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California Supreme Court Rules Insurance Commissioner's 2011 Regulation Covering Replacement Cost Estimates For Homeowners Insurance Supported By Statuatory Authority
By Lonce LaMon - January 24, 2017

The California Supreme Court yesterday reversed a court of appeals judgment invalidating a regulation set forth by California Insurance Commissioner Dave Jones, one which requires replacement cost estimates for homeowners insurance to include all costs necessary to replace a home.

The 7-0 decision rejected the insurance industry’s arguments and ruled the insurance commissioner has broad discretion to adopt rules and regulation as necessary to promote the public welfare.  In this case, the regulation in question demands that homeowners’ insurance writers that offer replacement cost insurance do so for all aspects of a home that require replacing in the case of a loss.

This regulation was borne out of the recent history with California wild fires.  In case after case, California residents whose homes had been damaged or destroyed explained why they had believed their homeowners insurance would enable them to rebuild their dwellings. Once they presented their claim to their insurance company, though, these homeowners discovered that their coverage fell well short of what they needed — sometimes by hundreds of thousands of dollars –– to rebuild their homes.

Between 1992 and 2005, the Legislature took steps to address the divergence between homeowners’ expectations of insurance coverage and the actual scope of coverage. Nonetheless, when large wildfires struck Southern California in 2007 and 2008, state officials realized the under-insurance problem persisted. The Insurance Commissioner once again received numerous complaints from affected homeowners who realized only too late that they were substantially underinsured.


The California wildfires near Camp Pendleton, 2007

In 2008, the Department of Insurance‘s market conduct division conducted an investigation of the four largest insurers –– ones that together accounted for approximately half the market covering these losses. The survey revealed that for a majority of the policies examined, coverage limits matched what was indicated by the insurer‘s own coverage calculator. But the recommended coverage nonetheless understated what was actually needed to rebuild the insured‘s home over 80 percent of the time. Even when the homeowner had purchased extended 3 replacement cost coverage, 57 percent of these policies still underinsured their policyholders relative to the cost of rebuilding their homes. A United Policyholders survey of victims who lost their homes in the 2007 wildfires similarly showed that only 26 percent had sufficient coverage to repair, replace, or rebuild their homes. These victims were underinsured by an average of $240,000. Once again, in a significant number of cases, the policyholder had relied on the estimate provided by the insurer‘s replacement cost estimate tool in purchasing such coverage.

Dave Jones believed the regulations were needed because insurance companies were misleading consumers by giving them incomplete home replacement cost estimates, sometimes by removing key components from the actual estimates they calculated, in order to undercut competitors with lower premium.  The practice unfairly left consumers who relied on their insurers’ estimates unaware they were underinsured, and many could not rebuild after fires destroyed their homes.

“We have won an important victory for California consumers over the insurance industry with the Supreme Court’s decision today upholding our consumer protection regulation,” Jones said in a statement yesterday.  “The Supreme Court rejected the insurance industry’s effort to strike down the department’s regulation, which protects consumers from misleading insurer estimates of home replacement costs, which left homeowners without adequate coverage or ability to rebuild their homes after fires.

“Climate change, years of drought, and more devastating wildfires have changed the landscape of California and led to a year-round fire season.  This regulation offers homeowners peace of mind, should disaster strike,” Jones added.  

 

lonce@adjustercom.com

 
 

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