California's new plan to insure more homes against wildfires called 'a scam' by consumer group

The California Department of Insurance has announced a new plan that hopes to incentivize insurance companies to write more policies to cover Californians in high wildfire risk areas, but one consumer advocacy group is calling the plan "a scam."

State Insurance Commissioner Ricardo Lara announced the plan on June 12. It comes as several insurance companies announced plans to stop writing policies in California. State Farm announced it would be dropping thousands of policies across the state, and would no longer accept homeowner insurance applications in California; Allstate has also said it would stop authorizing new homeowner policies, and Farmers Insurance has said it would cap its homeowner coverage policies each month.

Under California law, insurance companies are allowed to choose which parts of the state they will cover. Because of this, companies tend to lean toward issuing more policies in low risk areas, leaving homes like the ones in the path of the Post Fire that broke out in the Gorman area this past weekend with little to no options. For many, the only option is the California FAIR Plan, a last resort for many in the state. 

But Lara believes this new plan would incentivize insurers to write more policies in high risk areas, therefore increasing competition and ultimately leading to lower prices.

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Jamie Court with Consumer Watchdog disagrees. He calls the plan "a complete giveaway to the insurance companies, and it's outrageous."

Court takes issue with what's called catastrophe modeling, which allows insurance companies to use computerized historical and climate data to assess risk and determine their rates. Right now, companies can't use those models. Under Lara's plan, though, they can. But in exchange, they'll have to either offer policies equal to 85% of their market share in California in high risk areas, or increase policies in those areas by 5%. They can meet that quota by covering homeowners currently using FAIR.

But, while the directive would lead to more options for people in high risk areas, Court says there's no incentive for companies to keep their prices low.

"If they're selling policies that are literally $15,000 per year, and it's unaffordable for people in high risk wildfire areas — and people are being asked to pay that much — then [insurance companies will] have said, ‘We tried in good faith.’ So it's a complete scam," Court said.

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The California Department of Insurance, though, said that as part of the plan, insurance companies that use catastrophe modeling will be required to offer discounts to policyholders who have taken steps to lower their risk.

The plan goes into effect by the end of this year.

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