California Homeowners: You Have the Right to Confirm You Have Enough Coverage to Replace Your Home

In California, it has long been the law that it is up to the homeowner to decide how much insurance she needs, and that if a homeowner is uninsured, it is her fault.  This is the law despite the fact that insurance companies set the amount of insurance offered in a policy and do not inform insureds that they have not just the right, but the responsibility, to confirm that the amount is adequate if they need to rebuild. As a result, most homeowners who find themselves needing to rebuild lack the funds to do so.

The California Department of Insurance is aware of the problem and created regulations to address the issue. Since 2010, there has been an insurance regulation in California requiring that insurers take steps to provide accurate replacement cost estimates for homeowner insurance.  This regulation, 10 CCR Section 2695.183, was tied up in California courts for seven years as the insurance lobby fought against it. In January 2017, the California Supreme Court ruled that the regulation was valid.

What does Section 2695.183 say? First, the insurance company or agent does not have to provide an insured with an estimate of replacement value, or provide a suggested amount of insurance. If the insurer chooses to do so, then the estimate must include certain elements. It must include the cost of labor, materials and supplies.  It must include overhead and profit.  It must include the cost of debris removal.  It must include the cost of permits and architect plans.  It must consider and include the specific features of the home to be rebuilt. That includes the type of foundation, the type of frame, the roof, the siding, any issues relating to slope, the square footage, the geographic area, the age of the structure, and the materials used in the interior and the finishes.

Next, Section 2695.183 requires that any estimate be based on the cost of building an individual property, rather than tract or multiple dwellings.  The estimate also cannot be based on resale value of the land, or any mortgage. The estimate cannot include physical depreciation.

Importantly, on at least an annual basis, the sources and methods used to generate the replacement cost estimate must be “kept current to reflect changes in the costs of reconstruction and rebuilding, including changes in labor, building materials, and supplies, based on the geographic location of the insured structure.” (10 CCR  Section 2695.183(e).) Any time an estimate is provided, which would include when a homeowner buys insurance and at each renewal, the insurer must provide a copy of the estimate to the insured.

If an insurer fails to comply with 2695.183, then the estimate is per se misleading under Cal. Insurance Code Section 790.03.  This means that failing to comply with Section 2695.183 violates the Unfair Insurance Practices Act, and is a basis for a homeowner to sue for bad faith.  It can also be the basis for a claim of unfair competition under Bus. & Prof. Code Section 17200, as an unreasonable estimate to rebuild could be “likely to mislead the public.”

These are important changes to insurance law that most homeowners, and even many attorneys, do not fully understand.  However, these changes do not alter the original California law that homeowners are responsible for determining for themselves how much insurance they need, and to ask for more if they want more.  The regulations will protect homeowners whose insurance companies do not follow the steps outlined above.  However, there is nothing in Section 2695.183 that requires that the components of the estimate be accurate, and to date there have been no cases explicitly addressing this question.

For this reason, it is very important, especially as fires rage throughout California, that homeowners talk to a construction expert to get their own estimate of what it would cost to rebuild, and ask – in writing (email is fine)- for their insurance agent or insurer to set their insurance at that amount. Even if your insurance company declines to insure them at what they ask, by asking they demonstrate that they did ask for more, and therefore the insurer is liable for failing to provide what they requested.

If this situation sounds at all familiar to you and you have had trouble dealing with your insurance company regarding your homeowner policy, please call Kantor & Kantor for a free consultation at 800-446-7529 or use our online contact form.

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