California Moves Against State’s Insurer of Last Resort Over Smoke Policies

California regulators have announced legal action against the state’s fire insurer of last resort, the FAIR Plan, over its systematic denial of smoke damage claims to hundreds of wildfire victims.

On Thursday, the California Department of Insurance (CDI) filed an order to show cause against the FAIR Plan, asking the insurer to go to court and justify its “permanent physical damage” requirement, which for years has been behind its denials of policyholders’ claims related to smoke damage. It also issued a cease and desist order, with penalties, against the insurer.

“I’ve spoken with wildfire survivors who would rather lose their homes to flames than endure the stress and confusion of navigating smoke damage claims. This is unacceptable,” CDI Commissioner Ricardo Lara said in a news release on Thursday.

“This issue has persisted after every fire and has become even more urgent in the aftermath of the largest urban fires in history, the Palisades and Eaton fires. These consumers’ message is clear: they need assistance, not obstacles,” he added. “We will not tolerate insurance companies breaking the law and denying Californians the coverage they deserve, including the FAIR Plan.”

Critics, however, said that Golden State’s authorities should have taken action years ago when they first learned that the FAIR Plan’s smoke policies were likely illegal.

Newsweek contacted the FAIR Plan for comment on Friday outside standard working hours.

Why Is the California FAIR Plan Under Such Scrutiny?

The California FAIR Plan is the state’s fire insurer of last resort, offering fire coverage to homeowners who cannot find it anywhere else on the private market. The FAIR Plan, unlike other states’ insurers of last resort, is not operated by the state. It is under the helm of the insurance industry.

In recent years, as several major insurers cut coverage across the state to avoid paying enormous damage claims in some of the most risk-prone areas should disaster strike, the FAIR Plan inflated in size. As of June, according to the insurer’s own data, the FAIR Plan had 610,179 policies and a total exposure of $650 billion, up 42 percent from September 2024 and 289 percent from September 2021.

While for many homeowners dropped by their private carriers, any fire coverage is better than none, the FAIR Plan is often not an ideal solution. The insurer offers policies with less coverage than standard home insurance, and they are generally more expensive.

On top of that, many wildfire survivors have found through the years that the FAIR Plan is particularly reluctant to cover smoke damage claims. In June 2017, the FAIR Plan revised its policy language to require “permanent physical damage” for smoke claims, a rewording that has since allowed the insurer to issue more and more denials.

In 2022, an investigative hearing into the FAIR Plan found that the insurer’s handling of smoke claims was less than adequate. In May 2024, the California Supreme Court ruled that “damage caused by noxious substances or odors,” such as smoke, should be covered where a policy insures against “direct physical loss or damage to” property—a decision that the CDI asked the FAIR Plan to align with.

But the Palisades and Eaton fires struck before any change was made. Since then, the CDI has received more than 220 smoke-related consumer complaints against the FAIR Plan.

In July, a spokesperson for the FAIR Plan told Newsweek that its coverage of smoke damage was fully consistent with its coverage of burn damage.

“Both require direct physical loss. All FAIR Plan burn damage and smoke damage claims are handled consistent with California law. The FAIR Plan eliminated the use of the ‘sight and smell’ test last year, and has never enforced the smoke dispute resolution provision,” the spokesperson said.

They added: “Since last year, we have been working collaboratively with the California Department of Insurance to update and clarify our policy language around smoke damage, so the language is consistent with the manner in which these claims are being adjusted. Our goal is to continue providing fair and reasonable coverage for wildfire-related losses while maintaining the financial integrity of the FAIR Plan for all policyholders.”

Too Late for the FAIR Plan—But Not for State Farm

The Eaton Fire Survivors Network, a grassroots community connecting about 6,500 survivors of the January wildfires in Los Angeles County, said Lara already knew there was something deeply wrong with the FAIR Plan’s smoke policies in 2022, when his market conduct exam on the insurer was completed.

“Yet he took no action until today, three years later,” a statement by the network shared with Newsweek said. “That delay caused real harm. Eaton and Palisades fire survivors suffered needlessly under FAIR Plan smoke damage denials because Lara failed to act on the findings of his own investigation.”

The network is now shifting its attention to State Farm, asking Lara to complete and enforce the market conduct exam on the carrier “before approving another billion-dollar rate hike,” the group said.

State Farm, California’s largest home insurer, is now facing a market exam following numerous complaints by policyholders over delays in paying their damage claims or outright denials.

“Numerous homeowners reported delays and denials in claims processing, particularly concerning smoke contamination and hazardous materials like lead and asbestos,” Chip Merlin, the founder and president of Merlin Law Group, told Newsweek.

“The concerns regarding smoke are that State Farm has often delayed investigating for the finding of toxic residue from the smoke. Then when it does investigate, it limits its sample size so not enough areas of the home are being searched,” Marlin explained. “Further, it then does not fully test those samples looking to find all the various types of toxic materials. The allegations and complaints are that the delayed investigation is pretextual.”

State Farm is also facing allegations of purposefully underinsuring homes, a practice that previous market exams had already unearthed.

“I expect that the current examination will lead to many of the same conclusions as the last market conduct study. Many more mandated changes in State Farm’s claims handling procedures, restitution to affected policyholders and changes to its underwriting must occur,” Merlin said.

He continued: “Because State Farm had a chance to correct these issues and failed to do so, I expect that the potential fines are great. To prevent another repeat of this, I would expect the study to require State Farm to report on its progress in addressing these issues, along with deadlines it must meet.”

The company finds itself under scrutiny for its recent request to hike its rates again, which State Farm says is necessary to stabilize its financial footing on the increasingly risky California market.

In December 2023, State Farm received approval for a 20 percent increase in homeowners insurance premiums, which took effect in March 2024. Following the devastating wildfires earlier this year, it requested an emergency interim rate increase of 22 percent, which was reduced and approved as a 17 percent interim emergency rate increase effective June 1.

“State Farm is still pursuing approval for the full 30 percent increase, with hearings scheduled for later this year,” Merlin said. “I think State Farm will get another significant rate increase. The losses are much greater than what was originally determined. These fires were a historic event not seen since the last great urban fire in San Francisco more than a hundred years ago.”

He added: “The cost of these fires, as well as others that are happening at a much greater frequency, is causing significant losses and financial pressures. The fire peril losses in California have been off the charts for a decade. State Farm can certainly make a case for the need for higher rates.”

The question, Merlin said, is how to make sure coverage remains affordable for California homeowners. “Some may find that the cost of home ownership is simply too great, with insurance costs increasing significantly in such a short period,” he added.

“I don’t see a short-term solution to this problem,” Merlin said. “Rates and premiums will go up, but people might not be able to afford it. The long-term mitigation solutions will take far greater time to implement before those cost savings are realized. This is truly a crisis.”