D.A. in California Sues Farmers, Other Home Insurers Alleging Scheme to Underinsure
Alameda County District Attorney Pamela Price’s Consumer Justice Bureau has sued multiple home insurance carriers in California, including Farmers Insurance Exchange, alleging they’re operating a scheme that knowingly and systematically underinsures homes in California.
The complaint alleges these carriers provide consumers with inaccurately low replacement cost estimates, far less than what is needed to rebuild homes in the event of a disaster. The bureau says this violates insurance regulations requiring any such communication to “include the expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety.”
According to the charges, insurers generate replacement cost estimates though third-party software that considers little information about a specific home to be insured, instead relying on generalized features like the home’s ZIP code.
The complaint alleges the amount of insurance coverage purchased by homeowners is based on an estimate to rebuild a hypothetical home, not the actual home for which consumers are purchasing coverage. By avoiding the costs required to obtain detailed information about a home’s actual characteristics, home insurers offer lower premiums to increase their competitive position in the marketplace. However, this also leads to systemic underinsurance in California, leaving homeowners without the means to replace what are often their most valuable assets.
The complaint alleges this scheme violates numerous California laws, including Insurance Code regulations and California’s Unfair Competition and False Advertising Laws. The lawsuit seeks civil penalties and injunctive relief prohibiting home insurance carriers from continuing their conduct harming homeowners across California.
“The relationship between an insurer and the homeowner is necessarily one of unequal knowledge, expertise, information, and bargaining power, with homeowners depending on the insurance company to act in good faith,” Price said in a statement. “When an insurance company provides a homeowner with a replacement cost estimate, that estimate must pertain to the homeowner’s actual home, not some hypothetical home that suits the insurance company’s bottom line. Insurance companies must disclose all facts known only to them that are material to a homeowner’s policy, and they owe prospective clients 65 or older an additional duty of honesty, good faith, and fair dealing.”