Calif. Homeowners Underinsurance Regs Take Effect, Despite Legal Challenges

By | June 28, 2011

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

The replacement cost regulations (California Code of Regulations Section 2695.183 (h)):

• 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 (ACIC) and the Personal Insurance Federation of California (PIFC) have filed a lawsuit against Commissioner Jones in Los Angeles County Superior Court. The groups aim to stop one aspect of regulations relating to homeowners’ insurance issued by the California Department of Insurance (CDI), because they believe the commissioner 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 regulation, particularly the provisions requiring additional 1) training for insurance agents on estimating replacement cost for homes and 2) insurer record-keeping about homeowners’ insurance sales to ensure more information is available during a claims dispute. Insurers also supported Assembly Bill 2022, which improved the disclosures that insurers must provide to the public in a homeowners’ insurance transaction.

However, they said the replacement cost regulations that took effect June 27 are concerning because of the mandated formula and particular words insurers must use when talking with a customer interested in homeowners insurance and the punishments for deviating from the state-required formula.

“Under the regulation, 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 subjecting the insurer to discipline,” Frazier and Sektnan said.

The associations said the regulations create a new approach for determining what constitutes an “unfair practice” under the Insurance Code Section 790, the Unfair Practices Act. They maintain there are many more helpful ways than one to talk with a customer about the purchase of homeowners’ insurance, and the CDI’s approach “sets a technical trap to punish perfectly legitimate conduct.”

“The CDI regulations require very specific behavior by an insurer when discussing homeowners’ insurance with a customer, but the UPA only bans unfair, unlawful and deceptive behavior,” Frazier and Sektnan explained. “There are many legitimate and helpful ways to discuss homeowners’ insurance beyond the CDI’s one specific approach. The UPA does not support the CDI regulation. More importantly, such a restriction violates insurers’ constitutional protections for commercial free speech when talking to policyholders. The mere fact that an insurer did not follow a CDI formula under the regulations does not constitute a misleading communication.”

However, California Insurance Commissioner Dave Jones said the lawsuit “simply has no merit.” “It’s appalling that insurance companies want to block these important consumer-friendly measures, which protect people when they are at their most vulnerable,” he said. “Consumers are entitled to know at the outset what their replacement cost is so they can make informed decisions about their coverage. We will defend these regulations to ensure that members of the public receive full and fair disclosure from insurers about the products they are buying.”

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 also shared the concern articulated by the trade associations in the litigation that CDI may have grossly exceeded its statutory authority.

“In sum, there is simply no court opinion or legislative history that authorizes the CDI to regulate the homeowner’s underwriting process in the manner it is attempting,” Frazier and Sektnan concluded. Despite their opposition to the regulations, they said their members would comply with the regulations until a court determines otherwise.

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Latest Comments

  • August 29, 2011 at 2:26 pm
    rosegardener says:
    I agree, Mr. Solvent. The cost of replacement is determined by the marketplace. When most construction/homebuilders have no work, it will cost a let less to rebuild. And who i... read more
  • June 28, 2011 at 6:34 pm
    Mr. Solvent says:
    I'm not sure about California, but replacement cost is extremely variable...especially in diaster prone areas. I seem to remember pre hurricane screen enclosures costing $8,00... read more
  • June 28, 2011 at 3:48 pm
    Compman says:
    Hey No Tolerance, I think I will use "dumb ass" in my disclaimer!. I like your approach but I still believe it is easier to just let these types of clients go as they are the ... read more
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