A lawsuit filed by Consumer Watchdog against California Insurance Commissioner Ricardo Lara has triggered new concerns over the stability of the state's homeowner insurance market, and critics warn the legal fight could accelerate an already precarious situation for coverage across fire-prone regions.
Why It Matters
The lawsuit filed Monday arrives as California grapples with a deepening insurance availability crisis. Over the last several years, major insurers have scaled back or exited the state's home insurance market, citing unmanageable wildfire risks and state regulations that limit rate hikes.
This pullback has fueled explosive growth in the FAIR Plan, which provides homeowners with basic fire coverage when they can't get it from a traditional carrier. The program has more than doubled its policyholder base since 2020, reaching nearly 560,000 by March 2025. Following the January wildfires, which killed 30 people and damaged or destroyed more than 16,000 structures, the FAIR Plan reported $4 billion in expected losses—enough to drain its reserves and most of its reinsurance coverage.
What To Know
The legal challenge centers on a decision by Lara to allow insurance companies participating in the California FAIR Plan to impose surcharges on policyholders to recoup losses stemming from the devastating wildfires that swept through Southern California in January.
According to the lawsuit, this move could result in millions of dollars in added costs for homeowners statewide.
Consumer Watchdog filed the suit in Los Angeles Superior Court, arguing that the plan amounts to an unlawful "bailout" for the insurance industry.
"We look forward to defending the rights and pocketbooks of Californians and stopping this socialization of Fair Plan losses at the public's expense," said Ryan Mellino, an attorney for the nonprofit, in a statement.
The disputed surcharge plan stems from Lara's 2024 agreement with the FAIR Plan. Under that deal, if catastrophic losses exceed the plan's financial buffers, member insurers could recover their share of payouts by applying surcharges to all policyholders across the state with the commissioner's approval.
The arrangement allows for up to 50 percent of the $1 billion in residential insurance assessments to be passed on to consumers, and potentially 100 percent of any excess amount in the event of future disasters. Homeowners would not be charged for commercial claim losses, but the scope of residential liabilities could still amount to hundreds of millions of dollars.
Newsweek reached out to Lara and Consumer Watchdog for comment via email.
Consumer Watchdog claims the mechanism was approved without proper rulemaking, violating laws governing the FAIR Plan's operation. The group also argues that this cost-sharing approach will not incentivize insurers to return to underserved wildfire-prone areas, undermining Lara's broader Sustainable Insurance Strategy.
Lara's office declined to address specifics of the lawsuit but said the policy is part of efforts "to restore competition to all areas of our state," according to the Los Angeles Times.
Industry leaders have denounced the lawsuit as counterproductive. Denni Ritter, American Property Casualty Insurance Association department vice president of state government relations, called the legal action a "reckless and self-serving stunt" in a statement to the Insurance Journal, saying it threatens to tip the state's insurance market closer to "total collapse."
"Blocking recovery of the costs insurers have paid to safeguard the FAIR Plan would jeopardize the last-resort coverage option for homeowners—and push our fragile insurance market closer to total collapse," Ritter said.
"It is critical that recovery costs be spread equitably across a broader pool of insured customers to help restore California's insurance market and protect access to coverage for all consumers."
Gabriel Sanchez, press secretary at the California Department of Insurance, told the Insurance Journal that the lawsuit negatively impacts homeowners, small businesses, and nonprofits.
"It undermines our efforts to enhance competitiveness across the market, which would allow people to transition from the costly and limited FAIR Plan back to the standard insurance market," he said.
What People Are Saying
Consumer Watchdog staff attorney Ryan Mellino said in a statement: "It is palpably unfair to allow companies that for decades have privately enjoyed the profits of the FAIR Plan to now foist its losses onto their policyholders."
Mellino added: "California homeowners have suffered enough, and unlawful pass-throughs are just another insult on top of the significant injuries they've already faced."
Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek: "This lawsuit could impact the market in several ways. Any major litigation introduces regulatory uncertainty, which typically makes insurers more conservative in their market approach. If insurers perceive increased legal liability or inability to price risk accurately, more companies may follow others in restricting new business or withdrawing from California altogether."
Nationwide title and escrow expert Alan Chang told Newsweek: "California and other states have experienced strong pains in the homeowner insurance arena with stories of mass cancellations or dramatic increases in premiums. The Fair Plan was the last resort for many homeowners that were not able to find coverage anywhere else."
"This coverage was at a dramatically higher cost so an additional surcharge on top of an already high premium would add insult to injury. The industry needs a different path forward through updated policy and regulation in order to not continue to get worse in the near term."
Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek: "For many homeowners in California who live in disaster-prone areas, the process of getting insurance has turned into a nightmare in recent years. The Fair Plan sought to alleviate some of those issues by providing an outlet for those who couldn't obtain insurance from companies that had pulled out of covering parts of the state."
"However, with the recent fires that did billions of dollars worth of damage came the realization that based on the last series of negotiations, some of the costs of this tragedy would be passed on to policyholders. The current drama just escalates existing problems and will draw doubt to those already worrying about getting their properties insured that the Fair Plan is a reliable one."
What Happens Next
A state bill recently passed by the California Assembly would authorize the FAIR Plan to issue bonds to cover future catastrophic losses, potentially shifting the burden away from immediate policyholder surcharges.
For homeowners in the meantime, the new lawsuit could worsen lingering issues with finding home insurance, Ryan said.
"More areas of California could become effective 'insurance deserts' where standard coverage is unavailable at any price," Ryan said. "Property values in high-risk areas could decline as mortgage lenders require insurance that homeowners can't obtain or afford."
