A real estate sign sits among along a burned out hillside near Gorman, California on June 17, 2024. The Post Fire broke out Saturday afternoon along Interstate 5 in Gorman, Calif. a community about 60 miles northwest of Los Angeles, according to the California Department of Forestry and Fire Protection. Fueled by powerful wind gusts, the blaze had burned 15,610 acres of dry, mountainous land by Monday morning.
Monrovia, California – A legal challenge filed by Consumer Watchdog against California Insurance Commissioner Ricardo Lara is escalating concerns about the stability of the state’s already fragile homeowner insurance market. Critics warn that the lawsuit could further destabilize coverage availability, particularly in wildfire-prone regions already facing significant insurance pullbacks.
The lawsuit, filed Monday, arrives amidst a deepening insurance availability crisis in California. Over the past several years, major insurance companies have significantly reduced their presence or completely exited the state’s home insurance market, citing the escalating risks of wildfires and state regulations that limit their ability to raise rates to match that risk.
This retreat by traditional insurers has led to an unprecedented surge in the California FAIR Plan, a state-mandated insurer of last resort providing basic fire coverage. Since 2020, the FAIR Plan’s policyholder base has more than doubled, reaching nearly 560,000 by March 2025. Following the devastating January wildfires, which resulted in 30 deaths and damaged or destroyed over 16,000 structures, the FAIR Plan reported an estimated $4 billion in losses – a figure that threatens to deplete its reserves and most of its reinsurance coverage.
The crux of the legal battle lies in Commissioner Lara’s decision to permit insurance companies participating in the FAIR Plan to impose surcharges on their policyholders to recoup losses from the January wildfires in Southern California. Consumer Watchdog argues in its lawsuit, filed in Los Angeles Superior Court, that this move constitutes an unlawful “bailout” for the insurance industry, potentially adding millions of dollars in costs for homeowners statewide.
“We look forward to defending the rights and pocketbooks of Californians and stopping this socialization of Fair Plan losses at the public’s expense,” stated Ryan Mellino, an attorney for Consumer Watchdog.
The contested surcharge plan originated from a 2024 agreement between Lara and the FAIR Plan. This agreement allows member insurers to recover their share of catastrophic losses exceeding the plan’s financial buffers by applying surcharges to all policyholders across the state, subject to the commissioner’s approval. The arrangement permits 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 in future disasters. While commercial claim losses are excluded, the potential financial burden on residential policyholders could still reach hundreds of millions of dollars.
Consumer Watchdog contends that this cost-sharing mechanism was approved without proper rulemaking, thereby violating laws governing the FAIR Plan’s operation. The group also argues that this approach will fail to incentivize insurers to return to underserved, high-risk areas, undermining Lara’s broader Sustainable Insurance Strategy.
Commissioner Lara’s office declined to comment directly on the lawsuit’s specifics but stated that the policy is part of ongoing efforts “to restore competition to all areas of our state,” according to the Los Angeles Times.
Industry leaders have strongly criticized the lawsuit. Denni Ritter of the American Property Casualty Insurance Association labeled the legal action a “reckless and self-serving stunt,” warning that it risks pushing California’s insurance market closer to “total collapse.” Gabriel Sanchez, press secretary for the California Department of Insurance, echoed this concern, stating that the lawsuit negatively impacts homeowners, small businesses, and nonprofits and hinders efforts to enhance market competitiveness.
Finance experts warn that the litigation introduces regulatory uncertainty, potentially making insurers more hesitant to operate in California. Michael Ryan, founder of MichaelRyanMoney.com, suggested that increased legal liability could lead to more insurers restricting new business or withdrawing from the state altogether, potentially creating “insurance deserts” where coverage becomes unavailable or unaffordable.
Meanwhile, a recently passed state bill in the California Assembly aims to authorize the FAIR Plan to issue bonds to cover future catastrophic losses, offering a potential alternative to immediate policyholder surcharges. However, for homeowners currently struggling to find affordable coverage, the new lawsuit injects further uncertainty into an already precarious situation.
