Statutorily Insufficient Policy Language Fails to Protect Insurers

In Aliff v. California FAIR Plan Association, Case Number 21STCV20095, in the Superior Court of the State of California, County of Los Angeles, the court recently declared that the FAIR Plan’s policy language providing coverage for “direct physical loss” and smoke damage did not meet minimum coverage standard requirements under state law. Insurance Code Section 2071 provides a standard fire policy form, and the FAIR Plan is only permitted to deviate from that language to the extent that coverage is “substantially equivalent to or more favorable to the insured.” The court determined that the FAIR Plan’s “direct physical loss” definition covering only “permanent physical changes” instead of the standard form’s “[all] loss by fire” was unacceptable. To support its conclusion, the court noted an April 2017 notice in which FAIR Plan admitted that the “limitation on what is considered direct physical loss will result in denial of claims that might have been paid under prior policy wording.”

For smoke damage, the policy required that the damage be “visible to the unaided human eye” or “detected by the unaided human nose of an average person,” a downgrade from the standard policy’s requirement that it be perceptible “by the subjective senses of [the insured] or by laboratory testing.” The FAIR Plan language is also inconsistent with the California Supreme Court’s ruling in Another Planet Ent., LLC v. Vigilant Ins. Co., 15 Cal. 5th 1106 (2024). There, the court concluded that “direct physical loss or damage . . . need not be visible to the naked eye.” Id. at 1117. The Aliff court also noted the inherent vagueness in policy language like “unaided human eye [or] nose,” which conflict with the requirement under California law that any coverage limitation be “conspicuous, plain and clear.” E.M.M.I. Inc. v. Zurich American Ins. Co., 32 Cal. 4th 465, 471 (2004).