Wildfires in California: Insurance Companies Accused of Collusion

Introduction to the Crisis

Two lawsuits filed in Los Angeles allege major home insurance companies have colluded to limit coverage in California communities at high risk for wildfires and force homeowners onto the state’s last-resort insurance plan that offers basic coverage and high premiums.
Insurers, including State Farm and 24 other companies that hold 75% of California’s home insurance market, were part of an “illegal scheme” in violation of California’s antitrust and unfair competition laws, according to one of the lawsuits, filed last week.

The Alleged Scheme

The lawsuit said the companies worked together in 2023 to “suddenly and simultaneously” drop coverage or halt writing new policies in fire-prone areas, including in neighborhoods like Pacific Palisades and Altadena that were leveled in the January wildfires that destroyed nearly 17,000 structures and killed at least 30 people. That has forced hundreds of homeowners onto the FAIR Plan that offers limited coverage capping at $3 million, leaving them underinsured and now struggling to rebuild after the fires, says the lawsuit filed by a group of homeowners who lost their houses in the LA fires.
The other lawsuit includes all policyholders who obtained the FAIR Plan after January 2023, when the conspiracy allegedly began, the suit says.

Impact on Homeowners

“Insurance is a product that homeowners hope never to need, but rely on for peace of mind in normal times and for critical help rebuilding after a catastrophe,” Michael J. Bidart, who represents the homeowners, said in a statement. “The complaints allege that, 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 like January’s wildfires.”

Ongoing Insurance Crisis

The lawsuits come as California is struggling with an ongoing insurance crisis, where companies are boosting rates, limiting coverage or pulling out completely from regions susceptible to wildfires and other natural disasters. In 2023, several major insurance companies either paused or restricted new business in the state, saying they can’t truly price the risk on properties as wildfires become more common and destructive due to climate change.
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Response from Insurance Association

The American Property Casualty Insurance Association, the largest national trade association representing home, auto and business insurers, said it complies with the state’s antitrust laws and monitors its members to ensure they do the same.
“These suits defy logic, advance meritless claims, and we are going to focus on solving the challenges in the insurance market in California,” said Stef Zielezienski, the group’s chief legal officer.

State Department of Insurance Response

The state Department of Insurance said it is not involved in the suits but said its focus is on protecting consumers.
“Californians deserve a system that works — one where decisions are made openly, rates reflect real risk, and no one is left without options,” department spokesperson Gabriel Sanchez said in a statement.

The FAIR Plan

State Farm, the largest home insurer in California with roughly a million policies, didn’t immediately respond to requests for comment.
The FAIR Plan is an insurance pool that all the major private insurers pay into. The plan issues policies to people who can’t get private insurance because their properties are deemed too risky to insure. The plan, with high premiums and basic coverage, is designed as a temporary option until homeowners can find permanent coverage, but more Californians are relying on it than ever. There were more than 555,000 home policies on the FAIR Plan as of March, more than double the number in 2020.

New Regulations

The complaints also allege that insurers were pushing policyholders onto the FAIR Plan because companies wouldn’t have to shoulder all financial responsibility to sustain the plan. When the state’s top insurance regulator in February ordered insurers to provide $1 billion to the FAIR Plan to help it pay out claims related to the LA wildfires, he allowed for half of the cost to be recouped from policyholders statewide. Another lawsuit was filed last week to block the cost-shifting regulation.
California has been in the process of implementing various new regulations to give insurers more latitude to raise premiums in exchange for issuing more policies in high-risk areas. That includes regulations allowing insurers to consider climate change when setting their prices and allowing them to pass on the costs of reinsurance to California consumers.

Conclusion

The allegations of collusion among insurance companies in California highlight the need for transparency and fairness in the insurance market, particularly in areas prone to natural disasters like wildfires. As the state continues to grapple with the ongoing insurance crisis, it is essential for regulators, insurers, and homeowners to work together to find solutions that balance the need for affordable insurance with the need for companies to manage their risk.

FAQs

Q: What are the lawsuits alleging?

A: The lawsuits allege that major home insurance companies in California colluded to limit coverage in high-risk areas and force homeowners onto the state’s last-resort insurance plan, the FAIR Plan.

Q: What is the FAIR Plan?

A: The FAIR Plan is an insurance pool that all major private insurers pay into, which issues policies to people who can’t get private insurance because their properties are deemed too risky to insure.

Q: How many homeowners are on the FAIR Plan?

A: As of March, there were more than 555,000 home policies on the FAIR Plan, more than double the number in 2020.

Q: What is the response from the insurance industry?

A: The American Property Casualty Insurance Association says it complies with the state’s antitrust laws and monitors its members to ensure they do the same, and that the lawsuits "defy logic" and "advance meritless claims".

Q: What is the state’s response?

A: The state Department of Insurance says it is not involved in the suits but is focused on protecting consumers and ensuring that decisions are made openly and rates reflect real risk.