California turns up pressure on insurance as wildfire fight drags on
Eighteen months into the rebuild of Southern California communities destroyed by wildfires, the fights with insurance companies continue. It’s a battle waged by survivors and advocates.
Gov. Gavin Newsom is now warning insurance companies about the many complaints that have come in since those fires burned.
“I think somebody has to go after insurance companies, and I think it was really good that he would say that,” Peggy Holter, who lost her home in the fire and is now a board member of her homeowner’s association, told Straight Arrow.
The two main questions people have in response to the announcement are what the state can actually do in this situation and whether it will really help.
What can Newsom do
Insurance agencies are regulated by the states, and each one has someone in charge of that job.
For California, it’s Insurance Commissioner Ricardo Lara, who’s already done what’s called a Market Conduct Examination of the situation. The Every Fire Survivor’s Network represents many fire survivors and wants to join that action.
“We would like to come in and help ensure that there is a robust enforcement action that’s taken against State Farm,” Joy Chen, Executive Director of Every Fire Survivor’s Network, told Straight Arrow.
Newsom sent a letter to banks, credit unions and mortgage lenders warning about all the reports of red tape. He also sent a letter informing survivors of their rights while warning insurers not to delay or deny proper funds.
He also directed the new Business and Consumer Services Agency and Department of Financial Protection and Innovation (DFPI) to collect any complaints about insurance payment delays or denials.
The governor’s office said that financial institutions have a critical role to play as families move from immediate stabilization to rebuilding their homes and businesses.
“California could open an investigation, and it could charge State Farm with various types of pattern and practice misconduct,” Adam Scales, professor of law at Rutgers Law School and co-director of the Rutgers Center for Risk and Responsibility, told Straight Arrow.
The most likely way for Newsom and the state to punish State Farm is through a financial penalty.
“Usually, the more claims that the state finds or feels the insurance company is mishandling, the higher the fines are going to end up being,” Peter Molk, professor at the University of Florida College of Law, told Straight Arrow.
That’s something the state just did with Tesla Insurance, looking for $10,000 per willful violation.
“I don’t know if it will incentivize the insurance companies to change their policies or their ways,” Alison MacCracken, a real estate adviser, told Straight Arrow.
Even if Newsom and his office take that option, money levied in fines would still go back to the state, not the victims.
The state still could direct the companies to pay out what’s owed to their policyholders.
“They can threaten to impose those types of penalties, and then hopefully that encourages State Farm or any other insurance company to pay out more promptly on claims that are covered,” Molk said.
The state does have the final option of kicking a company like State Farm from the state, but that’s unlikely due to the massive headaches it would cause millions of Californians.
There are nearly eight million State Farm policies in California.
“California’s not going to do that because it’s going to leave millions of policyholders without an insurer and in a market that is already expensive and dysfunctional,” Scales said. “Believe me, State Farm is aware of this dynamic.”
State Farm’s options
Which is why State Farm is holding some cards in this situation as well.
“The biggest thing that insurance companies can do, especially if you are one of the largest insurance companies in the state, is that you can threaten to just walk away, and then you leave,” Molk said.
While that also seems unlikely, it’s not far-fetched.
State Farm reportedly lost more than $5 billion over a recent nine-year period in underwriting costs.
California is a state impacted by fires, flooding and earthquakes and can be a difficult place to insure.
“It would be, probably, much more effective on their part if they just started withdrawing and watch people go, ‘Oh my God, where are we going to get any insurance?’” Holter said.
State Farm may also be able to mount some arguments that it’s not all on them.
When a homeowner has a mortgage, the insurance company has to make any claim checks out to the homeowner and the bank that runs the mortgage. The bank can then hold that money in an escrow account and release it in chunks.
“If I were State Farm, I guess I would wonder why I should be putting money in an account that no one can even use right now,” Scales said. “If I were State Farm, that might be part of my defense as to why things are a little bit slow.”
State Farm has always maintained that its focus has been helping recover in previous coverage of this subject.
What happens next
It’s a somewhat symbiotic relationship between the state of California and the state’s largest insurer.
Which is why both sides benefit from getting this worked out.
“If I am the state Insurance Commissioner or I’m appointed by some elected official within the state, keeping my policyholders happy is a really big deal,” Molk said.
Lara’s term is coming up in November, and the state will have a chance to elect someone new to replace him.
This saga will likely have a major impact on that election.
“It shows the incoming Insurance Commissioner the critical component, that we need to have better-defined rules when people come to get their policy and make claims,” MacCracken said.
Part of the issue many Straight Arrow spoke with was also with the timing.
Why now, 18 months into the rebuild?
Things have moved slowly for many policyholders, which has some wondering why the governor would step in now.
“It’s better late than never,” Holter said. “But I don’t know if Gavin Newsom weren’t running for president, if he would do that.”
It’s unclear what Newsom will do next if things continue to move at the same pace with State Farm and other insurers and banks.
But for those in the middle of the fight, they’ll take any help they can get.
“The state is the primary enforcer of insurance contracts in our country, and we do need the state,” Chen said.
Many of these people have spent the better part of a year-and-a-half fighting their insurance company.
They’re very aware that even the government is in for a tough battle.
“It’s very hard to go after insurance companies,” Holter said.
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Ella Rae Greene, Editor In Chief
