The California Department of Insurance (CDI) has issued a show cause order against the FAIR Plan, accusing it of systematically denying smoke damage claims using policy language that conflicts with state insurance code.
Commissioner Ricardo Lara stated the plan may be engaged in unlawful conduct, including deceptive business practices and misrepresentation of policy coverage.
The department’s enforcement bureau filed the formal accusation on July 31, launching a regulatory hearing.
Penalties could reach $10,000 per willful violation and $5,000 per non-willful act. Based on over 220 policyholder complaints from the Palisades and Eaton wildfires alone, fines may exceed $1mn.
The CDI alleges that the FAIR Plan failed to investigate and resolve smoke-related claims in a timely manner. In particular, the regulator identified a recurring issue with how the FAIR Plan defines “direct physical loss.”
California law requires all fire policies to follow a standard form or provide equal or better coverage. Regulators said the FAIR Plan altered the standard “all loss by fire” to a narrower term—“direct physical loss”—defined as visible and permanent damage.
This change, implemented in 2017, became the basis for denying claims with no lasting visible destruction, despite evident smoke contamination.
In a sworn filing at the time, the FAIR Plan claimed the reworded definition would expand or preserve existing coverage.
The CDI approved it in January 2017. But several months later, the FAIR Plan privately circulated a notice to brokers indicating that claims once payable under prior wording would now be excluded.
The department only learned of this in 2021. It responded with a cease-and-desist letter, warning that any restriction of smoke damage coverage tied to “permanent physical change” violates California insurance law.
The CDI followed up with a focused audit of the plan’s claims practices spanning four years. In a sample of 259 claims, examiners found 118 violations linked to the disputed damage threshold.
In total, the audit uncovered 418 violations of the Unfair Practices Act and state claims handling regulations.
Despite assurances in May that its practices meet legal standards, the FAIR Plan continues to generate complaints over smoke damage payouts. While regulators have worked with the plan to address several operational issues, coverage gaps for smoke-related claims remain unresolved.
