Calif. Agents Could Face New CE Requirements

Agents, Insurer Groups Discuss Homeowners Replacement Cost Regulations

California insurance agents and producers may face new continuing education requirements on estimating replacement value on homeowners insurance. The California Department of Insurance has proposed regulations governing standards and training for estimating those values to alleviate concerns about homeowner under-insurance.

The department recently held a hearing to garner feedback on the regulations. The proposed regulations, which apply to fire and casualty broker-agents and personal lines broker-agents:

1. Set requirements applicable to replacement value and replacement cost estimates to create a more consistent, comprehensive and accurate replacement cost calculation;
2. Set a three-hour training requirement for agents and brokers who sell homeowners insurance within 90 days after the regulations become effective, covering differences between homeowners’ insurance coverage and other fire and dwelling property policies, which may necessitate differences in coverage or coverage levels;
3. Set standards for real estate appraisers who estimate replacement cost for insurance purposes;
4. Require the application of certain standards when estimating replacement cost and construction costs; and
5. Establish record keeping requirements, including requiring licensees to keep records of information supplied by the applicant/insured that is used to generate the estimate and a copy of the estimate given to the applicant/insured for the later of the term of the policy or the duration of coverage plus five years thereafter.

The regulations are designed to ensure that homeowners have more accurate replacement value estimates for their homes. CDI believes having an accurate estimated replacement value that is updated regularly is critical to preventing under-insurance, a common problem after major disasters such as California wildfires, according to Darrel Ng, CDI spokesman. As a secondary benefit, new jobs may be created and business may increase for real estate appraisers and other entities that can assist the insurance industry with estimating replacement costs and construction costs of residential dwellings, the department said.

Insurance Brokers and Agents of the West (IBA West) said, “The regs reinforce the rule that homeowners – not broker-agents – have the legal duty to choose replacement cost and other coverage limits, and the disclosures will make it much harder to sue broker-agents if the replacement cost estimate later proves to be too low.”

“These new proposed regulations are substantially improved over previous discussion drafts, but additional clarification is needed to minimize the impact on broker-agents,” said Steve Young, IBA West general counsel. “Spelling out how the replacement cost calculation is made protects agents and brokers, which I think is worth more than the additional duties, in terms of CE and record keeping.”

Yet the Insurance Agents and Brokers Association of California suggested the commissioner withdraw the proposed regulations, noting the record maintenance requirements are “onerous.”

Even if the estimate is provided to an applicant to whom a policy was never issued, records must be maintained for three years after the estimate is generated.

“There is no necessity for the requirement that producers retain records on estimates provided when no insurance was ever issued,” according to Joe Jimenez, the association’s president. Maintaining those records would be unmanageable for most producers, the association testified.

Furthermore, “the proposed regulations impose an unnecessary burden on insurance producers and serve no purpose but to open insurance producers to unfair penalties and civil litigation,” the association added.

Nevertheless, Young said CDI should be commended for attempting to address many of the underlying causes of under-insurance, and attempting to minimize liability of broker-agents when they just convey replacement cost estimates mandated by an insurer.

CDI did implement changes based from feedback on prior drafts of the regulations, adding: “When an insurer requires that a broker-agent utilize a specific source or tool to create an estimate of replacement cost or construction costs, (1) the insurer shall prescribe procedures to be followed by broker-agents when they use the source or tool, (2) the insurer shall provide the broker-agent with the training and materials necessary to properly utilize the source or tool according to the insurer’s prescribed procedures, and (3) the insurer, and not the broker-agent, shall be responsible for any noncompliance with the previous subdivisions (a) through (f) of Section 2695.183, unless that noncompliance results from failure by the broker-agent to follow the insurer’s prescribed procedures when using the source or tool.”

Mark Sektnan, vice president for the Association of California Insurance Companies, said his organization is concerned that some of the language in the proposed regulations is misleading. ACIC suggested the language be re-worded to distinguish between a recommendation by a licensee of appropriate homeowners replacement cost and the decision, which can only be made by the insured.

“It is up to the insured to determine whether he or she has sufficient coverage for his or her needs,” ACIC testified, noting that was the decision of the Court of Appeal in Everett v. State Farm General Insurance Co. (162 Cal. App. 4th 649).

ACIC also questioned whether the commissioner has the authority to establish standards for calculating estimates of replacement value that are conducted by insurance licensees, because the Insurance Code authorizes the DOI to establish standards for real estate appraiser’s estimates, not estimates by other individuals.

“Nothing in the legislative history of the statute suggests that the Legislature intended to authorize the department broad authority to establish standards applicable beyond real estate appraisers,” ACIC testified. “…The introductory sentence to this section would apply to a licensee who provides an estimate of replacement costs ‘to set or recommend a policy limit on a homeowners insurance policy for an applicant or insured…’ This provision would implicitly shift the responsibility for establishing estimated replacement costs as the basis for setting policy limits for structures from the property owner to the insurer. The shift is unwarranted, unnecessary and inadvisable.”

Moreover, ACIC believes the proposed regulations inappropriately expand the prohibition of Insurance Code Section 790.03. “The Unfair Claims Practices Act prevents insurers from providing information that is untrue or misleading,” Sektnan explained. “This regulation says if you don’t use replacement cost, then an insurer is automatically in violation of the Unfair Claims Practices Act, and we don’t feel like the Department has authority to expand what’s in violation of the Act.” Expanding what practices are in violation of the Act cannot be done by regulation, but instead must be determined by the Legislature.

Finally, ACIC would like to see the regulations incorporate the realities of e-commerce, in which an insurer may provide an insurance quote based solely on information provided by the applicant, without the applicant or agent/broker ever speaking.

To view the regulations, visit www.20.insurance.ca.gov/epubacc/REG/140870.htm.

Topics California Carriers Legislation Agencies Homeowners Training Development