It is a myth that big-name insurance companies are leaving the California homeowners market due to wildfires. They have not, but they are selling their usual homeowners policies with a twist – exclusions for fire losses. Carriers can and will do this so long as the customer also gets a fire policy from the California Fair Plan – a quasi-public insurer of last resort that provides fire coverage if no one else will. Such a sale does not violate the California minimum-standards for fire insurance policies and allows carriers to stay in the game and collect premiums.
With this trend, captive agents are now acting as broker of record for their customer’s Fair Plan policies. And most of them do not understand the differences, leading to errors. In the past, big-name carriers with captive agents would typically decline those ineligible for coverage due to their fire zone. In other words, these agents would turn these customers away with no more insurance than they had when they walked in the door. Those customers would then find their way to the California Fair Plan broker to get a policy. After that, the customers would seek a Difference in Condition policy designed to supplement the Fair Plan. Now that carriers are selling their homeowners policies with fire exclusions rather than not directing customers out the door, they are having their captive agents act as broker of record for the Fair Plan policy, too.
The problem is, Fair Plan is not like any other insurance carrier. These captive agents who are usually selling a policy for just one company often have no idea what the differences actually are. We’ve seen a huge uptick in lawsuits and claim disputes because the agent made a mistake. For example, one error we see quite frequently is the agent set the limits of the Fair Plan policy significantly lower than on the carrier’s policy. The Farmers’ 2019 internal guidelines on how its agents should understand the Fair Plan process, which are available online, remind their agents to make sure they consider the fact that Farmers policies have extended replacement cost coverage but Fair Plan policies do not.
Another issue we see is that these agents are mishandling premium payments. Unlike many mainstream carriers, the Fair Plan does not consider your coverage in effect until days after they receive your premium check. Agents thus misrepresent to their customers all the time that their coverage is in effect even though it is not yet. Customers’ escrow accounts can sometimes take an extended period to issue the premium check, leaving a huge gap in insurance. The agent’s misrepresentation may cause a customer to sit back uninsured when they could just write a check today to ensure coverage is in effect. Fair Plan also takes credit cards. But that’s too late when the property already burned down.
Yet another issue is that carrier agents are preventing folks from getting insurance from another admitted carrier who may actually write it. Under California law, one is not supposed to turn to the California Fair Plan for fire coverage until a diligent search is made to find coverage in the admitted and surplus market. A captive agent who only sells one carrier’s policy may not want to tell a customer that they need to go try other admitted insurers first, then surplus carriers, and then come back to get their insurance. They would lose the sale if they did that! So, carrier agents will sell customers a Fair Plan policy that is worse than a market policy when it may be true that another carrier will write a full fire policy.
We are likely to continue seeing other examples of negligence in this area as more and more captive agents write Fair Plan policies as brokers of record. Agents and brokers are liable in California only in certain situations – but errors like these may constitute liability situations. The law will surely continue to develop as more cases rise to the appellate courts with fact patterns like these. Until the law is clear, you can count on agents and carriers doing whatever they can to avoid paying for their mistakes.