A Los Angeles County Superior Court judge ruled Tuesday that California's insurer of last resort has illegally shortchanged wildfire victims on smoke damage claims, a decision that could force the state's overburdened FAIR Plan to pay out millions in previously denied claims.
Judge Stuart Rice found that the California FAIR Plan Association violated state insurance law by limiting smoke damage coverage in ways not permitted under California's Standard Form Fire Insurance Policy, which requires coverage for all "loss by fire" without distinguishing between fire and smoke damage.
Since 2017, the FAIR Plan has required fire claims to show "direct physical loss" defined by "permanent physical changes" to property, making it harder for homeowners to receive compensation for smoke damage1. The plan also required smoke damage to be visible to the naked eye rather than detectable through laboratory testing1.
"This notice seems to admit that the CFP Policy is less favorable to insureds than the Standard Form Policy," Rice wrote, declaring the policy illegal1.
Attorney Dylan Schaffer, who represents the plaintiff, called the ruling "a complete game changer" that could affect thousands of claims denied since 2012, including about 3,000 from January's Los Angeles wildfires12.
The ruling comes as the FAIR Plan faces unprecedented financial pressure following January's devastating Palisades and Eaton fires. The plan covered 22% of structures destroyed in the Palisades Fire and 12% in the Eaton Fire, with potential exposure exceeding $4.77 billion12.
The FAIR Plan has exploded in size as major insurers flee California's wildfire-prone areas. From covering fewer than 250,000 homes in 2021, it now insures more than 570,000 properties statewide31.
FAIR Plan spokesperson Hilary McLean said the association "eliminated the use of the 'sight and smell' test" for smoke damage last year and is unlikely to appeal Rice's ruling1.
"Since last year, we have been working collaboratively with the California Department of Insurance to update and clarify our policy language around smoke damage," McLean said1.
The state Department of Insurance conducted a market conduct examination in 2022 that found the FAIR Plan violated California regulations 418 times between 2017 and 2021, including failures to cover smoke damage claims2.
Schaffer said he plans to seek court orders forcing the FAIR Plan to change its smoke damage policy statewide, potentially affecting both new claims and cases closed since 20172.
