Last year’s California wildfires destroyed thousands of homes and cost billions of dollars, but they also created numerous new laws and regulations in their wake as Legislators and insurance regulators looked for ways to further protect homeowners.
With another series of record-breaking fires driving losses into the billions, the state could be in store for more laws and regulations, according to Guy Kopperud, the industry solutions principal for CoreLogic, a data provider for the industry.
Kopperud spoke with Insurance Journal as the November wildfires raged about what carriers and agents should know about the laws and regulations and why they may anticipate more laws next year.
This has been edited for clarity and brevity.
Insurance Journal: California had a particularly damaging wildfire season last year, and it looks like this year is not done. Regulators over the past year took some actions that were intended to help out home and property owners, and it’s yielded some new laws that insurers should be aware of. Can you talk about what’s been done?
Kopperud: Really, when we look all the way back to the cedar fire in 2003 in San Diego County, we saw the same types of events happening that happened in Santa Rosa where over 3,000 properties burned. Then again in 2007, we had another 1,500 properties and the legislation changed a lot of regulations at that time as well. So, some of what we’re seeing today is not necessarily a lot of new legislation, but really clarifying some of the things that were passed initially back in 2003.
So, some of those are specific to the insurance industry and some are not necessarily directly related to insurance regulations, but still nonetheless help the insurance industry and the homeowners. One example of that would be anti-gouging. In the long run, that would help the insurance carriers mitigate the exorbitant amount of rent that some of these homeowners would experience after a loss.
IJ: Can you expand on the Legislation a bit? Say Assembly Bill 1797, for example?
Kopperud: The purpose of (the law) is to allow the homeowner to get an updated reconstruction cost every other year or at renewal. So, in the past, they may have gotten that every two years, it wasn’t mandatory for the carrier to update that beyond that, or if the homeowner actually asks for a reconstruction cost. So, what does that mean? Well, today, we’re seeing that in northern California from last year’s fires, that quite a few properties are undervalued. When they’re undervalued, there’s usually two things that occur. Either the initial reconstruction cost that was established for that property was low, or they’re experiencing demand surge. In some cases, we’re seeing that in northern California.
And demand surges, simply the easiest way to put that is we’re paying more money for labor and materials to rebuild these homes. So, on one hand, 1797 was passed to help these homeowners, but at the end of the day, if the reconstruction costs that are being generated for that home are incorrect to begin with, then renewing it every year is not gonna help the homeowner. So, it’s really critical to make sure that carriers are using an adequate tool to develop that reconstruction cost from the get-go.
The other thing that the carriers can do is to use a construction factor or an index to allow them to project out the cost of that home. But at CoreLogic, we’ve always recommended that the best practice is to recalculate that property a minimum of every two years.
IJ: What are the implications of some of these changes for carriers?
Kopperud: There are a few things that you have to consider if you’re a carrier. One is that a lot of these bills really expand on the exposure that the carrier has. AB 2594 is another bill that extends a right to sue a carrier from 12 months to 24 months. So, if I’m in negotiations as a homeowner with the carrier, if I don’t settle within that 12-month period, then I have 24 months to turn around and sue.
Another one that is a little concerning for carriers is there was a bill by the Senate that was passed that, it’s SB 901, that shields utility companies from subrogation claims. So, the legislation realized that we can’t blame all this on the utility companies or the utility infrastructure, so we have to do something to try and protect them or we’re gonna make the utility companies go out of business. So, where the carrier may have thought, “We can go back and say that the utility company was responsible for some of these fires and sue them,” that door has been closed.
So, the last thing I would say is there are some things here, even all the way down to the agent level, that the agent has a certain amount of exposure and certainly more responsibility. I would say one of the biggest things that isn’t necessarily in a particular bill, but we’ve heard this case many times where a homeowner goes to an agent and says, “I need coverage. I’m in this high-risk area,” and the agent comes back with a reconstruction cost number and the homeowner questions that number and the agent says, “No, you’re fine. It’s enough,” and lo and behold, we find out after the fires that it was nowhere near enough.
So, I think even if it’s not covered in a bill, the agents really have to be proactive. If the homeowner is questioning a reconstruction cost and the amount of coverage they’re looking at, they should be very cautious about saying that indeed their coverage is sufficient. They could open themselves up to liability, as well.
IJ: Do you think with the fires ongoing, and some of the chances of more fires actually throughout the month, we’ll see more laws and some more regulations in the wake of this season?
Kopperud: I certainly think we will. As I said, a lot of these bills were clarifying existing regulations, existing laws. So, certainly, we’ll see more. I think at the end of the day, it really comes down to are carriers utilizing tools by whoever that’s providing the ability to generate a reconstruction cost? A lot of these concerns that the legislation’s trying to address is are the reconstruction costs that are being generated in California sufficient so that these carriers can properly provide coverage for those homeowners? Legislators are continuing to try and act on the behalf of these homeowners to help protect them and help them understand what their coverage limits really cover.
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