By Kimberly Lilley, CIRMS, CMCA, CAI-CLAC Insurance Task Force
On July 25, 2024, and then again on August 27, 2024, the CA FAIR Plan and the CA Department of Insurance (CDI) entered into an agreement that increased access to the CA FAIR Plan for many condominium associations in California, while also increasing the level of risk they would take on by having their insurance through the FAIR Plan.
The increased access for condominium associations to the CA FAIR Plan is due to a change in how the $20 million limit of combined property insurance (building, contents, etc.) can be applied. Previously, it could only be applied per “location,” with an apartment complex, a condominium complex, etc., considered to be ONE location, no matter how large, or how many buildings. This change will allow the $20 million of combined property coverage to be applied per “structure,” which means each building will be analyzed for how much it would cost to rebuild, and then insured for that amount, up to $20 million limit per building. There will be a cap of $100 million per location/association. This means that, with this change, many higher value communities will be able to get full coverage through the FAIR Plan.
But not yet. In the agreement between the CDI and the FAIR Plan, the FAIR Plan has until November 25, 2024, to file for new rates to cover this added exposure. Then, they need to wait for the rate approval process to happen, which can take from months to YEARS to complete. After the rate is approved, the FAIR Plan has an additional 4 months to implement this expanded coverage and updated rates. Once in effect, these new coverage limits and rates will be in play for three years, after which they will revert back to $20 million per location. The hope is that, after three years, the normal commercial insurance market will be able to offer policies to these customers instead.
Also included in the agreement is the ability of the FAIR Plan and their member carriers (all admitted insurers licensed to write basic property insurance in CA) to submit an application to the CDI to impose a “temporary supplemental fee” at policy inception, or at any renewal of a policy, with the goal of ensuring that the FAIR Plan has funds available for the increased risk exposure brought on by these higher limits.
- The fee may be applied to any new or renewing commercial policies with the FAIR Plan that have limits above the $20 mill per location.
- If member carriers are assessed by the FAIR Plan because of a loss that is too large for the FAIR Plan to cover, the member carriers may ALSO request to collect temporary supplemental fees from their own policy holders for up to 50% of the first $1 billion (or $2 billion for carriers that insure both residential and commercial property) if they are writing policies with limits of $3 million or less per location for residential, or $20 million or less per location for commercial insurance.
- If the amount assessed by the FAIR Plan EXCEEDS $1 billion (or $2 billion for carriers that insure both residential and commercial property), the carriers can request a “temporary supplemental fee” be placed on all of their policyholders to recoup ALL amounts assessed (not just 50%).
- And for those carriers that write communities that need the expanded limits of $20 million per structure and $100 million per location in the aggregate, they can request to use “temporary supplemental fees” to collect ALL of the amounts assessed to them by the CA FAIR Plan, starting at the first dollar, no matter how much they are being assessed for.
The August 27, 2024, stipulation added in that the CA FAIR Plan and the CDI will continue to work together in good faith to amend the operating plan of the FAIR Plan to allow the FAIR plan access to 1) a line of credit, 2) catastrophe modeling, and 3) inclusion of the net cost of reinsurance in their rate applications.
So, while the CA FAIR Plan may be able to provide basic fire coverage for more communities in California, it also comes with the risk of additional fees being added on top of the premium already paid. And so far, we have no way of knowing how much those fees might be.
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Kimberly Lilley, CIRMS, CMCA, EBP, is Director of Advocacy, Public Relations & Marketing for Berg Insurance Agency in partnership with LaBarre/Oksnee and serves at the CAI-CLAC Insurance Task Force Chair. She may be reached at Kimberly@BergInsurance.com.