I. Procedural History

In response to the considerable losses caused by the 2017 wildfires, the California Legislature enacted and amended several statutes to allow insureds the resources to rebuild their homes, especially given the reality of construction delays and price gouging of individuals in disaster locations. The following addresses the impact of these statutory revisions.

Effective September 21, 2018, California Insurance Code section 2051.5(b)(2) was amended to read:

  • In the event of a covered loss relating to a state of emergency, as defined in Section 8558 of the Government Code, coverage for additional living expenses shall be for a period of no less than 24 months from the inception of the loss, but shall be subject to other policy provisions. An insurer shall grant an extension of up to 12 additional months, for a total of 36 months, if an insured acting in good faith and with reasonable diligence encounters a delay or delays in the reconstruction process that are the result of circumstances beyond the control of the insured. Circumstances beyond the control of the insured include, but are not limited to, unavoidable construction permit delays, lack of necessary construction materials, and lack of available contractors to perform the necessary work. Additional extensions of six months shall be provided to policyholders for good cause. (Emphasis added.)

During the discussions related to Senate Bill 894, which enacted this amendment, the state Senate declared the following as the purpose of this amendment to the statute:

  • Purpose. The bill has several provisions intended to address the unique problems faced by policyholders who suffer total losses as a result of wildfires. It is frequently the case that the standard time frames associated with rebuilding after a major disaster are simply not long enough when so many losses have occurred. The bill is intended to grant these policyholders more flexibility with respect to temporary living expenses and policy renewals. But most important, the bill is intended to grant flexibility in how policyholders are allowed to use different types of coverage. Specifically, the bill allows use of contents and "other structures" coverage for purposes of rebuilding the primary dwelling.

( https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201720180SB894 ("894 Legislature Website"), 08/24/18 Assembly Floor Analysis.)

With respect to replacement cost coverage, Insurance Code section 2051.5(c) was also amended to read as follows:

  • In the event of a total loss of the insured structure, a policy issued or delivered in this state shall not contain a provision that limits or denies, on the basis that the insured has decided to rebuild at a new location or to purchase an already built home at a new location, payment of the building code upgrade cost or the replacement cost, including any extended replacement cost coverage, to the extent those costs are otherwise covered by the terms of the policy or any policy endorsement. However, the measure of indemnity shall not exceed the replacement cost, including the building code upgrade cost and any extended replacement cost coverage, if applicable, to repair, rebuild, or replace the insured structure at its original location. (Emphasis added.)

The purpose of this amendment was to change an alleged practice among insurers not to pay replacement cost coverage otherwise owed if the insured opted to purchase a home in another area as opposed to rebuilding in the same location. In discussing Assembly Bill 1800 to enact this amendment, the purpose of the amendment was stated as follows:

  • It has long been the law that policyholders are not required to rebuild on the insured site in order to obtain the coverage provided by a replacement cost policy. However, according to the Department of Insurance (DOI), some insurers have maintained that "extended replacement cost" and "building code upgrade" coverages do not transfer to a new location. The bill is intended to make it clear that, if the policyholder bought these coverages, they transfer if the policyholder decides to rebuild or replace at a new location.

( https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201720180AB1800 ("1800 Legislature Website"), 08/31/18 – Assembly Floor Analysis.)

In requiring insurers to provide estimates of the cost necessary to rebuild a residence, section 10103.4 was added to the Insurance Code. The statute reads as follows:

  • (a) An insurer that provides replacement cost coverage in accordance with Section 10102, except an insurer that satisfies the requirements of subdivision (b), shall, on an every other year basis, at the time an offer to renew a policy of residential property insurance is made to the policyholder, provide an estimate of the cost necessary to rebuild or replace the insured structure that complies with Sections 2695.180 to 2695.183, inclusive, of Article 1.3 of Subchapter 7.5 of Chapter 5 of Title 10 of the California Code of Regulations, as those sections provided on January 1, 2018.
  • (b) An insurer that satisfies either of the following is not subject to subdivision (a):
    1. The policyholder has requested, within the two years prior to the offer to renew the policy, and the insurer has provided, coverage limits greater than the previous limits that the policyholder had selected.
    2. The insurer has, in connection with its annual offer to renew the policy, done both of the following:
      • (A) Offers, on an every other year basis, the policyholder the right to have a new estimate of the replacement cost for the insured dwelling, that is compliant with Sections 2695.180 to 2695.183, inclusive, of Article 1.3 of Subchapter 7.5 of Chapter 5 of Title 10 of the California Code of Regulations, as those sections provided on January 1, 2018, provided the policyholder provides the necessary, requested information.
      • (B) Offered the renewal of the policy and the dwelling coverage limit in the renewal offer is based on an inflation factor that reflects the cost of construction in the policyholder's geographic area. This paragraph applies whether or not the policyholder has elected to accept that coverage limit.
  • (c) This section shall not be deemed to limit or preclude an insurer and insured from agreeing to provide coverage for a policy limit that is greater or lesser than the estimate of replacement value provided in accordance with subdivision (a).
  • (d) This section is not intended to change existing law with respect to the duty of the policyholder or applicant to select the coverage limits for a policy of residential property insurance.
  • (e) This section shall become operative on July 1, 2019.

The purpose of this addition was to combat the common issue of underinsurance by homeowners after a natural disaster. In stating the purpose of the statute, the Assembly stated:

  • Underinsurance often occurs as a result of inaccurate or outdated replacement cost estimates that were used to establish the coverage limit on the insured dwelling. The bill is aimed at improving the information available to policyholders so that they can make sound, informed decisions with respect to how much coverage to buy. Current regulations establish an approach that is intended to result in a sound estimate of the cost to replace a home, but that regulation does not mandate insurers to produce or update a replacement cost calculation.

To view the full article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.