California judge finds that FAIR Plan's smoke damage coverage violates state insurance code

By Isha Marathe

June 30 - (The Insurer) - A Los Angeles judge ruled that California's insurer of last resort, the FAIR Plan Association, provides less coverage for smoke damage than is required under the state’s standard form fire insurance policy

Plaintiff Jay Aliff sued the California FAIR Plan Association over its denial of coverage following the 2020 Mountain View Fire after his Lake Tahoe home suffered smoke damage. The FAIR Plan argued that cleanup of fire residue disqualified the claim from being considered a “direct physical loss," since the plan requires that fire claims must result in direct physical loss as defined by “permanent physical changes” to a property.

The plan agreed to pay $2,724.03 after subtracting depreciation and his deductible, while Aliff said the on-site adjuster estimated the damage at $7,034, according to the complaint.

He filed a proposed class action in 2021, but the court declined to certify the class. He then moved for summary judgment on his claims for declaratory relief and violation of the Unfair Competition Law.

The court said that while the unfairness prong of the UCL is broad, it isn't unlimited, and that the plaintiff did not meet the standard to prove the cause of action, but found in favor of the first cause of action.

Judge Stuart Rice cited a California FAIR Plan notice sent to its policyholders that its definition of "direct physical loss," which has been in effect since 2017, “will result in the denial of claims that might have been paid under prior policy wording."

In his ruling, he found that this criteria is less favorable to insureds than the minimum requirements of the standard form policy, violating California insurance law, which does not limit detection by the “unaided human eye," or "average human nose."

"Being unable to resort to their own senses or laboratory tests, it is entirely unclear how an insured could determine whether a particular loss is covered or not," Rice said in the decision.

"Any provision that takes away or limits coverage reasonably expected by an insured must be ‘conspicuous, plain and clear’ and must be stated precisely and understandably... This language falls short of that requirement."

The California FAIR Plan Association and counsel for Aliff did not immediately respond to a request for comment.