Hard to insure
Call it the California paradox: The most picturesque home sites are often the most perilous. Steep hillsides with sweeping views and tree-lined canyons may make the ideal house locale, but they also provide enough fuel-filled brush to torch a home within minutes during a wildfire.
For the tens of thousands living in brush areas, the price of paradise comes with higher homeowner insurance premiums or substandard, piecemeal coverage. Many unable to get conventional homeowners policies resort to the California FAIR Plan, a bare-bones option that insurance agents often refer to as “the insurer of last resort.”
Hard-to-insure homes in urban areas also fall into the plan’s safety net for a variety of reasons: faulty electrical wiring, significant mold or water damage, or a homeowner who filed multiple claims and was dropped by his or her insurer.
A lifesaver for homeowners turned away by the mainstream insurance market, the FAIR Plan is a basic fire policy that also provides limited coverage for wind and water damage.
The bad news is that FAIR Plan users often pay considerably more for property insurance than they would with a standard homeowners policy because they end up purchasing supplemental policies to make up for the plan’s shortcomings.
In fact, thousands of FAIR Plan customers pay “about 20% to 25% more because they’re buying two policies,” said agent John Rodway of ARES Insurance Brokerage Service in Sherman Oaks.
The FAIR Plan -- the acronym is for Fair Access to Insurance Requirements -- is an association of all property insurers operating in California. It was created by the state Legislature after the 1965 Watts riots, when insurers pulled out of urban neighborhoods deemed too risky to insure. Its goal was to provide basic, affordable property coverage to homeowners in those areas. Many other states adopted FAIR plans as well, and there are 31 such plans operating nationwide, according to California FAIR Plan spokesman Mike Harris.
Over the years, the FAIR Plan’s mission has evolved to encompass a broad mix of homeowners across the socio-economic spectrum. Of the 6.5 million owner-occupied homes in California, more than 160,000 in urban areas have FAIR Plan coverage, while an additional 20,000 are covered in fire-hazard brush zones, such as those in and around Los Angeles, including pockets of Malibu, Bel-Air, Topanga Canyon, Laurel Canyon, Glendale, Pasadena and Arcadia. Overall, about 80% of the plan’s policyholders live in Southern California.
The limited coverage of the FAIR Plan rankles policyholders who wish it offered more. The plan doesn’t provide theft and liability protection, for instance. It offers liability coverage to businesses but not to home-based businesses, which typically are covered by a residential policy.
The lack of theft protection concerns FAIR Plan policyholder Lloyd Wright of Malibu. “That’s a big comfort people want, and it’s something I don’t have,” he said.
Wright has a separate policy for liability coverage and a third to insure his home business, selling frozen medical supplies.
The FAIR Plan’s limited reach is evident in other areas as well. It covers water damage from storms but not from a pipe burst inside the home. And fire coverage tops out at $1.5 million -- more than enough for most homes but inadequate for multimillion-dollar estates.
Despite its shortcomings, the FAIR Plan has grown in use over the last two years, in part because of the departure of several large insurance carriers from the California market.
SAFECO and State Farm, for example, citing the high cost of mold and water damage claims, had stopped selling new homeowner policies in the state. However, both recently announced they would resume sales.
When insurers leave, the number of people applying for FAIR Plan coverage increases. “A couple of years ago, we were getting about 200 submissions a day, but now that’s doubled to over 400 per day,” Harris said. Up also is the number of policyholders who renew their policies rather than venture into the open market.
“Historically it’s about 75%, but now it’s 80%,” Harris said, which is an indication that more policyholders are unable to find other insurers. “If the FAIR Plan is growing, that’s not a sign of a very healthy insurance marketplace.”
While the FAIR Plan typically costs about 50% less than a standard insurance policy, there is the added expense of the supplemental policy.
FAIR Plan policyholders typically buy a Difference in Conditions (DIC) or a “wraparound” plan to cover what the FAIR Plan doesn’t. Insurers that offer the supplemental policies are generally moving away from the more inclusive wraparound plans to the more restrictive DIC.
“There are a couple of gaps in the DIC-FAIR Plan combination,” said agent Bart Baker of B.W. Baker Insurance Services in Malibu. If you lose the use of your home after a fire, for instance, neither policy provides “loss of use” money to pay for a rental residence while the house is being repaired.
By comparison, a wraparound policy provides all the coverage the FAIR Plan lacks. Insurers that specialize in high-risk properties, such as Lloyd’s of London and Lexington Insurance, will sometimes issue homeowners policies in brush areas, including Malibu and Topanga Canyon, Baker said. “But they typically cover only the higher-value homes.”
Judy Hein, a 30-year resident of Topanga Canyon and a real estate agent at the John Aaroe Division of Prudential California Realty, said most homeowners in the hilly, brush-filled community use the FAIR Plan.
“It is more costly overall and coverage is limited, but that’s the choice you make for living in a high-risk area,” said Hein, a FAIR Plan member herself since her regular homeowners policy was canceled two years ago.
Jilted homeowners should realize, however, that the FAIR Plan usually isn’t their only option, said Amy Bach, executive director of United Policyholders, a nonprofit consumer group that focuses on insurance issues.
“People can find coverage. They just have to look harder,” Bach said. “There are smaller carriers without big advertising that sell insurance. It takes a little more legwork, though.”
Bach questions the need for “quasi-governmental entities” like the FAIR Plan, which creates a concentration of bad risks, she said. “The coverage always tends to be inferior because the normal forces of competition -- offering better products at better prices, and being creative in coming up with new products -- don’t exist.”
The insurance industry counters that homeowners should treat the FAIR Plan as a short-term solution.
Candysse Miller, executive director of the industry’s Insurance Information Network of California, sees it this way: “The FAIR Plan serves a very important purpose, but ultimately your goal should be to get a standard policy.”
Jeff Bertolucci can be reached at jbert@aol.com.
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For information on the FAIR Plan
Additional information is available from the California FAIR Plan Assn. Call (213) 487-0111 or visit www.cfpnet.com.
