Imagine a state-run insurance program so brazen that even when explicitly ordered by the Department of Insurance to remove unlawful policy language, it shrugs and continues business as usual. Welcome to the California FAIR Plan, an entity overseen by executives from California’s major admitted insurance carriers—carriers who evidently believe rules are for other people. This post highlights only one issue of many I noted in the post, “Should We Call It the California Unfair Plan?”

At the heart of this scandal is the FAIR Plan’s self-crafted definition of “direct physical loss,” which, conveniently for them, demands “permanent physical changes” to property. Why should Californians care? Because this innocent-sounding technicality has become the FAIR Plan’s favorite excuse for denying legitimate smoke damage claims. Smoke damage, often invisible or subtle at first, doesn’t always leave permanent physical alterations to your walls, ceilings, or belongings, but it can certainly leave your property unlivable, unhealthy, and needing costly remediation.

This wording wasn’t just sneakily slipped into policies—it was brazenly misrepresented to California’s Department of Insurance. FAIR Plan executives, in documents filed under penalty of perjury, assured regulators in 2016 that these language adjustments wouldn’t reduce coverage. They even dared suggest that it could broaden coverage! Yet, just months later, they unabashedly informed their brokers and policyholders the exact opposite—that the new language would indeed “result in denial of claims that might have been paid under prior policy wording.” 1

Let’s call this what it is: Deception.

The Department of Insurance, upon discovering FAIR Plan’s bait-and-switch tactic, explicitly labeled the “permanent physical changes” requirement unlawful. They ordered the FAIR Plan to remove this language, cease applying it to claims, and review all previously denied smoke damage claims to rectify wrongful denials. Yet, astoundingly, FAIR Plan has shrugged off these directives and continues to sell the same deceptive policies. They have doubled down, showing an extraordinary level of audacity in openly defying the regulatory body responsible for overseeing their conduct.

It’s important to understand why FAIR Plan feels so emboldened: It’s managed by a governing committee composed of senior executives from the state’s largest property insurance carriers. These carriers are the very same companies that refuse to insure properties in wildfire-prone areas, thereby funneling desperate homeowners directly into the arms of the FAIR Plan. It’s a lucrative cycle of abandonment and exploitation, and California homeowners are caught squarely in the crossfire.

So why hasn’t FAIR Plan faced consequences? Apparently, there are no effective penalties in California for insurance executives who choose to flout the law—at least, not penalties significant enough to prompt compliance. FAIR Plan has essentially dared regulators to hold them accountable, betting that the system will look the other way.

This isn’t just a policy dispute-it’s an ethical battle. It’s about holding a quasi-public entity accountable for willfully deceiving the state of California and its homeowners, particularly at a time when recent wildfires have devastated Los Angeles neighborhoods.

Toxic smoke, soot, and ash is not trivial. It destroys homes, businesses, and the health of those occupying those structures unless they are cleaned and removed. FAIR Plan’s arrogant refusal to follow clear directives from California’s insurance authorities is nothing short of gouging, extracting profit from suffering policyholders who have no other option.

The only silver lining in this smoke-clouded scenario? Class-action lawsuits are underway, standing up for homeowners and challenging the FAIR Plan’s illegal policies and claims handling. 2 It’s time for California’s courts and regulators to send a clear message: insurance executives, even those hiding behind the FAIR Plan, are not above the law.

Thought For The Law

“I don’t know whether laws were made to be broken, but they certainly aren’t made to be followed strictly.”

—Katherine Hepburn

1 California Department of Insurance letter to California FAIR Plan, dated Jan. 4, 2021, and Market Conduct Report of California FAIR Plan Association (Adopted May 25, 2022).

2 Class-action complaints filed in Aliff v. California FAIR Plan Assoc., No. 21STCV20095 (Cal. Super. Ct. – Los Angeles); and Arteno v. California FAIR Plan Assoc., No 24CV084506 (Cal. Super. Ct. – Alameda).