California Homeowners Sue Insurers Over Wildfire Coverage Collusion

Two lawsuits have been filed in Los Angeles, accusing major home insurance companies of colluding to limit coverage in California communities that are at high risk for wildfires. The complaints allege that these companies, including State Farm and 24 others that hold a significant portion of California's home insurance market, engaged in an "illegal scheme" in violation of California's antitrust and unfair competition laws. According to the lawsuits, the insurers worked together in 2023 to "suddenly and simultaneously" drop coverage or halt writing new policies in fire-prone areas. This includes neighborhoods like Pacific Palisades and Altadena, which were devastated by the January wildfires that destroyed nearly 17,000 structures and killed at least 30 people. The lawsuits allege that this collusion has forced hundreds of homeowners onto the state's last-resort insurance plan, the FAIR Plan, which offers limited coverage capping at $3 million and high premiums. This has left many homeowners underinsured and struggling to rebuild after the fires.

The first lawsuit was filed by a group of homeowners who lost their houses in the LA fires. The second lawsuit includes all policyholders who obtained the FAIR Plan after January 2023, when the conspiracy allegedly began. Michael J. Bidart, who represents the homeowners, stated that insurance is a product homeowners rely on for peace of mind and critical help in rebuilding after a catastrophe. He alleged that by colluding to push plaintiffs and others like them to the FAIR Plan, the defendants have reaped the benefits of high premiums while depriving homeowners of coverage they were ready, willing, and able to purchase.

These lawsuits come at a time when California is grappling with an ongoing insurance crisis. 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, citing the increasing frequency and destructiveness of wildfires due to climate change. The largest national trade association representing home, auto, and business insurers, stated that it complies with the state's antitrust laws and monitors its members to ensure they do the same. The group's chief legal officer described the suits as defying logic and advancing meritless claims, and expressed a focus on solving the challenges in the insurance market in California.

The state Department of Insurance, while not involved in the suits, emphasized its focus on protecting consumers. Department spokesperson stated that Californians deserve a system where decisions are made openly, rates reflect real risk, and no one is left without options. The largest home insurer in California with roughly a million policies, did not immediately respond to requests for comment.

The FAIR Plan is an insurance pool that all major private insurers pay into. It 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. However, more Californians are relying on it than ever, with over 555,000 home policies on the FAIR Plan as of March, more than double the number in 2020. 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 implementing various new regulations to give insurers more latitude to raise premiums in exchange for issuing more policies in high-risk areas. This 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. The lawsuits highlight the complex and contentious nature of the insurance market in California, where the balance between protecting consumers and ensuring the financial viability of insurers is a constant challenge.