When the Eaton and Palisades fires tore through entire stretches of Los Angeles in January, they turned a spotlight on a corner of the insurance world that typically exists in the shadows: the California FAIR Plan.
Known as the state’s insurance provider of last resort, the FAIR Plan supplies “high-risk” insurance for properties that other insurers won’t cover. In recent years, companies like State Farm and Nationwide have pulled back from California’s increasingly hazard-prone market.
As a result, the number of FAIR plan policyholders has ballooned in areas like Pacific Palisades — so much so that in the aftermath of January’s fires, the insurer careened toward insolvency before state regulators swept in with a billion-dollar bailout. Much of the cost of stabilizing the insurer will be shouldered by homeowners and renters.
Today, most think of the FAIR Plan as a safeguard against wildfire risk; few are aware that its forerunner was created as a Band-Aid response to a very different L.A. conflagration: the Watts uprising of 1965. Sixty years later, as climate change triggers a new crisis for insurance markets, firms and policymakers can draw an important lesson from the program’s first decades, when it not only allowed the wounds of injustice to fester, but ultimately stood in the way of transformative change.
By continuing to lean on insurance-based solutions to deep-seated societal problems, California has put itself on a path toward repeating the mistakes of the past.
The proximate spark for the Watts rebellion, which began Aug. 11, 1965, was the violent arrest of a Black motorist. But the kindling for the six days of unrest had been laid by decades of racist policing and discrimination in housing, employment and education. Despite the tangible victories of the Civil Rights Movement — the Voting Rights Act had been signed just a week earlier — white supremacy remained regnant in South Central L.A.
As Watts burned, insurance men beat the National Guard to the scene by a full day. Entering the still-smoldering Los Angeles neighborhood to gauge the insurable damages, these were capitalism’s first responders. After tallying the $40 million in losses, the industry sharply reduced the supply of insurance in Watts and other neighborhoods of color. In those areas, many property owners could no longer access insurance, and even when they did manage to find coverage, premiums were at least double — and often many times more — what they had been a short while before.
Insurance redlining was nothing new; it had limited investment and indemnity in neighborhoods of color for decades. But following Watts, it intensified, and the area’s insurance market collapsed almost entirely. In an effort to restore access, California’s commissioner of insurance assembled the “Watts pool,” joining together 110 insurers to share in the losses or gains from writing insurance in the neighborhood.
Two years later, amid unrelenting rebellion across American cities, President Lyndon B. Johnson convened the National Advisory Commission on Civil Disorders, better known as the Kerner Commission, to propose nationwide remedies for the unrest.
An insurance-related offshoot of the Kerner Commission saw the Watts pool as an important prototype for what became the FAIR Plan, a government-organized pool of all property insurers operating in a given state. Established on a state-by-state basis beginning in 1968, the FAIR Plan was Washington’s answer to the deepening crisis of insurance redlining. By increasing access to property insurance in “riot-prone areas,” federal policymakers hoped the FAIR Plan would help douse the flames engulfing American cities.
We lose sight of the essential fact that against the climate crisis, we are all high risk, albeit to different degrees.
Though the FAIR Plan increased insurance access for some, it did little to address the root causes of the nationwide rebellion: police violence, increasing unemployment and deeply entrenched inequities in housing, jobs and education.
Instead, the program merely protected the real estate and insurance industries from the risks posed by those systemic problems. This would prove to be a deadly error.
As American cities entered the 1970s, the FAIR Plan buffered landlords and insurers from the growing urban crisis, introducing perverse incentives that led landlords to burn down their own buildings for insurance payouts. Though created to quell the uprisings, the insurance program ended up sparking a firestorm far more destructive.
By 1977, at least one insurance leader had realized that with the FAIR Plan, “we have jumped out of the frying pan into the fire.”
Blazes tore across L.A.’s rental stock as the city experienced a 500% increase in arson during the second half of the 1970s. But the epicenter of the arson wave was in the Bronx and elsewhere in New York City, where tens of thousands of apartment units — most insured by the New York FAIR Plan — were torched by landlords or their hired lackeys. Insurers, for their part, were able to absorb the resulting losses through a number of arcane industry techniques, all legal, including simply passing along the losses to every policyholder in the state.
In the 2000s, as the costs of climate change became less and less possible to ignore, statewide FAIR Plans began shifting their focus from the urban crisis to the climate crisis, increasingly issuing policies to wealthier homeowners at risk of fires or flooding. In Los Angeles, the plan’s “high-risk” policyholders are now just as likely to reside in Santa Monica as in South Central.
But the industry’s favored mechanism for offloading these hazards is effectively the same as it was in the 1960s: Hike prices on consumers and devise sophisticated financial instruments for transferring the losses elsewhere. Should the regulators at the California Department of Insurance stand in their way with muscular consumer protections, insurance companies can leave the state, or merely threaten to, until their underwriting autonomy is restored.
What this means is that we have a property insurance program first designed for so-called “riot-prone areas” now standing as the only source of indemnity for the vast geographies of fire and flood that seem to grow vaster with every passing year.
With all eyes on California’s insurance market, the country stands at a crossroads. Because property insurance offers a potent tool for absorbing economic shocks, it remains the economic order’s first line of defense against unexpected ills. But in the absence of further-reaching transformation, property insurance can merely bandage over the root causes of the present crisis, making them harder to see.
In 1995, 30 years after Watts and 30 years before the Palisades and and Eaton fires, Mike Davis, the seminal chronicler of the region’s fire ecology, warned us that at some point, we would have to “face the flames.”
Recent wildfires should force a reckoning with climate change, unchecked development and the existential risks posed by fossil fuel emissions. But instead, the fires are just continuing to feed the bloat of the California FAIR Plan, which reported its “fastest growth ever” in July.
As more and more policyholders get relegated to “high risk” status and insurance markets of last resort, we lose sight of the essential fact that against the climate crisis, we are all high risk, albeit to different degrees. Insurance cannot protect us from the infinite risks ahead.
Bench Ansfield is assistant professor of history at Temple University. Their book, Born in Flames: The Business of Arson and the Remaking of the American City, was published in August by W. W. Norton and recently named an Editors’ Choice pick by the New York Times.
This article was written for Zócalo Public Square, an ASU Media Enterprise publication.
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