Wildfire Took Your Home? Don’t Count on Insurance: Viewpoint

Liam Denning | Claims Journal | April 12, 2019

Own a home? No doubt you’ve insured it. Very sensible of you. But if that home were, say, burned to the ground, then your insurance company probably wouldn’t cover the cost of rebuilding it.

Don’t feel too bad, though. It’s only partly your fault.

Two-thirds of California wildfire victims are under-insured, according to Amy Bach, executive director of consumer advocacy group United Policyholders, speaking at a recent meeting of governor Gavin Newsom’s wildfire commission, held in Santa Rosa. Shocking as that figure seems, it comports with anecdotes I picked up reporting on the aftermath of the recent wildfires earlier this year. Meanwhile, Sarah Paulson of Kevin Paulson Insurance Agency Inc. in San Diego, estimates maybe 60 percent of policyholders are under-insured.

Now a new study titled “Minding the Protection Gap,” just published in the Connecticut Insurance Law Journal, concludes the prevalence of under-insurance among American homeowners might be closer to 80 percent. Kenneth Klein, a professor at California Western School of Law, bases that estimate partly on a report from the California Department of Insurance, prepared in the wake of the 2007 wildfires, that recently became public record. Remarkably, this found that even when homeowners had purchased extended coverage, 57 percent of such policies fell short.

Summing up his study over the phone, Klein calls homeowner insurance “a really weird market; people think they bought a Cadillac when they really bought a Yugo.”

By and large, homeowners think they do have adequate coverage in the event of a catastrophe – and that’s where they take a share of the blame. Standard policies haven’t offered “guaranteed replacement coverage” for several decades. But unless the homeowner takes the time to read the mind-numbing policy documents or ask the right questions, they generally assume they’re good if the sky falls.

Before piling onto this feckless homeowner, though, ask yourself a question: Do you know how much it would cost to rebuild your home? Didn’t think so.

Most likely, you’re relying on an estimate from your insurance agent. Typically, those are derived from sophisticated software tools such as Verisk Analytics Inc.’s 360Value or CoreLogic Inc.’s RCT. Insurance is the original big-data business, compiling myriad items of information to judge probabilities and costs; these tools are immense databases of such things as local labor rates, materials prices, storage costs and many other line items.

No software can accurately predict every contingency, though; especially if, for example, a wildfire burns down a whole neighborhood and surge pricing kicks in. More importantly, software doesn’t write insurance, companies do. And the incentives in homeowner insurance tend to skew one way.

Only a small proportion of homes are sold each year, capping the size of the market for policies. Customers tend to be ignorant of the true cost of reconstruction. And when disputes arise, courts tend to effectively side with the insurance provider – after all, the homeowner signed up for the coverage stipulated in their contract. In short, the homeowner tends to bear all the risk of under-insurance while usually being ignorant of that risk. Plus, thinking catastrophe a very remote possibility, they’re more motivated to keep their monthly insurance bill low than to cure their ignorance.

So there can be little incentive for an insurance provider to invest time and money in a more-thorough assessment of a home’s particular risks. It’s tempting to instead enter fewer parameters to the software tools to estimate coverage and simply quote the most competitive premium they can. Klein ran an experiment on his own home, getting replacement-cost estimates from six insurers and two software tools, involving different levels of detail. They ranged from $512,000 to more than $1.1 million.

One way of addressing this problem is better-educating the customer, such as with tools alerting them to potential under-insurance. Meanwhile, Klein recommends requiring insurers to quote a price for guaranteed replacement coverage. Would those premiums be higher? Probably much higher, although providers could also compete on them. More importantly, they would signal to homeowners the true cost of protecting their home – and they could then choose to accept it or go with a lower quote for standard insurance, with the clear understanding they bear the risk of less-than-adequate coverage. “This will reconnect risk creation and risk allocation,” Klein writes.

California’s wildfires didn’t create this market failure; just revealed it. The enormous claims arising from the past two wildfire seasons – some $25 billion – are having an impact on pricing and availability already. At that same commission meeting in Santa Rosa, Joel Laucher, chief deputy commissioner of the California Department of Insurance, said complaints about higher premiums or difficulty renewing coverage in the highest-risk counties have jumped by 224 percent and 573 percent, respectively, since 2010. Meanwhile, over the past five years, there has been a 51 percent increase in policies written for homes in wildfire-prone areas under California’s FAIR program – insurance so bare-bones the website states up top it should only be used as “a last resort.”

In many respects, the wildfires expose the true costs of climate change and how they intersect with people’s choices about where and how they live; choices often made out of necessity or made at a time when phrases like “global warming” seemed utterly abstract. Mitigating wildfire risk is, of course, central to addressing this, but so is reform of insurance, society’s ingenious method of pooling risk. Pushing the industry to provide better incentives for, say, hardening homes and communities must be a priority for California – and, indeed, any other state facing rising risks from a changing climate. Making those risks, and their costs, crystal clear to consumers would be a good start.


‘Matching Regulations’ Affecting Homeowners’ Insurance Claims: Viewpoint

Gary L. Wickert | Claims Journal | April 4, 2019

It remains one of the most difficult issues to deal with in the world of property insurance. Homeowners’ insurance policies usually contain a provision obligating the carrier to repair or replace an insured’s damaged property with “material of like kind and quality” or with “similar material.” They cover property damage resulting from “sudden and accidental” losses. When damage caused by fire, smoke, water, hail, or other causes results in a small portion of a home or building being damaged (e.g.,shingles, siding, carpet, cabinets, etc.), whether and when a carrier must replace non-damaged portions of a building in order for there to be a perfect match remains a point of contention. It is a matter of great importance to insurance companies because “matching” problems with a slightly-damaged section of roof or flooring can lead to a domino effect of tear out and replacement costs of many items that are not damaged. The problem of partial replacement is especially troubling where the damaged siding or shingles have been discontinued, making it virtually impossible to properly match. To replace only the damaged portion would result in an obvious aesthetic deficit due to a clear difference in the appearance of the replaced portion of the building from the portion that remains undamaged.

Would the entire structure need to be re-sided or the entire roof re-shingled? Or is it sufficient to replace just one wall of siding or just a few shingles? Whether or not the insurance company must pay to replace entire sections of the structure in order to bring the property back to its previous uniformity and aesthetics can bring various state insurance laws and regulations into play. On the one hand, many pundits claim that the terms of the insurance policy require the carrier to pay the cost to “repair or replace with similar construction for the same use on the premises.” They argue that “similar” doesn’t mean matching exactly. Others argue that coverage for “matching” and “uniformity” under a homeowner’s policy doesn’t exist without a specific endorsement. The truth lies somewhere in between and can vary greatly from state to state.

Replacement Cost Value (RCV) vs. Actual Cash Value (ACV) Policy

There are two primary valuation methods for establishing the value of insured property for purposes of determining the amount the insurer will pay in the event of loss under a homeowner’s policy:

  • Replacement Cost Value(RCV): This method is usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation. It pays an insured for the value of replacing the damaged property without deduction for deterioration, obsolescence, or similar depreciation of the property’s value. The carrier assumes the cost of paying the full cost of repairing or replacing the damaged property.
  • Actual Cash Value(ACV):This method pays an insured for a similar item less depreciation. ACV is ordinarily determined in one of three ways: (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property’s “fair market value” (“FMV”); or (3) using the “broad evidence rule,” which calls for considering all relevant evidence of the value of the damaged property. The insured bears the difference between the depreciated value of the damaged property prior to loss and the higher cost of repairing or replacing it.

The issue of “matching” or “uniformity” in first-party homeowners insurance claims is one that lends itself to RCV policies. If property is only partially damaged, the carrier takes the position that it is only required to pay for repair or replacement of the limited portion of the property that is damaged. The insured argues that replacing only the damaged property restores the functionality of the roof but does not fully replace the damaged property because the replaced property does not match the existing property. For example, a roof had a uniform appearance, and uniformity has a significant effect on value. Therefore, the proper measure of RCV is the cost to replace the entire roof to restore the uniform appearance. This is known as the issue of “matching” or “uniformity.” The issue is whether the carrier has to “match” the damaged property to the undamaged property in order to return it to its previous “uniform” appearance and restore the entire home to its condition prior to loss.

Whether the policy is an RCV or ACV policy can make a big difference. ACV coverage pays an insured for a similar item less depreciation. RCV coverage compensates an insured for the value of replacing the damaged property without deduction for deterioration, obsolescence, or similar depreciation of the property’s value. An insurer with an ACV policy may be able to exercise the option to repair, restore, or replace the damaged property itself rather than having to pay for the cost to repair the property with property of like kind and quality. Moreover, some “matching” regulations only apply to RCV policies.

A good illustration of the matching/uniformity problem is found in a 2014 Minnesota federal district court case in which a manufacturer discontinued the shingles used on the insured’s roof, thus leading to a mismatch problem. The issue was whether the carrier was obligated to replace the damaged shingles with substantially similar shingles or to pay for new shingles for the entire roof. Trout Brook S. Condo. Ass’n v. Harleysville Worcester Ins. Co., 995 F. Supp.2d 1035 (D. Minn. 2014). The Harleysville RCV policy provided coverage which obligated it to pay for the property’s “replacement cost,” defined as:

(1) “the cost of repair or replacement with similar materials for the same use and purpose, on the same site,” or

(2) “the cost to repair, replace, or rebuild the property with material of like kind and quality to the extent practicable.”

Harleysville claimed only partial damage to the roof and allocated $21,000 for roof repairs, but the insured’s construction expert believed the roof had to be entirely replaced at a cost of more than $800,000. In addition, the shingles were no longer being manufactured. The insured sued, arguing that the unavailability of matching shingles entitled it to full roof replacement. The court noted that the “covered property” under the policy was defined as the buildings (rather than the individual items on the property) and held there was a jury question as to whether the building suffered a loss on account of the unavailability of matching roof shingles. Whether Harleysville was able to replace shingles with shingles of a “like kind and quality” hinged on whether the unmatched shingles would provide an acceptable aesthetic result, and that had to be determined by a jury. The idea is that property that has not been physically damaged may become “damaged” where replacement of physically damaged property does not lead to an aesthetic result acceptable to the insured. It suggests that the carrier has an obligation beyond repairing the functionality of the damaged property, by paying to repair the aesthetics of the building.

Notwithstanding any insurance regulations that control the issue, a carrier’s obligation to pay for matching depends on the policy language and hinges on whether the loss payment and valuation terms of the policy can be read to obligate the carrier to match the replacement materials. The industry’s response is that allowing coverage for matching provides a windfall to the insured. To allow for full replacement of matching roofing and siding can be unduly burdensome on a carrier whose policy agrees only to repair damaged portions of the building.

Terms of Insurance Policy

The terms of insurance policies vary greatly and are extremely important to determining the carrier’s obligations in a claim which involves a “matching” concern. The current ISO HO-3 and HO-5 and company-specific policies contain “Loss Settlement” provisions which provide for payment of the “replacement cost of that part of the building damaged with material of like kind and quality and for like use.”

Individual insurance companies may have a variety of other standard terms included in their policies. Some policies may have other terms, conditions, and/or definitions which attempt to address the “matching” or “uniformity” issue and limit exposure in such situations. Some policies even contain “Roof Surfacing Loss Percentage Tables” which address the percentage of a roof the carrier will be obligated to replace as a function of the roof’s age and type of roofing surface material. Overshadowing all of the above are a patchwork of insurance statutes and regulations which attempt to govern claims which have a “matching” or “uniformity” component to them.

In response to a proliferation of “matching” claim issues, many insurers have begun inserting language in their policies that expressly precludes the coverage requirement of matching based upon color, a change in product specifications, or other factors, in an attempt to circumvent this clear precedent. Many states have statutes, insurance bulletins, or case law that directly address matching issues, but many do not.

Insurance Statutes, Regulations, and Case Decisions Governing Matching Claims

In an effort to provide uniformity and predictability in this area, many states have passed insurance statutes, rules, and regulations that govern the handling of matching claims. An Ohio regulation states that when “an interior or exterior loss requires replacement of an item and the replaced item does not match the quality, color, or size of the item suffering the loss, the insurer shall replace as much of the item as to result in a reasonably comparable appearance.” O.A.C. § 3901-1-54(I). In Kentucky, a regulation says that if “a loss requires replacement of items and the replaced items do not reasonably match in quality, color, or size, the insurer shall replace all items in the area so as to conform to a reasonably uniform appearance,” although the courts have not applied the regulation in private litigation. 906 Ky. Admin. Regs. § 12:095 § 9(b). Whether the statute or regulation applies, and whether the insured can bring a private right of action under the applicable statute or regulation, are also significant issues.

The National Association of Insurance Commissioners (NAIC) has drafted a model law called the “Unfair Claims Settlement Practices Act.” It is a consumer-protection law that prevents insureds from predatory and unfair claims settlement behavior on the part of insurance companies. Most states have enacted their own version of this model law, and the specifics of each such law vary from state to state. The NAIC Unfair Property/Casualty Claims Settlement Practices Model Regulation (MDL-902, 1997) has a section which reads as follows:

Section 9. Standards for Prompt, Fair and Equitable Settlements Applicable to Fire and Extended Coverage Type Policies with Replacement Cost Coverage.

  1. When the policy provides for the adjustment and settlement of first party losses based on replacement cost, the following shall apply:

(1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making such repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for betterment nor any other cost except for the applicable deductible.

(2) When a covered loss for real property requires the replacement of items and the replacement items do not match in quality, color or size, the insurer shall replace items in the area so as to conform to a reasonably uniform appearance. This applies to interior and exterior losses. The insured shall not bear any cost over the applicable deductible, if any.

On the other hand, subsection (B) governs ACV policies and reads as follows:

  1. B. Actual Cash Value:

(1) When the insurance policy provides for the adjustment and settlement of losses on an actual cash value basis on residential fire and extended coverage, the insurer shall determine actual cash value as follows: replacement cost of property at time of loss less depreciation, if any. Upon the insured’s request, the insurer shall provide a copy of the claim file worksheets detailing any and all deductions for depreciation.

(2) In cases in which the insured’s interest is limited because the property has nominal or no economic value, or a value disproportionate to replacement cost less depreciation, the determination of actual cash value as set forth above is not required. In such cases, the insurer shall provide, upon the insured’s request, a written explanation of the basis for limiting the amount of recovery along with the amount payable under the policy.

While Section A of the above regulation establishes a guideline for the insurance company to follow with regard to the payment of claims involving “matching” or “uniformity” issues, it doesn’t necessarily mean that a carrier in any individual state must adhere to those guidelines or that the regulation works to the advantage of a property owner who has been wronged by a carrier who simply ignores the regulation.

Private Right of Action

Most states have case decisions that state that an individual homeowner/insured does not have a private right of action under a state’s statute or regulations governing unfair claims settlement practices and the handling of a “matching” or “uniformity” issue. As an example, in California, the case of Rattan v. United Services Automobile Association, 101 Cal.Rptr.2d 6 (Cal. App. 2000) involved a home damage by fire. United Services Automobile Association (“USAA”) allegedly breached the terms of policy in adjusting the loss, and the insureds claimed that it violated requirements imposed on carriers under regulations established by the Department of Insurance. The Court of Appeals disagreed, stating:

Even in first party insurance cases, neither the Insurance Code nor regulations adopted under its authority provide a private right of action. (Zephyr Park v. Superior Court(1989) 213 Cal.App.3d 833, 839 [262 Cal.Rptr. 106].) Thus, any particular violation of the regulations does not require a finding of unreasonable conduct. (See California Service Station, etc. Assn. v. American Home Assurance Co.(1998) 62 Cal.App.4th 1166, 1175-1176 [73 Cal.Rptr.2d 182].) Rather, as the trial court stated, at most the regulations, which were in evidence, may be used by a jury to infer a lack of reasonableness on USAA’s part. Because given as instructions the regulations would have suggested to the jury that any violation of the regulations was per se a breach of contract or an act bad faith, rather than only evidence of a breach or bad faith, the trial court was fully warranted in rejecting them.

Simply because a state requires carriers to follow a regulation such as the one above doesn’t mean that an individual homeowner (private citizen) has a “private right of action” under the statute or regulation.

Defenses to First-Party Matching Claims

The arguments most effectively used by carriers in combating matching claims include the following:

  • The property lacked uniformity prior to the covered loss, it would be impossible to “conform” any replacement items to an existing “reasonably uniform appearance” and, therefore, the obligation to match the replacement items under the regulation was not triggered;
  • The lack of a reasonably uniform appearance prior to the covered loss was the result of causes that were excluded under the policy so there was no obligation to replace all the existing items because it would represent an unjust windfall to the insured;
  • Even if a matching regulation or obligation applies to the insured’s loss, the evidence establishes that the repair can be performed such that a reasonably uniform appearance can be maintained;
  • The replacement items can be matched to conform to a reasonably uniform appearance because “reasonably uniform appearance” is analogous to “like kind and quality.” The area that must be replaced to conform to a reasonably uniform appearance is less than the entire property (immediate area, slope section, line of sight); and
  • The regulation is not enforceable because it does not create a private right of action.

Much will depend on the court’s and the parties’ understanding of terms such as “like construction and use” or “reasonably uniform appearance.” The “fine print” terms, conditions, and/or definitions of the policy will factor into the “matching” or “uniformity” issue and could limit exposure in such claims.

Cosmetic Damage

While the “matching” issue involves repairing truly “damaged” or “destroyed” property and the ensuing problems that result when the repaired section of a roof, siding, or cabinetry, for example, does not “match” the remainder of the roof, siding, or cabinetry in appearance. “Cosmetic” damage, on the other hand, is a related subject, but differs in that it involves dents, scratches, or other minor imperfections to property which result from a loss, that do not rise to the level of being truly “damaged.” In other words, it is a qualitative difference. The damage is so minor that it is only “cosmetic” and affects only the appearance of the property in a very minor way. Such cosmetic damage does not cause any punctures, leaks, or loss of functionality of a particular piece of property. An example would be dents in a metal roof resulting from a hail storm.

Insurance policies vary, and some include exclusions for “cosmetic damage” or “appearance damage” to property. While not every home or business policy currently includes these kinds of exclusions, a growing number of major insurers have started including them in their policies. One policy might cover cosmetic damage while another will exclude it, while technically covering direct physical lossfrom hail, even if the homeowner’s insurance policy doesn’t distinguish between cosmetic and other types of damage and such damages are usually covered. However, some homeowner’s insurance companies are introducing endorsements which may exclude cosmetic damages. The two organizations that standardize forms and policies for property/casualty insurers, the American Association of Insurance Services (AAIS) and the Insurance Services Office (ISO), have both filed cosmetic damage endorsements. The endorsement also enables the insurer to exclude one component – such as the roof – separately. These are becoming common with homes that have metal roofs.

In practice, what the insurance company considers cosmetic damage as opposed to functional damage is rarely straightforward. In the example of the dented metal roof, what happens if the dents have subtly affected drainage, runoff, or seals? For example, it is not easy to differentiate cosmetic from functional damage on traditional and architectural shingles. Insurers will argue that a few dings to the surface do not compromise the shingle structure, but the storm-chasing roof sales industry will argue that any localized loss of mineral will expedite the demise of the shingle. Profitability in homeowners’ coverage has become a multi-faceted, politicized, and elusive objective in many states. Regulators, politicians, and consumer advocacy groups with little understanding of how insurance works can present significant obstacles to obtaining appropriate rates for such policies and risks.

Recovery of RCV Matching Claim Payments in Subrogation Actions

Subrogation claims traditionally involve an insurance company stepping into the shoes of an insured and proceeding against the third-party tortfeasor who caused the loss in the first place to recover those claim payments. The subrogated insurance company (subrogee) assumes the same rights against the tortfeasor as the insured possessed — no greater, no less. The tortfeasor can usually employ any defenses against the subrogee that it could have employed against the insured. As a result, the measure of recovery (i.e.,damages) for the subrogee is the same measure of damages as for the insured. This creates some unique and troubling issues when the law dictating third-party damages recoverable in tort are different from the measure of a first-party claim payment under a policy and/or applicable law or regulations. An insurance company that has paid additional damages in order to address “matching” problems in a first-party claim may or may not be able to recover those damages in its subrogation tort action against the tortfeasor/defendant. The law varies from state to state.

If a carrier pays for full replacement cost of a house or a portion of a structure, it might nonetheless be limited to recovering the “market value” or difference in market value before and after a loss, in a subsequent subrogation tort action. Whether a tort defendant is liable to a subrogated carrier for the additional claim payments necessary for the damaged property to match and be uniform after repair depends on the state. Reimbursement under an RCV policy is likely to lead to an economic betterment of the insured because it means that payment will be made to replace old, depreciated property with new property. Therefore, subrogated carriers cannot always count on recovering all of the claim dollars they have paid out. Liability carriers will argue they are only responsible for ACV or repair costs. Some states allow for recovery of the full cost of repairs without a reduction for depreciation or betterment, where the repairs do not materially increase the value of the property over its market value prior to the loss.

You can view a chart that summarizes the regulations or laws in all 50 states regarding the matching issue in the payment of first-party insurance claims HERE. This chart focuses on homeowners’ claims and only tangentially discusses commercial property policies/claims, although if law regarding a commercial policy is all that is available, it is included. It does not address whether damage alleged to be purely “cosmetic”, such as dents to a metal roof caused by hail, is covered “direct physical injury” or the issue of upgrades required by changes in modern zoning or building codes. It also does not address whether an individual private homeowner has a “private right of action” under the law of each state to mandate compliance with these regulations by an insurance company in a first-party RCV property damage claim or if a subrogated insurance carrier can recover the full RCV matching claim payments it has made in a civil subrogation tort action filed against a responsible tortfeasor.

Calculating RCV and ACV for Structures and Personal Property in California in 2019

Daniel Veroff | Property Insurance Coverage Law Blog | March 25, 2019

California has statutory and case law that defines replacement cost and actual cash value, and these laws are read into every insurance policy notwithstanding what the policy language says. This blog has several posts on the subject,1 and this post aims to give you one cohesive post to consult for all your questions on calculating ACV and RCV.

Actual Cash Value – Total Versus Partial Losses to the Structure

Insurance Code section 2051 proscribes how ACV is determined for partial and total losses to a structure. In some cases, the claim value changes significantly based on whether a loss is deemed total or partial. So, the preliminary question is, when is a loss total versus partial?

A California appellate court finally answered that question in 2014 after nearly a hundred years of uncertainty. In California Fair Plan v. Garnes,2 the court held that a loss to the structure is “total” if the structure has been totally destroyed; it is a partial loss if some usable portion is left.

Garnes therefore prohibits insurance companies from using the economic total loss formula frequently used in auto cases. Under that formula, some of the car remains, but the fair market value of the car before the loss is less than the cost to repair or replace minus depreciation. Under Garnes, this cannot be used in property claims.

Actual Cash Value – Total Losses to the Structure

When there is a total loss to a structure as defined in Garnes, Section 2051 requires the insurance company to make an immediate ACV payment of the fair market value of the property at the time of the loss, or the policy limits, whichever is less.

How do you determine fair market value? The law does not say. It is generally accepted in the industry that fair market value is determined by obtaining a fair market value appraisal from a certified California appraiser.

Actual Cash Value – Partial Losses to the Structure

For a partial loss to a structure, Section 2051 requires payment of the cost to repair, replace, or rebuild with materials of like kind and quality, minus a fair and reasonable deduction for physical deprecation. In other words, it is RCV minus physical depreciation. Therefore, the accepted practice is to determine the full cost to rebuild and make a deduction for physical depreciation.

Limits on Depreciation for Structural Losses

Under section 2051 and Regulation 2695.9(f)(1), depreciation must be based on the actual age and condition of the item at the time of the loss and reflect a measurable difference in the market value of the item. Regulation section 2695.9(f)(1) requires this to be set forth in writing and provided to the insured.

Under section 2051, structural components that do not normally get repaired or replaced—like interior wall studs—cannot be depreciated. Insurers must consider how that component is treated in all cases; not just in the property at issue in the claim.

Under both sections 2051 and 2695.9(f)(1), the insurance company can only take a deduction for physical depreciation. This means that items like material sales tax, labor, and overhead and profit cannot be depreciated.

Future changes to ACV laws?

We caution that there is a bill currently pending in California that may eliminate the distinction between total and partial loss payments for structural ACV claims. AB 188 would require ACV to be calculated based on the partial loss formula in either a total or partial loss. Tomorrow, Derek Chaiken of our California office will publish a separate blog post that addresses our thoughts on the proposed changes. In short, we have mixed feelings on it.

Actual Cash Value – Personal Property

Unlike structural property, there is no distinction in California law between total and partial losses. Therefore, RCV is RCV as set forth above, and ACV is RCV minus physical depreciation.

Replacement Cost Value – Structures and Personal Property

RCV is the same whether applied to a total or partial loss, and whether applied to personal or structural property. Under section 2051, the measure of indemnity for RCV is the necessary cost to repair, replace or rebuild with materials of like kind and quality.

Challenging the Insurer’s Structural RCV Estimate

Technically speaking, the law requires that the insured incur expenses above the amount of the ACV payment to receive any further RCV payments. However, in practicality insurers may be willing to make undisputed advanced payments as the replacement progresses as long as you can provide proof that the repairs are in progress and the payments are necessary to move forward.

In many cases, however, the carrier will simply issue a replacement cost estimate, deduct depreciation, and do nothing until amounts above the ACV are incurred. What if the RCV estimate from the carrier is not enough to actually replace?

Insurance Regulation 2695.9(d) states that the insurance company must provide the insured with a copy of any written estimate it bases a claim payment on. If the insured contends that the repairs will exceed the insurer’s estimate, the carrier must do one of the following three things:

  1. Pay the difference between its written estimate and a higher estimate obtained by the claimant; or,
  2. if requested by the claimant, promptly provide the claimant with the name of at least one individual or entity that will make the repairs for the amount of the written estimate. The insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and which will allow for repairs in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations; or,
  3. reasonably adjust any written estimates prepared by the repair individual or entity of the insured’s choice and provide a copy of the adjusted estimate to the claimant.

Replacing at a New Location

There is presently a lot of controversy around rebuilding at a new location or buying a property elsewhere. Insurance Code section 2051.5 states that an insured can choose to rebuild at another location or buying a new house, and the insurer must base its claim payment on the replacement cost at the loss location. In other words, you must determine the RCV to replace at the loss location, and that number becomes the maximum the insured can recover by replacing elsewhere.

Controversy arises as many carriers will not pay for the cost of new land. If an insured buys somewhere else, many insurers will determine the value of the land and deduct that amount from the purchase price. A similar result happens if new land is purchased and a new home is built on it. Under our view of the law, this is improper. The law does not allow for such a deduction. Carriers argue, however, that insurance does not cover land and the insured gets unjustly enriched because they end up with two pieces of land, since they get to keep the land at the original loss site. Be that as it may, insureds simply cannot replace at a new location without also buying the land, and the law does not authorize the insurer to make such a deduction. We expect to see this play out in future court battles.

Since this post aims to be a one-stop-shop for determining RCV and ACV in California in 2019, we appreciate any comments you have on issues we may not have addressed here. We will update the post as necessary in response.
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1 Seee.g., Claims Handling Requirements by State – California; California Supreme Court Affirms California Fair Plan Ass’n v. Garnes, and Preserves Homeowners’ Interests; In California, Can an Insured Homeowner Recover Full Replacement Cost by Purchasing a Home at Another Location?; Does Actual Cash Value Mean Fair Market Value or Replacement Cost Minus Depreciation?
2 11 Cal.App.5th 1276 (Cal. App. 2017).

Are Market Conduct Examiners Listening to Common Property Insurance Claims Complaints?

Chip Merlin | Property Insurance Coverage Law Blog | March 18, 2019

Market conduct examinations of insurance company claims practices are important. Do you think that examiners are listening to the same repetitive complaints I hear from policyholders, contractors, roofers, public adjusters and other lawyers at the various seminars and trade shows I attend?

Many market conduct studies never analyze internal operation analysis insurance companies own claims departments. Instead, most examinations are claim file examination which look for technical deficiencies.

The North Dakota Department of Insurance paid attention to the internal claims documents of Farmers claims management and fined Farmers $750,000. The Insurance commissioner noted that it was not his job to investigate why other states did not address Farmers “Bring Back a Billion Program” and incentive pay claims culture, but he had this to say about it:

We felt that Farmers’ programs created a natural, inherent bias against policyholders. When a person is either punished or incentivized by shortchanging the policyholder in how they pay a claim, that, in my opinion, is a violation of (state law).1

Here are some quotes from that North Dakota examination:

A series of catastrophic events in 1994, including the Northridge earthquake in California, resulted in Farmers paying out over $2 billion in insured losses. As a result, Farmers experienced a significant reduction of its policyholders’ surplus. In response to this situation, Farmers instituted a slogan, “Bring Back a Billion,” as well as certain programs, including a program called “Quest for Gold,” along with other cost-cutting, “non-rate” programs, all in an attempt to focus efforts on rebuilding that surplus. The stated goals of these programs included cutting costs and reducing the occurrence of claims handlers paying more than was required on particular claims, as well as reducing the possibility of paying on fraudulent claims. Farmers voluntarily terminated these programs in 2002….

The “Bring Back a Billion” slogan, adopted on a company-wide basis in 1994, was aimed at encouraging all Farmers’ employees to work to rebuild the surplus that was lost as a result of the several natural disasters in that year. Some employees signed “pledges” as part of this slogan campaign, promising to work toward rebuilding the surplus.

The “Quest for Gold” program, implemented in 1998, involved awarding bonuses to offices and management groups that met certain goals related to overall performance, and included cost cutting goals for all groups and offices. The Bismarck, North Dakota, branch claims office included specific monetary goals in individual claims employees’ “Performance, Planning and Review” forms (“PP&R”), which are evaluation forms that include the performance plan for the particular employee, as well as the review for each objective in that plan. The PP&Rs…included the employees’ performance as judged against numerous goals including “average claim payment goals” from prior years, adjusted for inflation. These individuals’ evaluations noted whether they had met the average claim payment goal, exceeded it, or failed to meet that goal for the year.

…the management of Farmers Insurance Exchange set various goals for claims handlers and other employees in an effort to increase company profits and thereby grow company surplus.

…Many of the performance goals for individual claims employees were appropriate. However, goals that were arbitrary and unfair to policyholders and claimants were also identified.

…The Company evaluated the performance of claims employees based, in part, on these unfair and arbitrary goals.

….These unfair and arbitrary goals do not take into account or make allowance for the unique circumstances or facts of each individual claim.

….Slogans such as Bring Back a Billion and incentive programs such as Quest for Gold may have created certain bias or interest on the part of claims handlers to pay less on claims.

….The unique circumstances and facts which comprise each individual claim are beyond the control of claims handlers.

….Because meeting these unfair and arbitrary goals was a part of the performance evaluation process and, therefore, linked to an employee’s pay, a potential conflict of interest was created between meeting these goals and effectuating a prompt, fair, and equitable settlement of each individual claim on its merits. This potential conflict may have created a certain bias or interest on the part of claims handlers, in some instances, to pay less on claims or to handle claims in an inappropriate manner in order to meet these goals.

The Insurance Regulatory Examiners Society has this to say about their mission and history:

The public decided long ago that fair, firm, honest insurance regulation is in everybody’s interest. The job of protecting consumers and preserving a robust, competitive marketplace was delegated to the states, where individual state insurance departments have built a strong and enduring foundation upon which all insurance now thrives. The Insurance Regulatory Examiners Society (IRES) is an important part of that foundation.

Protecting consumers and the public from underpaying insurance companies is very important. If insurance claims organizations are to have their claims payment philosophies and processes fully examined, a common-sense suggestion might be that examiners also ask for:

  • public comment about the carriers
  • internal management claims directives and goals,
  • third party consulting company analysis and reports of any claims department processes.

By asking for these materials, many insurance companies would not be tempted to start these wrongful philosophies and those who did would be more easily caught violating the law.

To be fair and balanced, I would like to give a shout out to USAA. Over the past two months, three former USAA claims adjusters in different parts of the country have told me stories of their honest and policyholder centered claims culture. They discussed time periods between 2009 and 2014. It was former USAA adjusters that tipped our firm off to TWIA managers wrongfully lowering Hurricane Ike damage estimates in 2009. One of them told me, “Chip, I don’t normally like talking with you; but, this is just not right.”

Can My Recovery be Limited to Actual Cash Value When the Insurer’s Failure to Pay Prevented Compliance with My Policy Condition on Recovering Replacement Cost?

Paul LaSalle | Property Insurance Coverage Law Blog | March 12, 2019

Insurers often try to limit damages once they are found liable for breach of the insurance contract by claiming that the insurance policy limits the insured’s recovery to the actual cash value because the insured did not comply with the policy’s condition on recovering replacement cost.1

Insureds generally counter by arguing it would be inequitable for an insurer to withhold payment of actual cash value because of alleged non-coverage under the policy (making it impossible or at least difficult for the insured to replace the damaged property without funds from the insurer), and later deny replacement cost payment when found liable for coverage because the insured did not comply with the policy condition on recovering replacement cost.

In a recent case,2 a federal court addressed this scenario and predicted3 that under Pennsylvania state law an insured could recover replacement cost despite noncompliance with a policy’s replacement requirement condition where the insurer’s denial of liability and failure to pay actual cash value prevents the insured from replacing the property. The court further ruled that the insured must still demonstrate that, but for the insurer’s denial of actual cash value payment, they would have replaced the property. Consequently, an insured may not be able to recover replacement cost if it is shown they had no intention of replacing the damaged property.

In utilizing the “prevention theory” to approach replacement requirement conditions in insurance policies, the inquiry focuses on the insurer’s actions and their consequences for the insured’s ability to perform—whether the insurer paid actual cash value or denied liability altogether and whether denying funds made it impossible, or at least unduly risky, for the insured to comply with the replacement requirement condition. Thus, the replacement requirement condition will be excused (and the insured may recover replacement cost) where the insurer’s denial of liability and failure to pay actual cash value prevents the insured from replacing the damaged property. A replacement requirement condition may not be excused, however, where the insurer has admitted liability and has made payment for the actual cash value, but the insured could not hire a contractor to rebuild because the parties disagreed on the proper value of the damaged property.
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1 The following is an example of an insurance policy’s condition on recovering replacement cost:
We will not pay on a replacement cost basis or any “loss”:
(1) Until the lost or damaged property is actually repaired or replaced with other property of generally the same construction and used for the same purpose as the lost or damaged property; and
(2) Unless the repairs or replacement have been completed or at least underway within 2 years following the date of “loss.”
2 Utica Mutual Ins. Co. v. Cincinnati Ins. Co., 2019 WL 290162 (E.D. Pa. January 23, 2019).
3 Under the Erie Doctrine, a federal court hearing a state law claim must apply state substantive law to resolve the claim. When a state’s highest court (in this case, the Pennsylvania Supreme Court) has yet to speak on a particular issue, a federal court deciding the matter and applying the state’s substantive law must predict how the state’s highest court would decide if confronted with the issue. This is commonly referred to as an Erie Guess.