What is an insurer of last resort?

An insurer of last resort is essentially a state-mandated property insurance plan that provides coverage to individuals who are unable to obtain insurance in the regular private marketplace.

Often referred to as FAIR plans, these policy offerings are typically used as a last resort and provide basic coverage for properties that are considered high-risk or difficult to insure, according to the National Association of Insurance Commissioners (NAIC). This may be because they are located in flood zones, hurricane-prone areas or at risk for some other type of natural disaster.

The first FAIR plans were implemented not in response to natural disasters but due to destruction caused by urban riots in the late 1960s. In response to the insurance crisis brewing in inner cities, Congress created the Urban Property Insurance and Reinsurance Act of 1968 to provide a framework for providing essential lines of insurance at a reasonable cost.

While the plans are instituted at the state level, they’re financially backed by private insurers operating in the state through a pool of funds. Private insurance companies still write and administer the plans, although, in Florida and Louisiana, there is a state-run company that writes the last resort plans.

FAIR plans were initially implemented in 26 states as well as the District of Columbia and Puerto Rico. Today, FAIR plans have expanded to include 32 states, D.C., and Puerto Rico.

There is an equivalent to FAIR plans called Beach and Windstorm plans, which provide insurance coverage in designated areas against hurricanes and other severe windstorms.

Colorado will be the latest state to create a program for homeowners who can’t find insurance elsewhere.

Who needs insurance from a state-run company?

Urban riots are no longer the principal reason property owners may need to turn to an insurer of last resort, although they can still serve that contingency. In recent years, it is more likely to be natural disasters such as hurricanes, flooding and wildfires that have made it difficult or extremely expensive to insure property.

In some states, such as Florida, Louisiana and Texas, private insurance companies have chosen to limit their business or entirely pull out of high-risk areas. It’s not entirely connected to natural disasters, however. In Florida, for example, some insurers have decided to exit the state due to soaring litigation costs. 

Some property owners may be forced to turn to a FAIR plan when they can’t get private insurance for other reasons, such as the age of the property, old plumbing, wiring or heating systems or because they live in an area associated with high crime, vandalism and theft.

Each state plan is managed differently and may have varying requirements to qualify. Generally, property owners must demonstrate they were unable to obtain insurance through a private insurance company at a rate that wasn’t unfairly prohibitive. In addition, you may be required to:

  • Make necessary improvements to limit the risk of fire, theft or water damage, such as upgrading your electrical wiring, heating or plumbing.
  • If you do not undertake steps to correct conditions that put your property at high risk, the FAIR plan administrators have the right to deny coverage.

Additional requirements may include ensuring the property doesn’t have any outstanding taxes, penalties or liens, that it isn’t in violation of any local ordinances or rules, and that the owner attempts to get private insurance after a certain period, such as two years.

Which states have last-resort insurance plans?

Currently, 32 states, plus the District of Columbia offer FAIR plans or their equivalents. They are: Alabama, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia, Washington, West Virginia and Wisconsin.

Windstorm plans exist in Florida, Mississippi, South Carolina and Texas. Other variations are in place in other coastal states. In New York, for example, the Coastal Market Assistance Plan helps owners get coverage if their application has been rejected by at least three private insurers.

As noted above, in Florida and Louisiana, Citizens Insurance provides coverage for homes that can’t be insured any other way. It’s a state-run insurance company that handles policies other companies won’t write. In most other states, private companies still administer the policies through the FAIR plan.

What will Colorado’s new FAIR plan look like?

Under the Colorado FAIR plan, the state’s governor will appoint a nine-person board by Jan. 1, 2024, to create the framework for the new entity. The board, which will consist of six members from the insurance industry and three representing consumers, will have six months to develop a plan.

Private insurers would be responsible for providing the initial $10 million in startup costs, $5 million of which could be recouped from consumers.

The new entity would offer bare-bones insurance and not serve as a competitive alternative to private options. Property owners would need to demonstrate they were unable to obtain insurance from a private company, which could include letters from insurers denying coverage.

Coverage will be capped at $750,000 for residential property owners and $5 million for commercial property.

Representatives for the state’s private insurance industry were consulted on the framework for the FAIR plan., but they still have concerns and will be watching its implementation carefully.

Carole Walker, who serves as executive director of the Rocky Mountain Insurance Information Association, says they have concerns and will be watching its implementation carefully.

“There is a lot of trepidation from insurers in Colorado about creating one of these,” she says. “We worked very closely with the bill’s sponsors to make sure it truly is an insurer of last resort. We’ve seen examples in other states where they’ve created these entities and they end up driving a lot of private insurers out.”

The ultimate goal, she adds, is to provide a temporary backstop during this period of higher wildfire and hail risk and eventually get people back into the private market.

Measures the association worked to include and which have been incorporated into the plan, including the policy financial caps, the requirement that property owners provide proof that they tried to obtain private insurance and could not and that representatives from the insurance industry have a majority of seats on the new entity’s board.

“It has to be run like an insurance business and can’t be beholden to whatever politics might be in place or whatever governor might be in place a few years from now,” she says.

Is property insurance coverage through a state or FAIR plan the same as private insurance?

In general, yes, however, each state may have variations or limitations on the amount of coverage offered. In Colorado, for example, the new FAIR plan being put in place caps coverage at $750,000 for residential property and $5 million for commercial.

Some of the typical policies under a FAIR plan provide coverage for:

  • Costs to repair or rebuild a structure if damaged or destroyed by an event covered by the plan. Some FAIR plans are limited to damage only from fire, vandalism, riots and windstorms, whereas standard policies typically cover more.
  • Coverage to pay for damaged or destroyed personal belongings.
  • Liability coverage to pay for medical expenses or property damage to others where you are legally liable.

Once again, plans vary from state to state, so you need to ensure you fully understand the breadth of your coverage.

Is a last resort insurer more expensive than private alternatives?

Last resort insurers are for those property owners who have been unable to get insurance through a private insurer. They’re not meant to provide a cheaper alternative.

As such, it is generally more expensive than the private market. Otherwise, state-managed companies would unfairly compete with insurance carriers.

In Louisiana, for example, the state FAIR plan operated under Louisiana Citizens is specifically mandated to be more expensive than private insurers.

Because of its limitations and the high cost, it almost always makes sense to secure property insurance through the standard homeowners insurance market.

If you are having difficulty getting coverage, consider the following strategies before throwing in the towel:

  • If your property is considered high-risk because of its condition, such as old plumbing or wiring, find out what steps you can take to make it more insurable. It might result in some up-front costs, but the longer-term costs could be greater.
  • Shop around more. Consider working with an insurance agent who may be more aware of which companies are willing to offer insurance in certain high-risk areas or perhaps which new companies have begun offering insurance in the state.
  • Talk to the company that currently offers you other forms of insurance like car insurance. They may be willing to cut you a break to maintain your loyalty.
  • Talk to your neighbors about which company insures their homes. Odds are they may be willing to take on yours as well.
  • Call your state insurance department. It can generally provide you with a list of insurers offering policies in your area.