The California FAIR Plan, the state's insurer of last resort, may require a substantial bailout following the catastrophic Los Angeles fires that have caused an estimated $35-45 billion in damages.
With only $377 million in reserves and $5.78 billion in reinsurance coverage, the FAIR Plan faces potential insolvency from the massive claims expected from the Palisades and Eaton fires, which have destroyed over 12,000 structures and claimed 27 lives.
The FAIR Plan currently insures 22% of structures within the Palisades fire zone, representing a potential exposure exceeding $4 billion. In the Eaton fire zone, it covers 12% of structures with exposure over $775 million. The plan has already received 3,600 claims, with more expected.
To avoid collapse, the FAIR Plan may need to rely on its member insurance carriers for financial support. These carriers could then pass costs to their policyholders through surcharges, pending approval from the state Insurance Commissioner.
A similar scenario occurred after the 1994 Northridge earthquake when member insurers bailed out the plan with $260 million in assessments. However, the current situation could prove far more challenging given the unprecedented scale of losses.
State legislators have introduced emergency legislation allowing the FAIR Plan to issue bonds to address "liquidity challenges." However, former Insurance Commissioner Dave Jones notes that bonds alone won't solve the underlying financial crisis since they must eventually be repaid.
The situation highlights growing concerns about California's troubled insurance market, as major carriers have increasingly withdrawn from high-risk fire areas, forcing more homeowners to rely on the FAIR Plan despite its limited coverage and higher costs.
"The L.A. wildfires are on track to be the costliest natural disaster in California in modern times," said Jones, warning that climate change poses "extraordinary financial challenges" for covering risks that private insurers now decline.
As claims mount, the FAIR Plan's ability to meet its obligations while remaining solvent faces an unprecedented test, with potentially far-reaching implications for California's insurance landscape and homeowners across the state.