Fair Plan? Maybe not.

Say you own a home in a marginal neighborhood. Your family has been there for many years and you love it. But the area has seen better days and property values are on the low side. In that case—and also if you own a home where forest fires are a problem—you may have trouble finding regular homeowners insurance.

Luckily in California the legislature has dealt with this problem by compelling the state’s largest insurers to get together to offer insurance to those who can’t otherwise find it. The insurer is called FAIR Plan. But recently it’s become clear FAIR Plan isn’t particularly fair.

Our client owns a home in Richmond. A kitchen fire caused about $400,000 in damage, but the house was still standing. Good news: the client had an “actual cash value” policy that covered all of the damage. Bad news: FAIR Plan decided to pay about $100,000. Its loss settlement approach, which we have challenged in the California Court of Appeal (check out our brief), says that it always pays the lesser of repair costs or fair market value.

So, if the house is worth a million dollars and the fire does $400,000 in damage, FAIR Plan pays for the repairs. So far, so good. But if the house is worth $100,000, and there’s a pretty big fire, even if the policy limit is more than the cost of repairs, FAIR Plan only has to pay the market value. In poor neighborhoods, this approach is a disaster. Our client had to choose between repairing the house with her own money, or moving out and leaving behind an abandoned property.

Why would an insurer do such a thing? Why would it intentionally settle covered losses in a manner that leaves its insureds essentially homeless? The answer, of course, is profits. But we hope to convince the Court of Appeal to toss out FAIR Plan’s practice because we think it’s illegal under California law going back more than 100 years. That would be good not only for our client, but for thousands of other FAIR Plan customers whose policies are similarly invalid.