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January 13, 2005


David Giacalone

George, are Californians who build homes in precarious locations being subsidized in any way in their insurance premiums (other than raising the rates of everyone in the pool)?

George Wallace

Most of those who are in the most obviously dangerous spots -- such as hillsides prone to collapse and, particularly, prone to wildfires -- cannot obtain coverage at all in the standard market, and must settle for the expensive, bare bones coverage offered by the California FAIR Plan. (The nature of the Plan was discussed in this post about a year ago.) FAIR Plan policies cover only the most basic perils -- fire, wind, and the like -- and provide none of the useful extras -- such as liability insurance -- that are standard in the usual homeowners policy. To obtain those coverages, and to wind up with the equivalent of what is available in a typical homeowners package, you need to buy a "difference in conditions" policy, which is also a pricey item. Earth movement, which includes earthquakes as well as settling, shifting, slipping and sliding of the ground beneath one's feet, is usually not covered at all under property policies, unless it is purchased at substantial extra cost, and usually comes with high deductibles and other distasteful limitations.

Some standard market insurers are willing to write coverage on some (less obviously risky) hillside properties. In those cases, there may be some subsidization going on, but I would have to say that most of the really precarious sites are pooled with other precarious sites, all with higher premium or restricted coverages or both, so that there is not much subsidization coming out of the general pool of risks.

David Giacalone

Thanks, GW, very helpful. My check's in the mail.


There is still a bit of subsidy hidden in the high risk homeowners market in California. I am not sure how big it is, as I don't have access to the FAIR plan info. If the FAIR plan does not break even, other insureds make up the difference though a surcharge. Thus, FAIR plan contracts, while more expensive are still likely to be under priced. So, if there is a loss and the loss is greater than expected, insurers participating in the FAIR plan can then charge all policy holders to make up the loss--not just those in the high risk area. (NB. I know the Texas plan, so the terms in California may be different.)


Business Insurance including the following writeup, and an office colleague and I were trying to figure out what kind of policy would apply--none that we've personally seen or even read cases about. Any thoughts?

Insurance to cover part of Bank of America settlement by Dave Lenckus Posted on March 03, 2005 2:47 PM CST CHARLOTTE, N.C.-Insurance would cover a portion of Bank of America Corp.'s $460.5 million proposed settlement with WorldCom Inc. investors, according to a Bank of America spokeswoman. The bank already has reserved the uninsured portion of the settlement in previous quarters' financial results, according to a statement. The bank provides only aggregate reserve figures and does not disclose individual reserve amounts, the spokeswoman said. Charlotte, N.C.-based Bank of America is one of 17 WorldCom bond underwriters that the investors are suing in class action litigation that also names former WorldCom directors and officers and auditor Arthur Andersen L.L.P. as defendants. Ashburn, Va.-based WorldCom revealed in 2002 that it had tampered with its financial reports for years to make the company appear profitable. The company filed for bankruptcy-the largest in U.S. history-later that year and emerged in 2004 as MCI Inc. Bank of America's settlement with the WorldCom investors is subject to court approval. Citigroup Inc. settled with the investors for $2.65 billion last year (BI, May 17, 2004). A settlement that a group of outside directors agreed to partially fund with personal assets was overturned earlier this month by the trial judge, who agreed with nonsettling defendants that the settlement could saddle them with an unfair amount of liability (BI, Feb. 7).

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