Insurers Accused of Collusion in Dropping Coverage for Fire-Prone California Areas

Two lawsuits filed in Los Angeles claim that major home insurance companies have colluded to restrict coverage in California areas at high risk for wildfires, forcing homeowners onto the state’s last-resort insurance plan. This plan offers only basic coverage with high premiums. Among the companies implicated are State Farm and another 24 insurers that collectively control 75% of California’s home insurance market. The lawsuits allege these companies engaged in an illegal scheme that violates California’s antitrust and unfair competition laws.

According to the lawsuits, the insurance companies worked together in 2023 to abruptly and simultaneously withdraw coverage or cease issuing new policies in fire-prone zones. This includes neighborhoods such as Pacific Palisades and Altadena, which were severely affected by wildfires in January, resulting in the destruction of nearly 17,000 structures and the loss of at least 30 lives. Consequently, hundreds of homeowners found themselves relying on the FAIR Plan, which provides limited coverage capped at $3 million, leaving them underinsured and struggling to rebuild after the fires. One lawsuit represents homeowners who lost their homes in the Los Angeles fires, while another includes all policyholders who resorted to the FAIR Plan after January 2023, when the alleged conspiracy began.

The lawsuits highlight the broader challenges California faces as it grapples with an ongoing insurance crisis. Companies have been increasing rates, restricting coverage, or withdrawing entirely from regions vulnerable to wildfires and other natural disasters amid climate change. In 2023, several major insurers paused or restricted new business in California, citing challenges in accurately pricing risks due to increasingly frequent and destructive wildfires.

The California Department of Insurance, while not involved in the lawsuits, emphasized its commitment to consumer protection. A department spokesperson stated that Californians deserve a transparent system where rates reflect real risks and no one is left without options.

State Farm, the largest home insurer in California with about a million policies, did not immediately comment on the lawsuits. Similarly, representatives from a major trade association representing home, auto, and business insurers also did not respond to requests for comment.

The FAIR Plan, an insurance pool funded by major private insurers, provides policies to those unable to obtain private insurance due to high-risk property assessments. Although designed as a temporary solution until permanent coverage can be acquired, a growing number of Californians are relying on it. As of March, there were over 555,000 home policies on the FAIR Plan, more than double the figure from 2020.

The complaints further assert that insurers are shifting policyholders to the FAIR Plan to avoid full financial responsibility for sustaining it. In February, when the state’s top insurance regulator required insurers to contribute $1 billion to the FAIR Plan for claims related to the Los Angeles wildfires, he allowed half of this cost to be recouped from policyholders statewide. A separate lawsuit was filed last week to challenge this cost-shifting regulation.

California is in the midst of implementing new regulations aimed at balancing insurers’ ability to raise premiums with the issuance of more policies in high-risk areas. These regulations allow insurers to factor in climate change when setting prices and permit the passing of reinsurance costs to California consumers.

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