Insurers May Challenge New California Rules Designed to Combat Underinsurance

New regulations designed to ensure California homeowners have adequate insurance to rebuild their homes following a wildfire or other disaster are getting a mixed response from the industry, with agents and brokers expressing support, and insurers balking.

Sam Sorich, president of the Association of California Insurance Companies, which opposed the new regulations, said a "one-size-fits-all" approach to calculating replacement cost coverage isn't in the best interests of consumers. "We're looking at the legal issues that could be raised, but haven't made a decision," said Sorich. "We are reviewing our options," adding insurers are, at this point, not resigned to living with regulations.

But Steve Young, general counsel with the IBA West, said agents, brokers and consumers will benefit from the changes.

The new regulations, approved by the Office of Administrative Law, strive to ensure reliable, comprehensive estimates of what it costs to rebuild a destroyed home in the event of a disaster. The OAL approved the regulations at the urging of Steve Poizner in his final days as the state's insurance commissioner. They are to go into effect June 27.

The regulations require that all replacement cost estimates be based on specific standards set forth in the regulations. They also require insurers, agents and brokers to document the sources and the methods used to calculate replacement cost estimates and require all resident fire and casualty brokers and agents and personal lines brokers and agents to complete a three-hour training course on homeowners' insurance valuation.

The ACIC opposed the regulation on the replacement cost calculation standards for several reasons, Sorich said. His organization thinks it is unnecessary, and he said insurance companies will have to abide by one formula for providing estimates.

"The department never showed why this formula is superior," Sorich said.

Sorich said the insurance department never provided evidence to demonstrate that replacement cost estimates were the cause of the problem of underinsurance. He said the 2007 wildfires resulted in some 40,000 claims, and from those, there were just 70 complaints about underinsurance, with no information if those complaints were justified.

He added that there are a variety of causes for people being underinsured, such as individuals seeking to keep premiums low or not keeping records up-to-date.

Young said IBA West supports the new regulations, adding that agents and brokers have a vested interest in selling adequate insurance.

Rules that standardize the process of calculating replacement costs are a good idea because the process is complicated, Young said, and he applauded requiring insurance companies, agents and brokers to provide more documentation about the factual assumptions made in replacement cost calculations. The process of producing replacement cost estimates can be complex, with a number of assumptions that potentially can be made to calculate a quote, he said.

"Every choice you pick has premium implication," Young said.

"It is a very complicated process to estimate before the fact what something is going to cost," said Young, explaining that as demand for products like lumber surges after a catastrophe, prices jump as well.

In addition, the new regulations should make it more difficult to bring unfair negligence lawsuits against agents and brokers, alleging that they "deliberately undersold" coverage, Young said.

Dave Jones succeeded Poizner as insurance commissioner at the start of the year (BestWire, Jan. 4, 2011).

(By Diana Rosenberg, senior associate editor, BestWeek)