• California's insurer of last resort will get a $1 billion bailout to cover LA wildfire damages.
• The bailout will likely lead to higher insurance premiums for California homeowners.
• This situation could escalate the state's insurance crisis and convince more insurers to leave.

Property owners across California will likely pay higher insurance premiums to help cover the damages of the Los Angeles wildfires after the state's insurance plan of last resort said it doesn't have enough funds to pay out its claims.

State regulators on Tuesday approved a $1 billion bailout of California's insurer of last resort, the FAIR Plan, which covers those who can't find insurance on the private market. The bailout will be funded by private insurers licensed to operate in the state — and under a new rule enacted last year, they can pass up to half of the cost on to their customers.

The FAIR Plan said it was set to run out of money by the end of March as losses piled up from the Palisades and Eaton fires. It would be the first time in 30 years that it had been unable to pay its claims.

The bailout comes after California's largest home insurer, State Farm, this month asked state regulators for emergency permission to raise homeowners' rates by an average of 22%, starting May 1, to avert a "dire situation" for the company's finances. As of February 3, State Farm had paid out $1 billion and said it expected to spend far more.

It's all part of a worsening home insurance crisis in California that was already underway before the LA blazes destroyed more than 12,000 buildings. Back-to-back fires in 2017 and 2018 decimated insurers' profits, prompting companies including State Farm, Allstate, and Farmers Insurance to either stop writing new policies, pull back coverage, or, in some cases, drop tens of thousands of property owners in the state. Insurers cited growing losses from wildfires and other disasters coupled with inflation and more expensive home repairs.

Most recently, beginning in July, State Farm dropped nearly 70% of its policyholders in the affluent Pacific Palisades neighborhood.

All of this has forced hundreds of thousands of homeowners into the FAIR plan, designed to be a backstop for those who can't find insurance on the traditional market. Participation more than doubled between 2020 and 2024 to nearly half a million homes — many of which were in areas devastated by the Palisades and Eaton fires.

Measures to keep home insurers from fleeing California

The bill for the bailout will be divided among private insurers based on their market share in the state. As of 2023, State Farm, Farmers Insurance, and CSAA Insurance held the largest percentage of policies in California, according to S&P Global data. They have 30 days to pay the FAIR plan and — under a rule change made by California Insurance Commissioner Ricardo Lara last year — insurers can request approval to pass up to half those costs onto residential and commercial policyholders.

The change was part of Lara's broader strategy to lure private insurers back to California to help stabilize the market. The rules also should make it easier for companies to raise premiums and factor in the costs of reinsurance and risks of future disasters. In exchange, insurers will have to expand coverage in communities most at risk of wildfires.

Lara said he approved the FAIR Plan bailout to protect consumers and blamed 30 years of stagnant regulations for putting more people at risk.

"The FAIR Plan must pay claims just like any other insurance company," he said in a statement. "I reject those who are hoping for the failure of our insurance market by spreading fear and doubt. Wildfire survivors can't cash 'what ifs' to pay for food and rent, but they can cash FAIR Plan checks."

Some consumer advocates on Tuesday threatened legal action to stop private insurers from surcharging customers.

"This gift to insurance companies rewards bad behavior and will only incentivize insurers to drop even more homeowners and force them onto the FAIR Plan in the future because there's no consequence for abandoning these families," said Carmen Balber, executive director of Consumer Watchdog in Los Angeles.

Are you a homeowner with a story to share? Reach out to these reporters at [email protected] and [email protected].

• Private home insurers are dropping a growing number of customers in most states, a Senate report found.
• That leaves homeowners at risk, turning to more expensive last-resort options or going uninsured.
• While Florida has managed to reverse the trend somewhat, the risk to homeowners is set to intensify.

As Americans flock to places in the US vulnerable to natural disasters, private home insurance companies are running the other way.

The problem has left a rising number of homeowners with just one option to cover property damage: insurers of last resort.

The scale of homeowners losing their plans became clearer on Wednesday after a Senate Budget Committee investigation found that private insurers' nonrenewals spiked threefold in more than 200 counties between 2018 and 2023.

"What our new data reveal is that the failure to deal with climate change is also affecting whether families can even get homeowners insurance, which threatens their ability to get a mortgage, which spells trouble for property values in climate-exposed communities across the country," Senate Budget Chairman Sheldon Whitehouse said in releasing the report.

A recent study by Harvard University's Joint Center for Housing Studies found that between 2018 and 2023, the number of properties enrolled in California and Florida's insurers of last resort more than doubled. A similar trend is playing out in Louisiana. While Florida has reduced participation this year, it still has the highest enrollment in the country.

The problem isn't isolated to the most predictable states. The Senate Budget Committee found that the rate of homeowners losing their private insurance also rose in Hawaii, North Carolina, and Massachusetts.

Policymakers and insurers are trying to stabilize the private market, by enacting new laws and overhauling regulations. However, with scientists predicting that climate-fueled disasters will become more frequent and severe for the foreseeable future, the risk to America's homeowners is mounting.

Growing insurance risk has some states looking for solutions

In nearly three dozen states, insurers of last resort, known as Fair Access to Insurance Requirements, or FAIR, are available to homeowners and businesses who struggle to find insurance on the private market.

The numbers are rising because private insurers are pulling back coverage and hiking premiums in areas at risk of wildfires, hurricanes, flooding, and other disasters often made worse by climate change.

While state-mandated FAIR plans are designed to be a backstop, insurance regulators and private insurance companies are alarmed by how many homeowners and businesses are enrolling, especially in California and Florida. The plans are often more expensive and provide less coverage. Plus, saddling one insurer with the riskiest policies increases the chances of one major disaster sinking the system and leaving taxpayers and insurance companies with the bill.

Florida and California are trying to reverse the trend, and Florida has seen some progress. The state's insurer of last resort, Citizens Property Insurance Corporation, said on December 4 that its policy count dropped below 1 million for the first time in two years.

Mark Friedlander, a spokesperson for the Insurance Information Institute, said the drop reflects a series of changes in recent years to stabilize the state's private insurance market after more than a dozen companies left the state or stopped writing new policies.

The Florida legislature passed laws to curb rampant litigation and claim fraud that drove up legal costs for private insurers. Friedlander said insurance lawsuits in the first three quarters of 2024 are down 56%, compared with the first three quarters of 2021 — the year before the new laws were enacted. Citizens also started a "depopulation" program that shifts customers to the private market. State regulators in October said they had approved at least nine new property companies to enter the market, and premiums weren't rising nearly as much as last year.

In California, many of the deadliest and most destructive wildfires have occurred within the last five years. As a result, some private insurers are hiking premiums and limiting coverage in risky areas, pushing more homeowners to the insurer of last resort. The Harvard study found that policies in the state's FAIR plan doubled between 2018 and 2023 to more than 300,000. As of September, the California Insurance Commission said policies totaled nearly 452,000.

The commission is working to overhaul regulations to slow the trend, including requiring private insurers to sell in risky areas. In exchange, it should be easier for companies to raise premiums that factor in reinsurance costs and the risks of future disasters. That should help stabilize rates, said Michael Sollen, a spokesman for the commission.

Sollen added that in the past, private insurers could seek approval for higher premiums but weren't required to offer coverage in wildfire-prone areas.

"In a year from now, what's happening with the FAIR plan will be a key measure for us," he said. "We expect to see those numbers start to stabilize and go down."

A mounting home insurance crisis

Still, a reduction in state-backed plans isn't necessarily a sign of progress, Steve Koller, a postdoctoral fellow in climate and housing and author of the Harvard report, told Business Insider.

A growing number of homeowners in places like Florida, Louisiana, and California are purchasing private insurance from nontraditional providers barely regulated by state governments. These so-called "non-admitted" insurers don't contribute to a state fund that guarantees homeowners will have their claims paid even if the insurance provider fails, leaving their customers without access to this backup coverage.

"Someone could be moving to a private insurer from Citizens, and that insurer might have higher insolvency risk," Koller said.

He added that more homeowners are opting out of insurance altogether. The number of US homeowners going without insurance has soared from 5% in 2019 to 12% in 2022, the Insurance Information Institute reported.

Plus, Americans are increasingly moving into parts of the country most vulnerable to extreme weather. Tens of thousands more people moved into the most flood—and fire-prone areas of the US last year rather than out of them, the real estate company Redfin reported earlier this year.

As insurers of last resort try to shift more risk to the private market, home insurance premiums are expected to keep rising. That's especially true in the areas hardest hit by climate-fueled disasters.

If private insurers exit hard-hit regions en masse in the future, Koller said states might need to become the predominant insurance provider in the same way the National Flood Insurance Program took over after the private market for flood insurance collapsed in the 1960s. Most flood insurance plans are still issued by the federal government.

"My guess is states are going to work very, very hard to avoid that and ensure the existence of a robust private market, but that's a parallel that I can't personally unthink about," he said.

Have you struggled to get home insurance, moved to an insurer of last resort, or gone uninsured? Contact these reporters at [email protected] or [email protected].