California homeowners may face unexpected costs due to a recent change in insurance rules, following the devastating Los Angeles wildfires, according to a Wall Street Journal report.

The crisis stems from major insurers retreating from California’s market, with more than half of the state’s largest home insurance companies halting or limiting new policies due to concerns about wildfire risks and insufficient regulated rates.

Fair Plan Transforms from Safety Net to Crucial Coverage Source

Originally established after the 1965 Watts riots to provide emergency coverage, the Fair Plan has transformed from a limited safety net into an increasingly crucial source of insurance for California homeowners who can’t find coverage elsewhere. The California Fair Plan, the state’s insurer of last resort, is at risk of being overwhelmed by the spiraling costs of rebuilding.

Former California Insurance Commissioner Dave Jones warns, “That would be a huge wake-up call for Californians because they have no idea that the rules have changed.”

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The Fair Plan, with an estimated $200 million in cash and $2.5 billion in reinsurance, may not be able to cover its share of losses, forecast at up to $6 billion. If the plan’s resources are exhausted, commercial home insurers can be called upon to pay the rest, and now they can pass these costs directly to policyholders.

Michael Wara, director of the climate and energy policy program at Stanford University, states, “It’s very likely they have lost more than $2.5 billion.”

New Rules Allow Insurers to Pass Costs to Policyholders

The rule change, implemented last year by Insurance Commissioner Ricardo Lara, allows companies to add up to 50% of the first $1 billion of an assessment to customers’ bills, and 100% of any amounts over that. Insurance Commissioner Lara implemented these changes as part of a broader strategy to entice major insurers back to California’s market, though critics argue this shifts an unfair burden to homeowners.

Consumer advocates are concerned about the potential impact on homeowners. Carmen Balber, executive director of Consumer Watchdog, argues, “Homeowners across the state shouldn’t pay because insurance companies dumped homeowners on the Fair Plan.”

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Widespread Destruction and Potential Solutions

The fires have caused widespread destruction, with insured losses estimated at up to $30 billion. Many homeowners, like Henry and Brenda Sharp in Altadena, have lost everything. “Our whole neighborhood burned down,” Brenda Sharp said.

State lawmakers are exploring solutions, including a proposal that would allow California’s infrastructure bank to issue bonds to support the Fair Plan. Additionally, the Plan could potentially recover costs by pursuing legal action against utilities if they’re found responsible for starting the fires.

As claims begin to pour in, there are concerns about delays and bureaucratic challenges for fire victims seeking compensation from the already-stretched Fair Plan.

Read more at The Wall Street Journal