A legal dispute over whether insurance companies can shift wildfire-related costs to California homeowners is moving forward, raising new questions about how the state handles risk in an increasingly volatile market.
The case stems from a $1 billion assessment approved by the California Department of Insurance (CDI) in April to help fund the FAIR Plan, the state’s insurer of last resort. After catastrophic fires in Los Angeles left the plan with an $800 million deficit, the CDI authorized insurers to recover up to half of the assessment through a temporary supplemental fee based on policyholder premiums. However, future base rates cannot include these costs.
Advocacy group Consumer Watchdog sued over the arrangement, arguing that state law prohibits insurers from passing FAIR Plan costs on to consumers. A Los Angeles Superior Court judge dismissed two of the group’s procedural claims but allowed the central argument – over the legality of such pass-throughs – to proceed.
“This is a significant procedural victory. It ensures that Insurance Commissioner Ricardo Lara’s arrangement, which could shift hundreds of millions of dollars from homeowners to insurers, will get the scrutiny it deserves,” said William Pletcher, litigation director for Consumer Watchdog.
The CDI sees the ruling differently. In a statement, Lara said the court affirmed his authority under Proposition 103, which empowers the department to regulate rates and protect consumers through its Sustainable Insurance Strategy.
“Consumer Watchdog’s lawsuit fails to address the state’s insurance crisis and is merely another attempt to create chaos in an already complex situation. I’m pleased the judge saw through their charade, which only harms homeowners, small businesses and nonprofits that need better access to insurance options,” Lara said.
The legal fight highlights a growing tension in California’s insurance market, where major carriers have scaled back coverage due to wildfire risk. The FAIR Plan reported in July that its exposure had surged 42% to $650 billion in just nine months, as more homeowners are pushed toward the program.
Consumer Watchdog attorney Ryan Mellino, who argued the case, warned that allowing the surcharge would set a dangerous precedent: “The law doesn't allow insurers to profit from the FAIR Plan while pushing their losses onto the people they're supposed to insure. This fight is just beginning – and we intend to prove in court that the commissioner’s plan isn't just unlawful, it's a betrayal of the very consumers he's supposed to protect.”
Pletcher added that “California consumers should not be forced to subsidize insurance companies when the law makes clear the amounts must be paid by insurers, not policyholders.”
The outcome of the case could determine how future FAIR Plan shortfalls are funded, especially as extreme weather continues to strain insurance systems.
