The advocacy group Consumer Watchdog filed a lawsuit against the California Department of Insurance and its commissioner to stop potentially hundreds of millions of dollars in “surcharges” State Farm wants to charge homeowners in order to cover claims from January’s firestorms in the Los Angeles area.
The suit, filed Monday, April 14 in Los Angeles County Superior Court, challenges a plan approved by state Insurance Commissioner Ricardo Lara in 2024 that permits insurance companies to pass through costs to policyholders for their share of an assessment issued by the FAIR Plan, the state’s insurer of last resort.
Also see: Why all California homeowners could be on the hook for LA County wildfire costs
Lara agreed last summer to allow the FAIR Plan to assess traditional insurers for funds to cover losses that the FAIR Plan incurred after a catastrophe — such as the LA County fires. The FAIR Plan does not have a role in determining how insurers manage costs once Lara approves an assessment.
Consumer Watchdog argues in the suit that homeowners across California are now on the hook to pay up to $500 million worth of the $1 billion FAIR Plan assessment approved Feb. 11 by Lara after the Palisades and Eaton Canyon fires.
The group is asking the court to order Lara to not approve any of the surcharges, or pass-throughs.
The lawsuit alleges the commissioner’s decision to allow insurance companies to “shift potentially billions of dollars in costs to homeowners was reached without any public input or participation,” and violated administrative rules and procedures, as well as the FAIR Plan’s own statutes.
“There is no upward limit on the amounts that can be passed through to homeowners in the future, and the next wildfires could see homeowners responsible for billions more in assessment costs,” said the group in a Tuesday, April 15 statement.
A FAIR Plan spokeswoman declined to comment on “active litigation” while a spokesman with DOI could not be reached for comment.
Rex Frazier, president of the Personal Insurance Federation of California, was perplexed by Consumer Watchdog’s beef over the FAIR Plan assessment since the mechanism that the organization is now challenging is the same process that it has used for decades to get paid intervenor fees in rate filing cases.
“It’s a bit of a head scratcher that they would be complaining about a special temporary assessment when it’s been used so many times to fund the very fees that companies pay Consumer Watchdog,” Frazier said. “It’s the way that they get paid.”
Also see: Wildfires add to growing worries about homeowner insurance
Consumer Watchdog was founded in 1985 by California Proposition 103 author Harvey Rosenfeld and is headquartered in Santa Monica. The proposition, passed by California voters in 1988, was designed to protect consumers from excessive insurance rates.
Besides the surcharges, three days of hearings before an administrative law judge were held at the insurance department’s Oakland offices last week to decide whether to approve State Farm’s emergency interim rate increase of 22% for homeowners, 15% for renters and condos, and 38% for rental dwellings.
State Farm executives have said previously that their finances are strained due to more than $7.9 billion in claims filed by policyholders following the L.A. fires.
In March, Lara said he would approve State Farm’s emergency rate increase if the insurer could justify the hike with data at last week’s hearing. He requested that State Farm halt non-renewals of homeowners’ insurance in California and pursue a $500 million capital infusion from its parent company in order to restore financial stability.
A State Farm spokesman was not available for comment on the hearings.
Bloomington, Ill.-based State Farm Mutual Insurance Co., which is made up of several companies in the U.S., insures more than 1.2 million policyholders for homeowners’ insurance through its State Farm General division in California.
See Also: California reconsiders State Farm rate hike as insurer’s losses rise
State Farm wants to begin billing existing clients with this new rate June 1.
The 22% rate increase equals $740 million for homeowners, or $600 per policyholder annually, across California, according to Consumer Watchdog calculations of the latest premium values filed by State Farm.
The insurer’s request also includes an increase of 38%, or $118 million, for rental dwellings, and a 15% increase, or $36 million, for renters and condominium owners.
The commission chief said at a March meeting on the phone with State Farm executives that his review of the insurer’s financial statements from 2023 and 2024 indicate “a concern regarding its surplus and a need to strengthen, especially, it’s risk-based capital ratio” — a financial yardstick used by regulators to measure the health of an institution.
Dan Krause, California’s president and CEO of State Farm General, confirmed in the meeting that he received approval from State Farm Mutual’s board of directors, who are willing “to consider capital support if our interim rate request is approved” and add $250 million in the short-term until the rate review is completed.
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