Court Finds California FAIR Plan Unlawful

    The Superior Court granted summary judgment to a policy holder who was issued a policy by the California's insurer of last resort, known as the FAIR Plan. Aliff v. California FAIR Plan Association, No. 21STCV200095 (Super. Ct. California June 24, 2025). 

    Plaintiff sued the California Fair Plan Association (CFP) arguing that the property policies it issued unlawfully restricted claims for smoke damage after a fire. The second amended complaint asserted causes of action for declaratory relief and unfair business practices under California statute. Plaintiff moved for summary judgment.

    California outlined a standard form policy by statute setting minimal standards for coverage. Plaintiff contended that the CFP policy offered less coverage for certain losses from fires than the standard form policy and was therefore unlawful.The standard form policy provided for coverage for all "Loss by Fire" without any distinction between that and smoke or smoke damage. The CFP provided a notice which stated, in part, as follows:

The following may be viewed as reducing or limiting coverage:

Direct physical loss has been newly defined . . . to require permanent physical changes to covered property. This limitation on what is considered direct physical loss will result in denial of claims that might have been paid under prior policy wording.

The notice admitted that the CFP policy was less favorable to insureds than the standard form policy. The language was an admission that the CFP policy's definition of "direct physical loss" had undergone a change for the worse such that it fell beneath the statutory minimum it had previously tracked. 

    The requirement that damage cause "permanent physical changes" offered less coverage that the general coverage for "Loss by Fire" contained in the standard form policy. 

    There were also problems with the CFP requirement that smoke damage be "visible to the unaided human eye" or "detected by the unaided human nose of an average person." In considering whether there was property damage in the COVID-19 context, the California Supreme Court held that the change or alteration constituting the loss "need not be visible to the naked eye to constitute direct physical damage to property; alterations at the microscopic level may meet this threshold." Another Planet Entertainment, LLC v. Vigilant Ins. Co., (2024) 15 Cal. 5th 1106. 1117. The CFP policy defined smoke damage as something "that is visible to the unaided human eye, or odor from smoke or ash that is detected by the unaided human nose of an average person, and not by the subjective senses of you or by laboratory testing." A definition of physical damage or physical loss that required perception by the senses and excluded" laboratory testing" was inconsistent with Another Planet. Being unable to resort to their own senses or laboratory tests, it was entirely unclear how an insured could determine whether a particular loss was covered or not. The terms "unaided human eye" and "average human nose" were not exact terms and a lay insured would be in no position to know what sort of smoke damage this clause would or would not cover. The policy language in the CFP policy was not in accord with Another Planet or the standard form policy. 

    The plaintiff, however, did not demonstrate standing to pursue a claim for unfair business practices. The plaintiff did not support an inference that he lost money or property because of CFP's unlawful conduct. While plaintiff might be successful at trial, the motion for summary judgment was denied at this stage because plaintiff had not carried his burden as to standing,