LA fires live updates: Residents await further evacuation orders and warnings

Because of the fires that broke out last week, this pivot may be at risk of breaking, with consequences that would ripple across California’s economy.

According to California Senator Alex Padilla’s office, the FAIR plan had just $377 million available to pay claims as of last Friday. It is not yet known how much damage the plan will face, but total insured losses from the fires have so far been estimated at up to $30 billion. With the fires still burning, that number could rise.

Unlike regular insurance companies, the FAIR Plan cannot deny coverage to homes simply because they are in vulnerable areas. As the risk of forest fires increases, the FAIR Plan’s books are becoming increasingly populated with houses that are classified as too dangerous by major insurers.

Between 2020 and 2024, the number of homes covered by the plan more than doubled, to nearly half a million properties with a value that tripled to about half a trillion dollars.

Homes in the Pacific Palisades were increasingly covered by the FAIR plan. A fire in the area has so far destroyed more than 1,000 homes, damaged 5,427 and threatened another 12,250, according to data released Tuesday by the Federal Emergency Management Agency.

Since the fires broke out last week, FAIR Plan has refused to publicly disclose how much money it had on hand. A spokesman, Patrick Dorsey, would say only that the plan was “prepared for disaster.”

Senator Padilla’s staff said the $377 million figure came from California Insurance Commissioner Ricardo Lara’s office, which regulates the FAIR plan. The commissioner’s office confirmed the figure was correct.

If the FAIR plan doesn’t have enough money to pay all of its claims, it can rely on something called reinsurance – essentially insurance for insurers in the event their losses exceed a certain amount.

Mr. Dorsey also declined to provide details about how much reinsurance protection the FAIR plan provides. Senator Padilla’s staff said the plan calls for $5.75 billion in reinsurance.

If the FAIR plan cannot make up its losses through reinsurance alone, it can seek money from California insurance companies to make up the difference.

But that requirement, called an appraisal, would raise a new problem, according to Neil Alldredge, president of the National Association of Mutual Insurance Companies, whose members in California purchase most home insurance policies based on dollar value.

Insurers who remained in California were already struggling to make money, Mr. Alldredge said. If they also receive a bill from the FAIR plan, some might reconsider their decision to stay, he said.

“Will some of them evaluate their risk tolerance? Absolutely,” Mr. Alldredge said. “None of this will make the California market more attractive.”

The prospect of a government-backed insurance plan being unable to cover losses has raised concerns in Congress. Last year, Sen. Sheldon Whitehouse, Democrat of Rhode Island and then-chairman of the Senate Budget Committee, said he was concerned about the financial strain on Florida’s state insurance plan of last resort and pointed to “possible future requests for a federal bailout.”

“Climate-related uninsurability has the potential to trigger cascading defaults that undermine our entire economy,” the senator said.

Last March, FAIR Plan President Victoria Roach warned lawmakers that it posed too much risk. “If we were a normal insurance company, we wouldn’t be able to grow at this rate,” Ms. Roach said during a committee hearing. “As these numbers rise, our financial stability becomes more and more in question.”

She also made a comment that seemed to predict the current fires.

“We are one event away from a full assessment,” Ms. Roach testified. “There’s no other way to say it because we don’t have the money and we have a lot of attention out there.”

Mr. Dorsey declined to make Ms. Roach or other executives with the plan available for an interview.

There are other reasons to question the plan’s ability to absorb losses from the Los Angeles fires.

The FAIR plan, like other California insurers, requires approval from the state insurance commissioner to increase premiums. Mr. Dorsey, the FAIR plan spokesman, said the plan was committed to charging rates “sufficient to cover losses and expenses.”

However, Ms. Roach told lawmakers during the hearing that the FAIR plan would need to increase tax rates by about 70 percent in 2021. Perhaps anticipating that regulators were unlikely to approve such a large increase, she said that the plan officially calls for a 48.8 percent rate hike.

The insurance commissioner allowed the FAIR plan to increase its premiums by only 15.7 percent, Ms. Roach said.

Michael Soller, a spokesman for the state insurance commissioner, said some of the costs the FAIR plan cited in seeking higher premiums, including reinsurance, were prohibited under state rules at the time.

Last April, Ms. Roach appeared before an independent state watchdog and testified again about the financial challenges facing the FAIR plan. A former lawmaker, Anthony Cannella, noted that the arrangement seemed less than ideal: Insurers could decide that some homes were too risky to cover — but if the FAIR plan lost money on those homes, those same insurers would still have to pay for it.

“It just seems like a house of cards,” Mr. Cannella said.

Ms. Roach said nothing to dispute his claim. Instead she laughed.