The California FAIR Plan, originally established in 1968 as a last-resort insurance option for homeowners unable to obtain coverage in the traditional market, is now facing serious financial challenges due to the increasing frequency and severity of wildfires in the state. As fire seasons grow longer and more destructive, the FAIR Plan has been forced to assume more risk and manage a rapidly expanding portfolio of high-risk properties.
The FAIR Plan is not a government-funded program, but rather an association made up of all insurers licensed to write property insurance in California. Each participating insurer contributes to the FAIR Plan based on its share of the property insurance market. This structure spreads the risk among many insurers, but also makes the entire system vulnerable when claims spike due to catastrophic events like wildfires.
As of September 2024, the FAIR Plan’s exposure reached a staggering $458 billion. This marks a dramatic increase from $50 billion in 2018, illustrating how rapidly the demand for this state-mandated insurance solution has grown. The surge is largely driven by insurance companies exiting high-risk markets, particularly in rural and wildland-urban interface (WUI) areas, leaving homeowners with few options other than the FAIR Plan.
Recent wildfires have added substantial pressure to the Plan’s finances. In the past year alone, wildfire-related claims have totaled $914 million. Analysts estimate that losses from ongoing and future fires could reach up to $4 billion. The costs of rebuilding homes, paying out claims, and maintaining reserves to handle future disasters have ballooned, raising concerns about the FAIR Plan’s ability to remain solvent and fulfill its obligations to policyholders.
To help offset these massive claims, a $1 billion assessment was recently approved. This assessment will spread the financial burden across most insurance policyholders in California, impacting nearly every homeowner in the state. The assessment is applied indirectly by requiring insurers to contribute to the FAIR Plan, who may then increase premiums or fees for customers. While this move provides temporary relief to the FAIR Plan, it also signals the urgent need for long-term reforms in California’s property insurance market.
Many experts argue that the FAIR Plan is not designed to operate at its current scale. Originally intended to be a safety net for a small segment of the population, it now insures hundreds of thousands of homes. Without systemic changes to reduce wildfire risks, improve land management, and incentivize private insurers to re-enter the market, the FAIR Plan may become unsustainable.
Homeowners in very high fire risk areas are encouraged to review their coverage options carefully. Although the FAIR Plan offers basic fire protection, it lacks coverage for theft, liability, water damage, and other common risks. Pairing a FAIR Plan policy with a wrap-around “Difference in Conditions” (DIC) policy may be necessary to achieve adequate protection.
DIC policies can vary widely in price depending on the property’s location, construction type, and risk factors. On average, they cost between $500 and $1,500 per year, but they can provide essential protection that the FAIR Plan does not offer. Homeowners should work with experienced insurance brokers to ensure they understand what is and isn’t covered under each type of policy.
For more info, text or call Monreal Insurance Solutions at (909) 757-1311.