What A FAIR Plan Is And What It Is Not

When no standard insurer will write a property, many states offer a residual market mechanism, commonly called a FAIR plan. It is a backstop with defined limits rather than an equivalent to a standard policy.

How these plans are constituted

A FAIR plan is established under state law and operated as an association of the insurers licensed to write property business in that state.

Member insurers share the plan's results in proportion to their market share, so losses and expenses are distributed across the industry in that state rather than borne by a single company.

The plan is not a state-funded program in most cases, and its structure and governance differ from state to state.

Eligibility rests on prior declinations

Applicants generally must show that coverage was unavailable in the voluntary market, often by documenting declinations from licensed insurers.

The plan is intended as a last resort, so eligibility rules are designed to prevent it from competing with insurers that would write the risk.

Properties in poor condition may still be declined or required to complete repairs, since the plan underwrites for insurability even where it cannot decline on location.

Coverage is deliberately narrow

Many plans provide a basic named peril form covering fire and a limited set of other perils, rather than the broad coverage a standard homeowners policy provides.

Liability coverage, theft, water damage and loss of use may be absent or available only as add-ons, depending on the state.

Coverage limits are commonly capped, which can leave higher-value properties underinsured relative to replacement cost.

How owners fill the gaps

A common arrangement pairs a FAIR plan policy with a separate difference in conditions policy from a surplus lines insurer to add perils and liability.

Surplus lines insurers are not subject to the same rate and form filing requirements, which is what allows them to write risks standard insurers decline.

These arrangements involve two policies with different terms, so the coordination between them is worth reviewing carefully with an agent.

Treating it as temporary

Plans generally expect policyholders to seek voluntary market coverage, and some require periodic evidence that the search continued.

Mitigation work, roof replacement or a change in an insurer's appetite can restore eligibility in the standard market later.

FAIR plan availability, coverage and eligibility rules vary by state and change over time; the state insurance department or a licensed agent is the right place to confirm the current position.