California’s home insurer of last resort has violated state law with how it limited coverage for smoke damage under its fire insurance policies.
Last month, Los Angeles Superior Court Judge Stuart Rice ruled that the California FAIR Plan Association violated state insurance code by providing less coverage than the requirements under the Standard Form Fire Insurance Policy.
The backstory: Lake Tahoe cabin owner Jay Aliff sustained smoke damage in the 2020 Mountain View Fire and filed a claim with his insurer, the California FAIR Plan, which provides insurance coverage to those who cannot obtain it otherwise.
- After Aliff filed a claim, the FAIR Plan offered him a reduced payment that was in contradiction to a higher estimate that was completed by an adjuster.
- The Department of Insurance launched an investigation following complaints and directed the FAIR Plan to change its policy language regarding smoke damage.
- Aliff then filed a lawsuit claiming that the FAIR Plan did not heed the directive of the Department of Insurance and continued to deny claims based on its definition of direct physical loss and its requirement that coverage was only available to damage that was perceptible by sight or smell.
Zoom in: California insurance code states that insurers are allowed to not follow the standard form for their fire insurance policies as long as the policy provides coverage that is substantially equivalent to, or more favorable to, the insured.
- The FAIR Plan’s definition of smoke damage included sudden and accidental physical loss from smoke, including airborne particles like soot, ash or char debris that are visible to the unaided human eye or odors detectable by the unaided human nose. The policy excluded reliance on laboratory testing or individual subjective senses.
- In order to resolve disputes for smoke damage claims, the FAIR Plan allowed a three-person panel to determine whether evidence of smoke damage exists or for a sole neutral umpire to make the determination.
The big picture: Rice noted in his ruling that the Standard Form Fire Insurance Policy simply provides coverage for loss by fire and does not distinguish between fire damage and smoke damage.
- Rice also ruled that while direct physical damage from smoke requires a change to property, the change does not need to be visible to the naked eye.
- Further, Rice ruled that any policy language that limits coverage must be plain and clear, with phrases such as unaided human eye and unaided human nose being inherently vague.
