The traditional insurance marketplace is known as the “voluntary market,” which means insurance companies voluntarily write coverage and can choose the risks they accept and reject. In the voluntary market, high-risk homes may not find any insurance company that is willing to cover them. This is when homeowners need to access the “residual market,” where insurance companies must accept the risks that no one in the voluntary market will accept. The FAIR plan in each state is a form of the residual market. As a condition of being licensed to write insurance in the state’s voluntary market, insurance companies must also agree to take a share of the residual risks.
FAIR plans vary from state to state, but the concept is essentially the same: to provide home insurance to homeowners who are unable to find any coverage in the voluntary market. Residual markets similar to the FAIR are also available for some other types of insurance, such as automobile liability and workers compensation. Most FAIR plans require homeowners to shop for insurance through regular insurance channels and, only after being unable to find any coverage, will the FAIR plan step in to provide coverage. This is what gives the FAIR plan the nickname of “insurance of last resort.”
You might be surprised to find that the FAIR plans are not only for homeowners faced with natural disasters, though. The plans are actually designed to help homeowners in high-risk areas facing losses from many perils that they cannot control, like if you are a homeowner with a house in a neighborhood prone to crime, civil unrest, or vandalism.
If you are not eligible for the FAIR plan or do not need the FAIR plan for home insurance, remember that you are still part of the program. Insurance companies providing you with coverage must participate in the FAIR plan and share in its profits and losses. As a consequence, your premium and rates may be affected by that participation. However, you should also consider that one day, you might end up needing the FAIR plan to protect your home. That’s why the acronym is appropriate — it makes the insurance market “fair” for all to participate in.