Newsome's Fire Insurance Crisis Solution to a Value Transfer to the Wealthy

Or: A Fire Crisis is a Horrible Thing to Waste

· Why did insurance commissioners levy no assessments on carriers since 1995 to cover firestorm losses resulting in a broke FAIR Plan by the 2025 Palisades Fire? Was this insurance crisis planned and allowed to simmer until the Palisades Fire?

· Why was an influx of homeless allowed in late 2024 in Palisades High Fire Zones?

· Why did Gov. Newsome Block a National Guard Firefighters Fast Response Team until 10 days after the fires broke out?

· Why Gov. Newsome call a special session of the legislature purportedly to “Trump proof” the state’s global warming programs from federal DOGE cutbacks that would entail suing the federal government while perplexingly asking Trump for $2.5 billion in part to fund those lawsuits?

Interviewer Question: “(Is the California property insurance crisis) going to get worse before it gets better?

Answer: (Worse). Especially if you’re anywhere near trees (a forest). Everybody thinks of the wildfire area as the place where they see trees everywhere around mountains. But the concern is not the wildlife areas that don’t have a lot of properties in them. That is not a real concern in the great scheme of things. It is not that bad. The real risk area is the WUI (‘woo-eee’). That stands for Wilderness Urban Interface where the forest ends and then there is this collar around it where you’re abutting up against. It’s the transition zone where the wildfire starts out, where wildfire embers blow into the “WUI.” That’s what Pacific Palisades is – a WUI. It’s a transition zone to wildfire. So, a fire starts out in the forested area and the embers blow into the WUI, and you get this house-to-house spread. So, if your property is in the WUI you can sort of look at the greenspace on a map and imagine being within a mile and a half of a densely forested area; that’s the WUI – those properties are going to have a very difficult time getting coverage”.

-- Darren Nix, CEO, Steadily Insurance Company

If you made a bad satirical joke that California’s plan to bail out its underfunded high risk fire insurance plan by starting more fires to enlarge its 330,000 pool of policy holders to spread the burden, it might be difficult to separate the joke from reality because no one would laugh and upon second thought might believe it is credible.

Nonetheless, compound negligent government policies and decisions over decades have resulted in homes in such Wilderness-Urban Interface zones (defined above) becoming rows of tinderboxes when wildfire ignites. The tendency of such ember-driven fires to hop from house to house in a precise pattern evokes suspicions that some microwave beam is surgically involved. But there is no need for such high technology as wildfires are pulled like magnets to fuel sources such as stick built homes with shingle roofs, and “firenados” rush in to fill low air pressure areas. The one thing in common with the Palisades, Eaton Canyon and Lahaina fires is high density substandard wood framed structures that are not hardened against combustibility. Albeit even concrete homes can be destroyed by 1,000 degree F heat generated in a fire vortex.

California’s public/private FAIR (Fair Access to Insurance Requirements) Plan had a total $449 billion net fire insurance liability exposure as of September 30, 2024. This does not even include the $35 to $45 billions of estimated property losses incurred by the infamous Pacific Palisades and the Eaton Canyon Fires that ignited on January 7, 2025.

The FAIR Plan and Newsome’s Re-Build Plan

What is the FAIR Plan? Thirty-five other states also have a FAIR Plan. It is not a taxpayer funded state agency. It is a mandated organization regulated by statute, with involuntary participants, of around 100 private property casualty insurers. It is regulated by an elected state insurance commissioner. Some of the major carriers have left California due to the high risk of insuring Wilderness-Urban Interface zone homes and its FAIR Plan being only 2 percent funded. FAIR writes policies for risks the private insurers will not write. So, if where you live is in an Urban Wilderness Urban Interface zone (defined above) you cannot get private insurance, and the only option is the FAIR Plan. The FAIR Plan, however, also has the government power of assessment. So, all 100 +/- property insurers in California are subject to an involuntary assessment to fund FAIR’s $449 billions of wildfire liability exposure. Insurers must, in turn, commensurately raise insurance premiums for all property policy owners to cover that exposure.

If exposure is spread only over California’s 330,000 Fair Plan policy holders this reflects a staggering $136,061 hypothetical higher added premium per policy holder. But if spread over California’s estimated 8,909,419 single-and-multifamily housing owners this would only reflect about $5,040/year per residential property owner. FAIR policy holders represent only 3.7 percent of all state property owners. Moreover, according to the Lending Tree, some 806,600 homes in California are uninsured for fire loss, with 1 in 10 homes in the Los Angeles area uninsured. Presumably, FAIR would have no power to assess uninsured property owners. Adjusting for the uninsured, this would reflect $5,541 per year.

Gov. Newsome’s catastrophic fire loss Re-Build Policy calls for rolling FAIR’s liabilities into a tax-exempt municipal bond issued by the California Infrastructure and Economic Development Bank, which typically funds fire stations, public schools, roads, parks and water and sewer systems in new master-planned residential developments with tax exempt municipal bonds. High risk municipal bonds in California reflect about a 4.5% to 5% interest rate compared to 10% or higher for a high-risk corporate bond. Taking the $5,541 of exposure spread over 8,048,619 policy holders, this would equate to $36.57 per month additional insurance burden or about $440 per year. Conversely, if this risk exposure can only be spread over FAIR’s existing policy holders, this would reflect an additional roughly estimated insurance payment of $898 per month or $10,775 per year, which would be unacceptable to the public. So, the only politically acceptable and economic option is to socialize the $449 billion in uncovered fire risk exposure over all policy holders in the state.

Which brings us back to the aspect of government negligence and inept leadership. The Pacific Palisades land was purchased by the Methodist-Episcopal Church in the 1920’s. It was divided up into highly dense small lots with no requirement for paying for public works or infrastructure or environmental impacts. There was no residential lot subdivision law as there is today. The Palisades was known as an opportunity to purchase an ocean view lot for peanuts in today’s prices. Custom homes were built out one at a time without heavy permit processing by government. The Pacific Palisades has never been annexed into the city but apparently contracts with LA for public services.

No water tank space on each lot or street for fire suppression were provided as would be required today if not grandfathered by zoning law. The municipal water lines were not designed for holding water pressure for fire hydrants if everyone tries to wet their roofs at the same time. According to an anonymous civil engineer I contacted, residential land subdivisions are not so designed even today as costs would be prohibitive.

Some homeowners have already filed lawsuits against the city over the empty reservoir issue, but the Santa Ynez reservoir is a regulating reservoir not a storage reservoir. Potable water is supplied to Los Angeles from Castaic Lake, a large state-run storage reservoir which receives water from the State Water Project from Northern California.

Fire risks and reliability of water pressure in a firestorm are issues typically dealt with by real estate disclosure laws where buyer due diligence and seller disclosure is required. The Pacific Palisades lots and homes are legal but non-conforming improvements that do not meet current building and land division codes but are grandfathered under the law. Moreover, no property in a WUI can be sold without the seller giving the buyer the wildfire disclosure report.

Put differently, Newsome’s Re-Build Plan would entail 96 percent of all property policy holders picking up the extra tab for about 4 percent of policy holders who have suffered fire losses in Wilderness Urban Interface areas. Looking at a map of where the FAIR Plan policy holders are located indicates Southern California insurance liabilities are clustered in forest tourist areas (Big Bear City, Big Bear Lake, Lake Arrowhead) and luxury home areas (Palisades, Crestline). Northern California policy holders are in hilly urban forest areas (Berkeley, Orinda) and mountain forested areas (Grass Valley, Nevada City, Truckee).

Windfalls for Wipeouts – Gaming the System for Land Value Capture

But several major insurers have already left writing new policies in California as the state did not keep fire loss assessments up to date and fully funded. This may have been due to political pressure put on government by wealthy homeowners who learn as an investor class to socialize losses but capture private gain wherever possible (see Donald Hagman’s book Windfalls for Wipeouts: Land Value Capture and Compensation, 1974). Palisades residents whose homes were destroyed reaped real estate appreciation windfalls for decades by escaping land planning and building code requirements, only to be now wiped out for the very same reason. And it appears the Palisades landowners will be bailed out again by Gov Newsome’s Re-Building Plan at the expense of everyone else.

Such windfalls should be no surprise given 1930’s Los Angeles was the Hollywood movie backdrop of the historical corruption of bringing water from Owens Lake in the Sierra-Nevada Mountains, the loss of lives due to failure of St. Francis Dam designed by untrained William Mulholland, and land speculating by elites based on inside knowledge of that water being distributed in residential subdivisions in formerly dry San Fernando Valley, all made famous by the movie “Chinatown”. But there is a catch to any such double dipping windfall.

Real estate broker Josh Altman asserts 70% of the Palisades homes will not be re-built due to insufficient insurance, elites gaming the system by not carrying fire insurance, unaffordability of rebuilding given $1,000 per square foot construction costs, and the inability to find a contractor when 16,000 homes all need to be built concurrently. And any unbuilt lots will eventually have to be sold at a literal “fire sale” price (50% discount of fully developed value) to induce a buyer to take all the development risks with full knowledge that any new home may likely be vulnerable to another fire every ten years or sooner. However, if a competitive market arises for the lots, the eventual sale price may climb higher than 50% of fully developed lot value. There may be no way for a property owner to recoup all market loss unless their home is re-built.

(Note: I worked 20 years for California’s largest wholesale urban water district and have privately appraised many billion-dollar new land subdivisions for issuance of tax-exempt bonds for new homeowners to pay their Community Facility District assessments for fire stations, schools, water and sewer systems, etc.).

Newsome’s Fire Insurance Crisis Solution a Value Transfer to the Wealthy Or: A Fire Crisis is a Horrible Thing to Waste, California Gov. Gavin Newsome, California FAIR insurance program, Wayne Lusvardi