FAIR plans are insurance plans for homeowners in areas with high risk of natural disasters. The plans are generally offered as a last resort to homeowners who cannot find coverage on the private market. FAIR stands for Fair Access to Insurance Requirements. Each state regulates its own insurance market. Therefore, the design of FAIR plans differ from state to state.
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FAIR plans were originally created in the 1960s in response to several risks to private property -- including riots in California and other states. According to the International Risk Management Institute, the requirements vary from state to state. However, they usually require insurers to participate in the plan as a condition of their ability to write other types of insurance policies, such as auto insurance. According to the Insurance Information Institute, 28 states have authorized FAIR plans
Properties that obtain insurance through FAIR plans are generally placed in a "pool." Premiums are charged, but they are dispersed to companies that participate, usually based on the size of their market in that particular state. Private insurance companies then share in the losses and profits of companies in that pool. The pool itself is backed by the financial strength of the companies that participate. In years with significant disasters, like hurricanes, companies may end up dipping deep into their own reserves to pay claims.
Because of the high risk nature of FAIR Plan properties, there are typically some barriers to entry. In Texas, for example, homeowners are only eligible for FAIR plan coverage if they have been denied coverage from two companies and if they do not have a pending offer from another company.
FAIR plan insurance usually costs more than traditional insurance plans. It also offers less coverage than typical homeowners plans. But at least there is some insurance available. According to the Insurance Information Institute, "All FAIR plans cover losses due to fire, vandalism, riot and windstorm. About a dozen states have some form of a standard homeowners policy, which includes liability. In California, the plan covers brush fires. Georgia and New York provide wind and hail coverage for certain coastal communities." Hurricane damage is particularly troublesome for FAIR plans. In Texas, certain coastal counties risks from hurricanes are specifically excluded from policies written there. The state has a separate pool for windstorm risk in those counties.