Calif. Agent, Insurer Groups Discuss Homeowners Replacement Cost Regs

By | May 17, 2010

To alleviate concerns about homeowner under-insurance, the California Department of Insurance has proposed regulations governing standards and training for estimating replacement value on homeowners’ insurance. CDI hosted a hearing to garner feedback on the regulations on May 17 in Los Angeles.

The proposed regulations, which apply to fire and casualty broker-agents and personal lines broker-agents:

  1. Set out requirements applicable to replacement value and replacement cost estimates to create a more consistent, comprehensive and accurate replacement cost calculation;
  2. Set forth a three-hour training requirement for agents and brokers who sell homeowners insurance within 90 days after the regulations become effective, with the training to cover the differences between homeowners’ insurance coverage and other fire, and dwelling property policies, which may necessitate differences in coverage or coverage levels;
  3. Set forth 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.

The reason for proposing the regulations is to ensure that homeowners have more accurate replacement value estimates for their homes. CDI believes that having an accurate estimated replacement value that is updated regularly is critical to preventing under-insurance, a common problem after major disasters like California wildfires, according to Darrel Ng, CDI spokesman. As a secondary benefit to the proposed regulations, 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), which testified and Tweeted from the hearing, said it would support the regulations because, “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 recordkeeping.”

Young said CDI should be commended for attempting to address many of the underlying causes of underinsurance, and also for attempting to minimize liability of broker-agents when they do nothing more than convey replacement cost estimates mandated by an insurer. However, he said additional changes were necessary to clarify broker-agent responsibilities.

CDI did implement changes based from feedback on prior drafts of the regulations, specifically 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 or training 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 this 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. His group suggested that the language be re-worded to assure recognition of the distinction between a recommendation by a licensee of appropriate homeowners replcaement 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 had the authority to establish standards for calculating estimates of replacement value that are conducted by insurance licensees, because it said Insurance Code 1749.85 (d) authorizes the DOI to establish standards for real estate appraiser’s estimates, but not estimates conducted by other individuals.

“Nothing in the legislative history of the statute suggests that the Legislature intended to authorize the department broad authroity 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 expands 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 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, he said.

Finally, ACIC said it would like to see the regulations more carefully incorporate the realities of e-comerce, 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.

Other groups that testified at the hearing included the Insurance Agents and Brokers Association of California, and National Association of Mutual Insurance Companies.

The DOI has not laid out a timetable regarding if and when the regulations will be revised or adopted. To view the proposed regulations, click here.

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