California’s Office of Administrative Law recently approved new regulations promulgated by the California Insurance Commissioner for homeowners insurance. The regulations create new duties, impose additional standards and establish a new "unfair trade practice" violation on insurance companies and insurance producers selling homeowners insurance policies in California. Months in the making, the new regulations profess to respond to underinsurance problems experienced by California homeowners who in the wake of wildfire disasters throughout the state in the past decade discovered they did not have enough insurance to rebuild their homes. The new regulations, as well as a newly revised California Residential Property Disclosure Form and California Residential Property Insurance Bill of Rights, mark a key shift in California’s public policy. The new California homeowner insurance regulations and disclosure requirements take effect on June 27, 2011, and July 1, 2011, respectively.
Under the new regulations, California resident fire and casualty broker-agents and personal lines broker-agents must complete a training course on homeowners’ insurance valuation prior to estimating the replacement value of structures or explaining the various levels of coverage under a homeowners’ insurance policy. Specifically, insurance producers are expected to “be able to estimate the value of an insured's property by having basic knowledge of its value”; “know the valuation principles and methods”; “know the value of the components of a dwelling to assess its replacement cost or value”; “have the ability to recognize other factors influencing the replacement cost”; and “understand the process used in determining the value of an insured's property”, among others, California Department of Insurance Property & Casualty Broker-Agent and Personal Lines Broker-Agent Homeowners Insurance Valuation Course Curriculum.
In addition, under the new regulations, replacement cost estimates provided to applicants must be documented and the sources or methods used to create the replacement cost estimate identified. Critically, insurers and producers must ensure that the estimates are complete and based upon the specifically enumerated standards set forth in the regulations.
California’s new regulations cut deeply against California case law as well as homeowner insurance policy provisions that expressly place the duty to insure one’s home to value on the policyholder. “It is up to the insured to determine whether he or she has sufficient coverage for his or her needs,” Everett v. State Farm Gen. Ins. Co., 162 Cal. App. 4th 649, 660 (2008). Absent a specific assurance of adequacy, insurers do not have a general duty to investigate and inform the insured of adequacy of coverage, Jones v. Grewe, 189 Cal. App. 3d 950, 954 (1987). Contrary to California precedence, the new regulations appear to impose a duty on insurers and producers to accurately diagnose their insureds’ needs.
Insurance industry opponents have also criticized the new standards which lock in an estimating formula that may or may not provide consumers with the better estimates. The Association of California Insurance Companies (“ACIC”) has characterized the government’s mandatory standards as “unwise public policy.” It “cement[s] into law one formula for presenting replacement cost estimates. Today the department thinks this is a good idea. However, if experience shows the formula is not helping consumers, it will take months of rulemaking to change the mandates in [the regulation]. During that process, insurers will be prevented from offering their customers better estimates and improved service.” Statement of the Association of California Insurance Companies on the October 27, 2010, Amended Text of Proposed Regulations on Homeowners Insurance Estimating Replacement Cost Value (November 12, 2010).
California’s new regulations have numerous ramifications for the sale, underwriting and renewal of homeowners’ insurance policies. Time will tell whether or not these regulations have helped alleviate underinsurance problems. No doubt, they will spawn litigation on many fronts.
Marina Karvelas is an insurance litigation and regulatory law partner in Barger & Wolen’s Los Angeles office. She is a frequent contributor to the firm’s Insurance Litigation and Regulatory Law Blog and can be reached at firstname.lastname@example.org or (213) 614-7345.