAIR Plan was codified in 1968 following a season of riots and brush fires, the needs of California homeowners have changed. Most notably, in the last decade, California has faced frequent, destructive, and often-devastating wildfires that have impacted – sometimes entirely destroyed - large residential communities. This, in turn, has caused insurance companies to stop offering fire damage insurance in certain high-risk areas, leading more Californians to rely on the FAIR Plan as their only insurance option.

As more homeowners look to the FAIR Plan for insurance coverage relief, there is no indication that there will be an increase to the basic level of coverage currently offered. This leaves many homeowners in high-risk areas with insufficient insurance coverage for disasters that cause great property damage or loss, partial or total.

Given the limited coverage offered by the FAIR Plan, homeowners who have no other option may find themselves in an insurance deficit crisis, left with nothing

"For condominium homeowners to be eligible under the FAIR

Plan, they must prove they suffered a denial of insurance coverage on the standard, primary, insurance market leading them to seek coverage in the secondary market." but the most basic insurance coverage to protect their own homes, likely their single greatest investment, with nothing more than Fair Rental Value coverage. Some advocates, supported by the underinsured homeowners, demanded an increase from the FAIR Plan in the coverage options it offers. This criticism has been responded to with arguments that an expansion of the FAIR Plan might end up competing with traditional insurance markets not its intention at inception. Further, offering expanded insurance coverage could result in the FAIR Plan itself becoming increasingly expensive resulting in unattainable coverage, negating the very purpose for which it was created.

Unfortunately, many California homeowners in high-risk areas appear, for now, to be out of luck. They must hang onto the basic insurance coverage offered under the FAIR Plan when no other option is available. As such, it is imperative to focus on preventing large losses due to wildfire by becoming a Firewise community, creating a defensible space around homes in wildland areas, and inquiring into the California Wildlife Prevention Grants Program.

Although the FAIR Plan is intended to offer a “fair” option, the reality is that it is not always perceived as fair by those who need it. Those in high-risk fire areas are too often left with little-to-no options in obtaining sufficient insurance coverage to protect against the threat of damage, destruction, or in some cases, total loss, to the places they call home; scenarios that seem not too farfetched in the draught-stricken, wildfire-abundant state of California.

To find more information on the California FAIR Plan, please visit https:// www.cfpnet.com.

Leena Danpour, Esq. is an Associate Attorney with the law firm of SwedelsonGottlieb and exclusively represents Homeowners Associations in both litigation and transactional matters, providing corporate governance advice to Boards of Directors who serve Associations throughout California. You may reach Leena at (310) 207-2207 Ext. 206 or by email at ld@sghoalaw.com.