Insurance companies use illegal policy provisions to burn homeowners on wildfire claims: Report

Consumer Watchdog calls for immediate action from commissioner as CDI’s internal audit of FAIR Plan confirms illegality

THE ANGELS , July 11, 2022 /PRNewswire/ — A review of public records by Consumer Watchdog reveals that insurance companies inserted provisions into the fine print of their home, condo and renters insurance policies that allow them to limit or deny coverage after a wildfire in violation of California law. Read the report ‘In smoke: How insurance companies and the insurance commissioner are burning bushfire victims’ here:

Among the provisions are:

  • “Smoke Damage” Recovery Limits – Smoke is often the most common and costly result of wildfires. Insurance companies have adopted policy provisions that treat “smoke damage” as separate from “fire damage” and limit smoke damage compensation to much less than the total fire policy coverage.

  • Arbitrary Reasons to Report Losses – State law only requires policyholders to report a loss in a timely manner. Instead of setting the reporting timeframe based on the date of loss, some insurance companies arbitrarily base the reporting trigger on another event, such as the “start date of the wildfire,” potentially leading to the company denying a late claim.

  • Refund Sublimits – California the law requires fire insurance policies to cover “all losses by fire.” But some companies limit compensation if a homeowner misses a reporting deadline or based on the type of fire loss (such as the smoke damage sublimits noted above).

  • Commencement of coverage exclusions – These provisions say that the policyholder does not have coverage for bushfire losses that occur within a certain time after the policy is purchased (usually 72 hours).

  • Appraisal Provisions Preventing Litigation – Such provisions prevent a policyholder from suing an insurance company in court over a claim dispute or (1) without first going through a loss appraisal process; or (2) after passing through an assessment.

All these provisions are illegal under California law. Consumer Watchdog also found that many insurers illegally failed to notify policyholders of their legal rights after a government-declared forest disaster.

Among the companies whose policies contain these illegal provisions are Farmers, Travelers, Nationwide and California FAIR Plan. The FAIR Plan is a government-mandated but insurance-industry-controlled organization that sells policies to Californians who can’t find coverage on the marketplace — a population that has grown rapidly as private companies have refused to sell insurance in communities everywhere California.

Indeed, an as-yet-undisclosed internal audit of the FAIR plan by California Department of Insurance investigators confirmed that the FAIR plan’s policies contained provisions limiting coverage for “smoke damage” — and that they violated California law.

Consumer advocates See wrongful claim practices

California regulators, who are required to review home insurance policies for compliance with state laws, should never have allowed those policies to be sold, Consumer Watchdog said. Policy provisions that allow companies to deny or limit coverage directly affect rates and premiums. Thus, under insurance reform Proposition 103, insurance companies must submit such policies to the commissioner, justify the prices they propose to charge for those policies, and obtain the commissioner’s approval.

“The financial harm and personal trauma that homeowners experience when their insurance company refuses to pay legitimate claims is incalculable,” said Harvey Rosenfield, author of Proposition 103 and founder of Consumer Watchdog. “Insurance companies have lowered payouts or denied coverage altogether when people filed claims following the horrific wildfires that have swept the state in recent years. The frustration and anguish of fighting with an insurance company for insurance coverage you’ve already paid for can be just as bad as the accident itself. Insurance Commissioner Lara must take immediate action to correct this gross injustice and enforce the law.”

Insurance Commissioner Lara scheduled a public hearing on the FAIR plan on Wednesday, July 13, 2022at 9 in the morning in Oakland.

Request for immediate action by Commissioner Lara

Consumer Watchdog called on Commissioner Lara to: (1) stop approving policies which are illegal; (2) use the full powers of his office to cause insurance companies to reopen and pay claims that have been reduced or denied on illegal grounds (such as the Insurance Commissioner John Garamendi after the Oakland Hills fires of 1991); (3) imposes maximum financial penalties against insurance companies that have violated the law; and (4) investigating and seeking prosecution of companies and corporate executives who defrauded policyholders, including conspiring to reduce coverage in violation of state antitrust laws. The organization also called for an independent audit of the agency’s failure to recognize and stop illegal behavior.

Since taking office in January 2019, Insurance Commissioner Lara has made it a point to visit communities devastated by wildfires and has repeatedly promised to protect Californians from wildfire insurance abuses. Regulations have been proposed but not yet passed that would require insurance companies to give homeowners a discount on their premiums to reduce the risk to their homes and property, and Consumer Watchdog called on the commissioner to close a dangerous loophole in their language.

Read the Consumer Watchdog report here:

Read the CDI FAIR Plan audit here:

Read Consumer Watchdog’s comments on the latest draft homeowner regulations proposed by Commissioner Lara here: %20REG-2020-00015. pdf

Consumer Watchdog is a nonprofit, nonpartisan organization that monitors the insurance industry and the Insurance Commissioner’s compliance with California law after voters passed insurance reform Proposition 103 in 1988. The organization defended and enforced Proposition 103 in the courts and at the California Department of Insurance. The organization’s challenges against exorbitant auto, home and business insurance rates saved Californians $3.48 billion since 2004


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SOURCE Consumer Watchdog

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