A recent bulletin from the California Department of Insurance reveals a critical update that affects homebuyers, property owners, and real estate investors alike. If California’s FAIR Plan, the state’s insurer of last resort for wildfire insurance, runs out of money following a catastrophic wildfire, it could charge a surcharge to all policyholders, even those whose properties weren’t damaged.
This change has serious implications for anyone buying, owning, or investing in real estate in California, especially in wildfire-prone regions.
What Is the FAIR Plan?
The California FAIR Plan provides insurance to property owners who are unable to get coverage through traditional insurers due to wildfire risk. The plan is backed by all major insurance companies operating in California, including State Farm and Allstate.
Under the newly clarified terms:
- Insurers are responsible for 50% of wildfire-related losses up to $2 billion.
- The remaining 50% can be recovered from policyholders in the form of a surcharge, with the approval of the Insurance Commissioner.
This means that even if your home or investment property is not damaged by a wildfire, you could still be billed to help cover statewide insurance losses.
The FAIR Plan’s Growing Exposure
As of June 30, the FAIR Plan had expanded to cover more than 419,000 properties, making it one of the largest insurers in the state. Its total risk exposure reached nearly $400 billion—a 26% increase in just six months. This dramatic growth shows how dependent property owners have become on the FAIR Plan as private insurers retreat from high-risk areas.
Why This Matters to You
If You’re Applying for a Mortgage:
Many lenders require proof of adequate insurance to finalize a mortgage. If the only available option is the FAIR Plan, especially in high-risk fire zones, your monthly payment could be much higher than expected. Future surcharges could further increase your cost of ownership.
If You’re a Homeowner in California:
You may already be covered under the FAIR Plan without realizing it. Even if you don’t live in a wildfire area, a statewide surcharge could still affect your bill.
If you’re a Real Estate Investor:
Surcharges, rising premiums, and limited policy options can directly impact profitability and cash flow. This development also adds a new layer of complexity to acquisitions and long-term hold strategies.
What You Should Do Now
1. Assess Your Property’s Risk
Check whether your current or target property is located in a wildfire-prone area. Use tools like CAL FIRE’s Fire Hazard Severity Zone map to evaluate risk.
2. Review Your Insurance Coverage
If you already use the FAIR Plan, review what it does and doesn’t cover. Many policies exclude liability, theft, or water damage unless you add supplemental coverage.
3. Budget for Surcharges and Rate Hikes
Even if you’re not impacted today, future surcharges could raise your costs. Adjust your monthly and annual budgets accordingly, especially if you’re financing a new property.
4. Diversify Where You Can
If your portfolio is heavily concentrated in wildfire zones, consider exploring properties in lower-risk areas to balance your exposure.
5. Seek Expert Advice
Understanding how insurance shifts affect your financing, closing, and returns is critical. A financial partner that specializes in real estate can make a real difference.
How Scout Lending Can Help
At Scout Lending, we guide real estate clients, buyers, and investors through California’s evolving property landscape. Whether you’re applying for a mortgage or expanding your portfolio, our team helps you:
- Understand the total cost of ownership, including insurance and surcharges
- Prepare accurate financing strategies that factor in real risks
- Evaluate property investments with long-term performance in mind
- Stay ahead of policy changes that could impact your real estate goals
Take the Next Step
The wildfire insurance landscape is shifting, and costs are rising. If you’re preparing to buy, already own, or plan to invest in California real estate, it’s time to plan.
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