The lawsuit targets the FAIR Plan as well as major insurers who fund the plan, including State Farm, Allstate and Nationwide. (Credit: Kyle/Adobe Stock)
California’s FAIR Plan is being sued by 10 policyholders who allege that its denials of coverage for smoke damage are illegal.
The policyholders’ homes survived the LA wildfires but suffered smoke damage. The lawsuit says cleanup costs were denied by the FAIR Plan, even though smoke had turned their homes into “toxic traps, with each room and surface caked with invisible, hazardous chemical residue.”
The lawsuit targets the FAIR Plan as well as major insurers who fund the plan, including State Farm, Allstate and Nationwide. The plaintiffs are seeking payment for their claims as well as damages.
The suit alleges that denial of smoke damage claims is a longstanding practice for the FAIR Plan — and an illegal one. It says in 2016, the plan redefined “direct physical loss” to mean damage that creates permanent physical changes.
The suit says the FAIR Plan assured the California Department of Insurance that this wouldn’t change coverage, but it was actually aiming to reduce its financial exposure as its policyholder base grew.
After a series of wildfires starting in 2018, the suit says the FAIR Plan began “systematically denying” smoke damage claims. The plan received a notice from the California Department of Insurance in 2021 that the practice was against the law. The lawsuit says the notice was ignored.
A market conduct exam of the FAIR Plan followed, and regulators found 418 violations of the California Insurance Code and the California Code of Regulations between 2017 and 2021. It also found that the FAIR Plan’s fire policy did not meet state standards.
“Our clients have been stranded by a system that was supposed to protect them,” said Dylan Schaffer, co-founder of Kerley Schaffer, the law firm bringing the suit, in a statement. “Unfortunately, what we’ve learned in our years of litigating against FAIR Plan is that FAIR will push people until they push back. And that’s what we are here to do.”
The wildfires have left the FAIR Plan with an estimated $4 billion in losses. In February, it issued a $1 billion assessment to its member insurers to help pay claims.
In March, California Insurance Commissioner Ricardo Lara issued a bulletin ordering insurers to investigate and pay smoke damage claims, saying policies that cover “direct physical loss of or damage to property” include coverage for smoke damage.
“Wildfire survivors deserve fair treatment from their insurance companies,” Lara said in a press release. “Insurance companies must investigate smoke damage claims properly — not deny them outright or pressure homeowners into accepting less than they are owed. My message to insurance companies is clear: consumer claims must be paid fairly, fully, and quickly.”
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