First the fires, now the fight: Flaws in California insurance plan will test L.A. homeowners

S E E D E D   C O N T E N T

By Gretchen Morgenson

When a massive wildfire tore through Sarah Mapel's Northern California neighborhood in the late summer of 2020, she considered herself lucky. Firefighters saved her historic home, built in 1898, using water from a nearby creek.

But making her ash- and toxin-filled home safe to live in again turned into an epic, yearslong legal battle with her insurer: the California FAIR Plan Association. An insurance pool created by state officials in 1968, the plan offers coverage to residents and business owners in wildfire-prone and other vulnerable areas who cannot obtain coverage from private insurers.

Mapel's problems with FAIR Plan began when her insurer sent her a $1,151 check for a repair estimate on her home that exceeded $50,000, documents show. For months, other challenges and frustrations followed.

Thousands of victims of the costliest wildfires in Los Angeles' history could soon face the same maddening process and meager coverage. More than 3,600 policyholders in Altadena, Pacific Palisades and other parts of greater Los Angeles have submitted claims to the FAIR Plan to try to recover some of what they've lost, it said in a Friday update. Mapel has some advice for them: Get ready for a fight.

In addition, all FAIR Plan policyholders may have to pay fees to the participating insurers thanks to a policy change issued last July by Ricardo Lara, California's insurance commissioner. Under a deal struck by Lara and the insurance companies that run FAIR,insurers will be able to collect money from policyholders to recoup half of any assessed losses up to $2 billion as a way to "modernize" and "stabilize"the operation.

The new rule was part of a package designed to safeguard the FAIR Plan's financial stability, itself part of a broader initiative Lara calls the Sustainable Insurance Strategy, said Michael Soller, a spokesman for the state Insurance Department, in a statement. But it means all FAIR Plan policyholders, not just those affected by the recent wildfires, will likely pay some of the damage costs they assumed the insurer would shoulder.

Property owners have long expressed frustration with how private insurance companies handle damage claims made after fires, hurricanes or other catastrophes. But many consumers dealing with the California FAIR Plan have experienced significant problems simply getting paid for losses, an NBC News investigation found.

The plan also discloses little information about its operations to the public or even the state's Department of Insurance. And a 2022 assessment by the department shows that in recent decades the plan appears to have been profitable for the insurance companies running it, a situation that frustrated policyholders find galling.

Sarah Mapel in her San Francisco home on Jan. 17.Hiram Alejandro Duran for NBC News

Launched with good intentions

California is the largest insurance market in the country, but wildfires, earthquakes and other natural disasters have generated losses for some property and casualty insurance companies there. In recent years, some insurers have dropped customers in high-risk areas or stopped doing business in the state altogether, forcing residents to rely increasingly on the FAIR Plan.

The plan provides coverage for those who can't obtain insurance from private insurance companies and only covers losses caused by fire or lightning, internal explosion and smoke. It caps residential policies at $3 million.

Like some other states' FAIR plans, California's was created by the governor and state Legislature in 1968 when urban areas were on fire amid civil unrest. As insurers fled these neighborhoods, states set up what they called Fair Access to Insurance Requirements plans to guarantee that residents in areas abandoned by private insurers could protect their properties.

There are 33 FAIR plans across the U.S., according to the National Association of Insurance Commissioners. The plans are funded by private insurance companies doing business in the states, and those companies share in FAIR Plan profits, losses and expenses in amounts proportional to their market shares in the states.

Sarah Mapel's personal art collection, family photos and stack of books she was able to recover after the 2020 CZU Lightning Complex Fire scorched her home in Boulder Creek, Calif.Hiram Alejandro Duran for NBC News

California's FAIR Plan policies can be costly, its customers say. Bruce Silverstein, a Malibu resident and city council member, said his basic FAIR Plan insurance costs him around $9,000 a year, roughly double what his private insurer had previously charged to insure his home before discontinuing coverage.

Unlike private insurers that must file detailed financial reports with state regulators where they operate, California's FAIR Plan functions in near total secrecy. A consortium of roughly 300 insurance companies that conduct business in the state, it produces only limited public information on its financial position, reserves and reinsurance arrangementswith other insurers.

The FAIR Plan does not publish a roster of current executives, for example. FAIR plans in other states routinely disclose those details, a recent California Insurance Department analysis found.

Losses from the recent Los Angeles fires could reach $30 billion, according to estimates. Autonomous Research, a financial services analytics firm, estimates that the FAIR Plan could be on the hook for up to $8 billion in losses from the fires. As of Jan. 10, the plan had only $377 million to pay claims, the Insurance Department said.

Among the sparse data the FAIR Plan does provide: It has a total of 452,000 residential policies in force and $458 billion in total insurance exposure as of Sept. 30, 2024, up 61% from the prior year. On Friday, the FAIR Plan calculated its exposure in the Pacific Palisades at $4 billion. It has not been determined how many of those properties have been damaged or destroyed by the fire.

"The FAIR Plan generally does not share its surplus, cash-on-hand estimates or amount of reinsurance," said spokeswoman Hilary McLean in a statement, declining to say why. It is too soon to anticipate the impact the latest fires will have on its customers, she said, adding: "We can share that the FAIR Plan, primarily a catastrophe insurer, is prepared and actively serving customers who have made claims."

Flaws in operations

In recent years, information about flaws in the FAIR Plan's operation has emerged both in consumer lawsuits and in rare assessments of the plan issued by the Department of Insurance. One 2022 Insurance Department examination, for example, found that between 2017 and 2021, the FAIR Plan's claims handling practices repeatedly violated the state's insurance code and code of regulations.

More than 400 violations were identified in the examination. Among them, the FAIR Plan made "unreasonably low" settlement offers, delayed payments and "failed to make thorough, fair and objective" investigations when dealing with claims. In response to the report, the FAIR Plan said it disagreed with most of the findings.

Another Insurance Department investigation in 2022 characterized the FAIR Plan's operation as opaque and insufficiently funded, and noted inaccuracies in its financial reporting. In addition, executives failed to provide periodic inspection reports to the Insurance Department as required.

A group of FAIR Plan policyholders claimed it also failed to routinely provide internal investigative reports to policyholders making claims as state law requires, according to an ongoing lawsuit. These reports allow homeowners to see the FAIR Plan's claim materials such as third-party findings related to damage and repair costs. On Jan. 6, the California Superior Court ordered the FAIR Plan to comply with California law in the case.

Asked about these criticisms and those of some customers, McLean, the spokeswoman, said in a statement:"The California FAIR Plan is focused on serving policyholders who are impacted by the Southern California fires. We disagree with the accuracy of a number of the assertions that are the basis of your questions and have no further comment at this time." She declined to specify which assertions it disputed or why.

The California Department of Insurance has sparred with the FAIR Plan over following state rules. In January 2021, after policyholders sued over policy limitations and coverage denials for smoke damage,Lara's office wrote to the president of the FAIR Plan alleging it had illegally limited coverage for some claims. The FAIR Plan disagreed with the department and declined to reverse any of its claim denials, said Dylan Schaffer, the Oakland, California, lawyer representing the plaintiffs.

"For these current wildfires, Commissioner Lara expects FAIR Plan to process and pay all claims (including all smoke claims) in line with industry standards and in compliance with all laws," said Soller, the insurance department spokesman, in a statement. Last week, Lara declined multiple requests for an interview from NBC News.

Bruce Silverstein in his Malibu home, which was damaged in the Franklin Fire last December. Silverstein now has an open claim with the California FAIR Plan.Alex Welsh for NBC News

Silverstein, the Malibu city council member, has personally experienced problems submitting claims to the FAIR Plan, he told NBC News. He is in litigation with the insurer on a 2021 claim and has another pending claim based on the Franklin Fire that ripped through Malibu in December 2024, forcing him from his home.

Given the recent L.A. fires, Silverstein said state authorities must step in to help homeowners get what they are due from the FAIR Plan.

"The state of California needs to intervene and make FAIR Plan do what they're supposed to do, which is honor their contractual obligation to make people whole who have paid them premiums year after year," Silverstein told NBC News. "The insurance commissioner needs to get tough with them and the attorney general needs to bring legal action against them to force them to honor their obligations."

Less transparency than in other states

Compared with other FAIR plans, California's is unusual not only in terms of its failure to publish financial statements, but also because of its decision not to provide public information about its management and operation. FAIR plans in Louisiana, North Carolina and Texas, by contrast, provide such details, the 2022 Insurance Department report said. And while the assessment urged the FAIR Plan to "provide enhanced transparency and information to the general public to strengthen public awareness and accountability," it has not done so. The plan's spokeswoman declined to say why.

Fire damage in Silverstein's home in Malibu on Jan. 17.Alex Welsh for NBC News

California's FAIR Plan also compared unfavorably in financial strength with plans of similar size, the report said, with far lower capital levels, liquidity and less access to outside sources of capital, as well as considerably less reinsurance coverage provided by outside insurers. The FAIR Plan did not have a formal capital management or liquidity management plan, the report also noted.

FAIR Plan's staffing stood well below that of comparable plans, the Insurance Department found in the 2022 report. California's plan had 133 staffers, compared with average staffing of 222 at four comparable plans.

The FAIR Plan spokeswoman declined to say whether it had changed its policies as a result of the 2022 Insurance Department findings. To assess the FAIR Plan's responses to the report's recommendations, the Insurance Department launched an exam last April. It is in progress.

Even as insurers have complained that California's insurance market is not profitable, the California FAIR Plan appears to have generated more profits than losses to its member insurers over the years, according to the 2022 Insurance Department assessment.

Silverstein in his Malibu home that was damaged in the Franklin Fire.Alex Welsh for NBC News

As with other plans, the insurers operating California's plan determine when its member companies must contribute funds after a catastrophe, known as an assessment. No assessments have been levied by the California plan since 1995, the 2022 report noted, despite multiple high-cost calamities in the state. While insurance company members paid $260 million in two assessments in 1994 and 1995, since then, the FAIR Plan has distributed $438 million to those companies, the report said.

These profitability figures raise questions about the July change requiring FAIR Plan policyholders to share wildfire losses with insurers, said Schaffer, the Oakland lawyer, who has successfully sued the FAIR Plan on behalf of policyholders.

"The fact that FAIR Plan has not made any assessments in 30 years during substantial wildfire events suggests this business does not have the profitability problems the insurers say it does," Schaffer told NBC News. "But now that we have a multibillion liability for the FAIR Plan, the insurance industry is going to pass it along to the consumer? That's 180-degrees contrary to its legislative purpose."

Fire damage in Silverstein's Malibu home on Jan. 17.Alex Welsh for NBC News

Soller, the Insurance Department spokesman, said that after Lara began as insurance commissioner in 2019, he stopped the FAIR Plan from returning profits to its member companies without the commissioner's approval. Since then, he has not approved any such payments, the spokesman said.

'Any updates?'

In 2024, four years after the conflagration known as the CZU Lightning Complex Fire ravaged Mapel's Santa Cruz County neighborhood, her fight with the FAIR Plan finally concluded. She cannot discuss the terms of her settlement with the plan, but she did describe her dealings with the entity.

Sarah Mapel's personal art collection and family photos rest in the corner of her dining room on Jan. 17.Hiram Alejandro Duran for NBC News

Mapel became a FAIR Plan customer after two private insurers dropped her, she explained. After the fire, her claims process began well enough, she recalled, with FAIR Plan staffers appearing eager to help. But she and her insurer's paths soon diverged when the FAIR Plan contended that she could move back into her house as soon as water and power were restored.

Everything was covered with soot and ash, she recalled, and its redwood construction had absorbed all of those toxins. "Just stepping into my house gave me a horrible headache," Mapel said. She refused to move back.

Meanwhile, Mapel waited for the report from the FAIR Plan insurance adjuster — which took several months, according to her lawsuit. "I was calling California FAIR Plan every week — they weren't communicating with me," she said. "Any updates? What do I do to get back into my home?"

Sarah Mapel near her San Francisco home on Jan. 17.Hiram Alejandro Duran NBC News

As the process dragged, the FAIR Plan cut the allowance it gave Mapel for rent payments while her home awaited remediation. Meanwhile, her neighbors with private insurance were receiving help, she said. Frustrated, she filed a complaint with the California Department of Insurance and hired Schaffer to represent her in a lawsuit against the FAIR Plan. She also testified about her experience with the plan at an Insurance Department hearing.

"I had the only coverage available to me, I did all the right things that I was supposed to do," Mapel said.

Mapel eventually sold her Santa Cruz County home during her insurance battle and now lives in San Francisco. She is no longer a FAIR Plan customer because she rents.

Her advice to those beginning the claims process with the FAIR Plan: "Stay resilient and stay strong and stand up for yourself."

The most important thing to understand about the FAIR Plan, she added: "They're not actually there for you."