Insurance Law Client Alert: California FAIR Plan Limited to Coverage Provided by Statutory Fire Insurance Policy

In St. Cyr v. California Fair Plan Association (No. B243159, filed 1/31/14), a California appeals court held that the state’s high risk property insurance plan is not obligated to provide any greater coverage than that mandated for the state’s statutory fire insurance policy.

The plaintiff-policyholders lived in high fire risk areas and were insured under the California FAIR Plan, which provides property insurance to the otherwise uninsurable. Following loss of their homes and other property in wildfires, the policyholders were paid the full amount of their policy limits, but contended that they were entitled to additional payments. Specifically, the policyholders alleged that the FAIR plan provided less protection than statutorily mandated by Insurance Code sections 10090 through 10100.2, which spells out the “Basic Property Insurance Inspection and Placement Plan” of the FAIR program.

The policyholders contended that FAIR was required to issue a policy not only in accordance with the standard form fire insurance policy set forth in Insurance Code section 2071, but also the “‘Basic Property Insurance’ written in the normal market . . . known as the ‘HO-3’,” referring to the copywrited homeowners policy form promulgated by the Insurance Services Office (ISO).

Based on that contention, the policyholders alleged that FAIR’s policy improperly excluded coverage available in the “insurance industry standard ‘Basic Property Insurance’ policy,” including coverage for “‘Other Structures,'” “‘Additional Living Expenses,'” “trees and shrubs,” “debris removal,” “‘fair rental value,'” and “building code upgrades.” Those purportedly improper exclusions effectively reduced the promised coverage for total losses by 35 percent.

Under the FAIR Plan “Basic property insurance” is defined as:

“[I]nsurance against direct loss to real or tangible personal property at a fixed location in those geographic or urban areas designated by the commissioner, from perils insured under the standard fire policy and extended coverage endorsement and vandalism and malicious mischief and such other insurance coverages as may be added with respect to such property by the industry placement facility with the approval of the commissioner or by the commissioner, but shall not include insurance on automobile or farm risks.” (Insurance Code § 10091(c).)

Under the statutory scheme, the FAIR Plan is an involuntary joint reinsurance association of all property insurers. (Insurance Code §§ 10094, 10098.) It is the insurer of last resort, and statutorily mandated to make available basic property insurance to any “persons having an interest in real or tangible personal property who, after diligent effort … are unable to procure such insurance through normal channels from an admitted insurer.” (Insurance Code § 10094.)

The appeals court rejected an argument that the FAIR policy failed to conform with the statutory fire policy requirements of Insurance Code section 2071, pointing out that under Insurance Code section 2070, a fire policy need not follow the statutory form word-for-word as long as, when viewed in its entirety, it is “substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.”

The court then examined Insurance Code section 2071 and concluded that “[t]he standard form does not mention coverage for loss of trees and shrubs, for debris removal, or for additional living expenses.” “Under the plain language of the standard form fire policy, an insurer must insure … the insured’s property at the location of the property from all loss caused by fire or lightning and any other covered perils, to the extent of the [Actual Cash Value] of the property at the time of loss, but not exceeding the cost to repair or replace the property, without including an allowance for increased costs due to building ordinances, and without compensation for loss from interruption of business; nor, in any event, for more than the interest of the insured.”

As a result, the court ruled that the FAIR Plan had fulfilled its contractual and statutory obligations to the policyholders by timely paying them the full amount of the limits, which set forth the maximum amount due under the policy.

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February 4, 2014