California’s property insurance market remains in turmoil, exacerbated by escalating wildfire risks, insurer withdrawals, and systemic shortcomings in the state’s safety net—the California FAIR Plan. As homeowners confront rising premiums and limited coverage options, comprehensive reform is imperative to stabilize the market and protect policyholders.
In the aftermath of the January 2025 wildfires in Southern California, which destroyed over 18,000 structures and claimed at least 30 lives, insurers like State Farm, Farmers, and Allstate have further scaled back their presence. State Farm, the state’s largest home insurer, stopped issuing new policies in 2023 and has since implemented a 17% interim rate hike effective June 2025. It has also requested an additional 11% increase, citing $7.6 billion in wildfire losses in Los Angeles County. A hearing is scheduled for October.
Two lawsuits filed in Los Angeles allege that major insurers colluded to limit coverage in wildfire-prone areas, effectively funneling homeowners to the FAIR Plan. The complaints claim coordination through industry groups to reduce exposure while preserving profitability, at the cost of coverage availability and affordability.
The FAIR Plan, originally intended as a last-resort fire insurer, has now become a primary fallback for over 555,000 policyholders—nearly four times the number it served in 2015. As of March 2025, its total exposure had reached $599 billion, a 31% increase since the fall of 2024. The plan covers only named perils, excluding theft, water damage, and liability, requiring costly supplemental policies for full protection. Following the January wildfires, it paid out over $900 million across nearly 4,800 claims and levied a $1 billion assessment on its member insurers to maintain solvency.
Consumer advocates, including Consumer Watchdog, are suing the California Department of Insurance and Commissioner Ricardo Lara to block insurers from passing $500 million of that assessment onto homeowners through surcharges. They argue the fees lack legislative approval and place undue financial strain on policyholders already grappling with rising costs.
In response to the deepening crisis, lawmakers have introduced several bills. Assembly Bill 1354 proposes a tax credit for homeowners whose fire insurance premiums exceed their 2023 baseline, beginning in 2026. AB 226 would let the state issue bonds and provide the FAIR Plan access to a revolving credit facility to bolster liquidity. AB 567 seeks to suspend the gross premiums tax on residential property policies for four years starting in 2026.
New regulations now permit insurers to pass a portion of reinsurance costs directly to policyholders, in exchange for commitments to continue writing policies in high-risk areas. Although this may result in average increases between 30% and 40%, the goal is to stabilize the market and reduce FAIR Plan dependency. Insurers are also authorized to use forward-looking catastrophe models that incorporate projected wildfire risks into rate calculations, encouraging more accurate pricing and potentially incentivizing mitigation.
Related: State Farm Still Wants a 30% Rate Increase in California
Further complicating the landscape, the state’s newly updated fire risk maps have reclassified several areas, including Carmel, as “very high” severity zones. Residents in affected communities now face potential rate spikes and reduced coverage availability, prompting concerns over long-term economic and social impacts.
A new legal precedent on smoke damage claims may also impact insurer exposure. In Gharibian v. Mercury Insurance Co., 94 Cal. App. 5th 437 (2023), the California Court of Appeal held that smoke damage from a wildfire did not trigger coverage under the homeowner’s policy. This decision—marking the first published California appellate opinion to deny smoke damage coverage in a wildfire—could influence both insurer underwriting and claims practices if it remains good law.
To stabilize the system, California must take a multi-pronged approach. First, it must improve FAIR Plan operations, including more transparent claims handling, timely payments, and expansion of basic coverages. Second, the state must aggressively promote fire risk reduction through defensible space and home hardening; however, participation remains low, partly due to a lack of incentives from insurers. A centralized inspection and certification program—paired with mandatory premium discounts for compliant homes—could change that dynamic.
Related: Bill to Address California Wildfire And Insurance Crises Moving Through Legislature
Third, Proposition 103, the 1988 initiative requiring prior approval for rate increases, needs to be modernized. While its consumer protections are vital, its rigidity prevents insurers from responding swiftly to escalating risks. Reforms allowing for more agile rate filings, conditioned on actuarial justification and public transparency, would help preserve both affordability and insurer solvency.
California’s path forward must blend fiscal relief with long-term resilience. Without bold reforms, policyholders will face ever-higher premiums, eroding coverage, and deepening underinsurance—particularly in rural and working-class communities. But if lawmakers, regulators, and industry leaders work together, it is still possible to build a fair, functional, and sustainable insurance market for California’s future.
Veroff is an insurance attorney at Merlin Law Group, representing policyholders in large-loss property insurance disputes. He is based in the firm’s San Francisco office, and he is licensed in California, Oregon, and Washington, and has co-counseled cases across multiple states. Email: [email protected].
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