LA wildfires ignite questions on insurance sustainability and legal battles over liability

As wildfires raged through some of the wealthiest parts of greater Los Angeles this week, California policymakers were forced to grapple with a lingering question: when does the math stop working? When it does, litigation will could determine who pays the price.

JPMorgan Chase & Co. published an estimate on Wednesday of over $10 billion in damages from the fire in just a few days. This was quickly topped by a projection from private weather forecasting service AccuWeather Inc. of $52 billion.

The blazes come after years of reform efforts meant to lessen fire damage and prop up the state's insurance markets. Like another state vulnerable to climate change, Florida, California has been trying to do the latter by both constraining and appeasing private insurers while filling in the gaps with a plan of last resort.

California's insurance pool is called the FAIR Plan. Despite repeated statements by California Insurance Commissioner Ricardo Lara that his goal is to shrink the number of polices held by the FAIR Plan, that number more than doubled between 2020 and 2024, to over 450,000.

"We're all trying to figure out what the FAIR Plan's exposure is so far," said Jamie Court, President of Consumer Watchdog.

Court added that the high value of homes in many of the burned areas would paradoxically shield the FAIR plan, at least in the short term. In 2019, Lara increased the plan's coverage limit to $3 million for residential policyholders. In an area like Pacific Palisades, where Court said homes "start at about $2.5 million," this means many policyholders will try to tap so-called "excess coverage" plans from private insurers.

Lara has undertaken a series of recent reforms designed to keep the FAIR Plan solvent. This has included provisions allowing insurers to use forward-looking climate models and pass on some costs to policyholders. A lawsuit filed last year claimed plan officials were allowing insurers to offer inadequate levels of fire coverage. Arteno v. California Fair Plan Association, 24CV084506 (Alameda Super. Ct., filed July 24, 2024).

"We have a hearing on 2/20 relating to FAIR Plan's motion that the suit should be abated," said Dylan Schaffer, who filed that case a partner with Kerley Schaffer LLP in Oakland, in an email.

Court said more litigation could be on the way.

"The FAIR Plan seems to suggest in their statements they have everything under control," Court said. "In the unlikely event the FAIR Plan does dip into reserves, there will be a real legal question about what happens. That is because the statute requires companies to pick up the cost of any excess reserves."

"My department and I are committed to ensuring your claims are honored and that you receive the services you contracted for with your insurance company," Lara said in a new release on Wednesday. "Insurance companies are pledging their commitment to California, and we will hold them accountable for the promises they have made."

Lara said he would invoke rules allowing him to protect homeowners in fire-affected areas from non-renewals by the insurance carriers and deploy teams to protect fire victims from fraud.

The Insurance Commissioner has one ace up his sleeve. Court said he has significant regulatory power over insurers who want to do business in the state--and that few "want to turn their back" on the biggest home and auto policy markets in the country. But if an insurer decides to leave the California market entirely, there is little Lara, or a successor, could do in the long run.

That day may be inching closer. Last year, insurance giant State Farm began the process of denying renewals for tens of thousands of home policies in California, including most policies in some of the areas hit by fires this week. According to the real estate website Zillow Group, Inc., the average home price in Pacific Palisades fell 5% in the last year, dropping below $3.5 million.

"We are looking at what is, I think, likely to become the costliest wildfire disaster in California, if not national history, along with a number of other superlatives," said UCLA climate scientist Daniel Swain in a statement widely quoted in the media.

Late Wednesday, Swain posted on his social media accounts that he had been "overwhelmed" by over 300 media requests and was battling a respiratory infection. On Thursday he published an article in the journal Nature Reviews finding that "climate whiplash" -- a term for the growing extremes of wet and dry weather -- was increasing California's fire risks by growing more vegetation in the winter and then drying it out more quickly in the summer.

The fires will focus the attention of the California Legislature this year. The very first bill introduced in the new Assembly session, AB 1, would require Lara's office to regularly update fire hardening standards. While some have questioned how much could be done to fire-harden the kinds of urban areas that have burned in California in recent year, Court said the fires exposed how much hardening could have helped in many of the areas that burned.

AB 1 is a reintroduction of a bill that failed last year, AB 2416. The office of the bill's author, Assemblymember Damon Connolly, D-San Rafael, did not respond to a request for comment by press deadline.

"With the current state of our insurance market, it is critical that we are supporting homeowners across California that are taking responsible steps to harden their homes," Connolly said in a Dec 2 news release. "This legislation will help consumers save money on their insurance bills while simultaneously strengthening our communities against the risk of wildfire."