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February 2014

California Fair Plan Association Not Required to Pay Fire Losses Exceeding Policy Limits

A Jan. 31 California Appeal Court opinion affirmed a trial court’s decision to dismiss complaints filed by homeowners who alleged they were entitled to additional payments in excess of their policy limits under the California FAIR Plan.

According to the opinion in St. Cyr v. California Fair Plan Association, in 1968 the California Legislature enacted the FAIR Plan as a joint reinsurance program to provide property insurance for those who could not otherwise obtain coverage. Several homeowners who lived in high fire risk areas purchased insurance through the FAIR Plan.  Following the loss of their homes and other tangible property due to wildfires, the California FAIR Plan Association paid the homeowners the “actual cash value” for their damaged homes only up to policy limits. 

Believing that the FAIR Plan policies did not meet statutory minimum requirements, the homeowners filed complaints against the FAIR Plan asserting causes of action for bad faith, breach of contract and unfair business practices.  They alleged that the FAIR Plan policies provided less protection than statutorily mandated by California Insurance Code §§ 10090 through 10100.2, which created the FAIR Plan.  Moreover, they argued that the FAIR Plan was required to issue policies in accordance with the standard form insurance policy contained in California Insurance Code § 2071.  The homeowners argued that the FAIR Plan improperly excluded coverage for “other structures,” “additional living expenses,” “trees and shrubs,” “debris removal,” “fair rental value,” and “building code upgrades.”      

The trial court referred several issues regarding the policies to the California Insurance Commissioner.  After reviewing the matter, the Department of Insurance (DOI) informed the trial court that: (1) the Commissioner did not have primary jurisdiction over the issues; (2) the DOI had approved the FAIR Plan’s rate filing based upon its submitted forms; (3) there was no evidence that changes in the Fair Plan policy forms created a change in the rate impact; (4) if a change in the forms affected the rate impact, the FAIR Plan would need to submit those forms to the DOI for approval; and (5) the FAIR Plan was not authorized to issue the standard form fire policy and all of the coverages offered therein because the FAIR Plan had not submitted it as part of its rate plan.

The FAIR Plan filed a demurer to the homeowners’ complaints for failure to state a cause of action.  The trial court sustained the demurrer without leave to amend and found that the FAIR Plan had performed its obligations under the policies and under the California Insurance Code.  The homeowners appealed. 

On appeal, the homeowners argued that the FAIR Plan breached its duty under California Insurance Code § 10100.2 to write a fire policy on a form approved by the Commissioner.  The homeowners noted that in its 1997 rate filing the FAIR Plan had submitted standard policy forms rather than the forms issued to the homeowners.  The Court of Appeal rejected that argument explaining that § 10100.2 did not require the use of a particular form.  Further, if the homeowners believed that the policies issued by the FAIR Plan improperly broadened or restricted coverage their remedy was to present further information to the Commissioner or to seek a writ of mandamus compelling the Commissioner to review the policy forms.

The homeowners also argued that the FAIR Plan was required under California Insurance Code §§ 2070 and 2082 to write a fire policy using a line-numbered statutory form set forth in § 2071.  However, the requirements of California Insurance Code §§ 2070 and 2082 do not apply to policies issued by unincorporated associations or fire insurance policies that provide coverage for both fire and other perils “provided that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire policy.”  The Court of Appeal determined that the FAIR Plan policies fell within both of these statutory exceptions and were not required to comply with § 2071.

The homeowners’ final argument was that the FAIR Plan policies failed to provide the mandated coverage set forth in § 2071.  The Court of Appeal found that the FAIR Plan provided coverage substantially equivalent to or more favorable than the coverage contained in the standard form policy required under § 2071.  The standard form policy did not mention coverage for loss of trees and shrubs, for debris removal or for additional living expenses.  Moreover, the standard form included a policy limit provision that preceded all other coverage descriptions.  The FAIR Plan was not required to provide any additional coverage to the homeowners in excess of their policy limits.  The Court of Appeal also rejected the homeowners’ argument that a notice provision in California Insurance Code § 10103, subdivision (a)(2), implicitly repealed the policy limit requirement.  Accordingly, the Court of Appeal affirmed the trial court sustaining the demurrers filed by the FAIR Plan.

The opinion in St. Cyr v. California Fair Plan Association (2014) 2014 Cal.App. LEXIS 105, 14 C.D.O.S. 1216, is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.

Click here for the opinion. 


Steven R. Inouye
George P. Soares