Calif. Homeowners Underinsurance Face Challenges

A series of new California homeowners regulations aimed at enhancing the standards and training for estimating the replacement value on homeowners’ insurance took effect on June 27. Meanwhile, two insurance trade associations continue to fight the regulations’ implementation.

The replacement cost regulations:

• Include provisions for laying out requirements applicable to replacement value and replacement cost estimates to create a more consistent, comprehensive and accurate replacement cost calculation;
• Require all broker-agents who sell residential insurance policies to complete a three-hour continuing education course on replacement cost;
• Create standards for real estate appraisers who estimate replacement cost for insurance purposes;
• Require the application of certain standards when estimating replacement and construction costs; and
• Require insurance companies to provide written training to their broker-agents on how to comply with whatever methodology the insurer has selected to conform to the new requirements.

“These regulations will go a long way toward ensuring that consumers who are victims of a disaster, such as a wildfire, are able to get the financial relief to rebuild their homes and their lives, while also dong much to ensure that homeowners are not underinsured,” said Insurance Commissioner Dave Jones.

However, the Association of California Insurance Companies and the Personal Insurance Federation of California have filed a lawsuit against Jones. They believe he does not have the statutory authority to impose one mandatory underwriting criteria for calculating replacement cost.

“Insurers want to foster open communication with policyholders and these regulations restrict these communications,” said Rex Frazier, PIFC president, and Mark Sektnan, ACIC president, in a statement.

The associations said the insurance industry supports most of the CDI’s regulations and they will follow them until a court says otherwise, but the mandated formula, particular words insurers must use when talking with customers interested in homeowners insurance and the punishments for deviating from the state-required formula are “concerning.”

“Any such change to the formula, however beneficial or clarifying that change may be, is automatically treated by the state as a ‘deceptive’ sales practice,” Frazier and Sektnan said. “There are many legitimate and helpful ways to discuss homeowners’ insurance beyond the CDI’s one specific approach. …The mere fact that an insurer did not follow a CDI formula under the regulations does not constitute a misleading communication.”

Commissioner Jones said the lawsuit “simply has no merit.”

Insurance Brokers and Agents of the West (IBA West) General Counsel Steve Young said his association was supportive of what CDI was trying to accomplish with its regulations, but shared the concern that CDI may have grossly exceeded its statutory authority.