A New Twist in the California Debate Over Allegedly Inadequate Replacement Cost Limits in Homeowners’ Policies

shutterstock_105910559The April 8, 2015 decision of the California Court of Appeals in Ass’n. of Cal. Insurance Companies v. Jones, 2015 WL 1569669, 2015 Cal. App. LEXIS 298 (Cal.Ct.App., Apr. 8, 2015) held that the state’s Insurance Commissioner overstepped his authority in attempting to regulate the content and format of replacement cost estimates under homeowners’ insurance policies.  Although the legislature may choose to provide such a definition, it has not done so.  While the sufficiency of policy limits remains a concern in the insurance industry and there are other valid statutes in effect that address replacement cost, pending a potential appeal of the decision the Regulation at issue, Title 10, Cal. Code of Regulations, §2695.183, is therefore no longer effective.

Fire victims, whose homes have been lost in any number of Southern California wildfires, have repeatedly argued that their replacement cost limits were insufficient to cover their rebuilding costs.   Historically, many such homeowners filed lawsuits against their brokers or their insurers, alleging negligence and misrepresentation in policy placement.  Insurers, community activists, and others have held numerous public hearings on the subject, and agencies have conducted studies to assess the adequacy of replacement cost limits in homeowners’ policies over the last decade.  Attempting to remedy some of these concerns, effective in June 2011, the Insurance Commissioner issued  §2695.183.  Entitled “Standards for Estimates of Replacement Value,” this elaborate Regulation set forth requirements for establishing replacement cost limits for homeowner’s policies.

The Association of California Insurance Companies (ACIC) filed a declaratory relief complaint against the Insurance Commissioner, arguing: (1) that the Regulation was invalid because the Commissioner lacked the authority to regulate the underwriting of homeowners insurance;  (2) that Cal. Ins. Code § 790.03 (the “Unfair Insurance Practices Act” or UIPA) did not authorize the imposition of a single detailed method for estimating the replacement cost of houses; and (3) that the Regulation violated the insurance companies’ free speech rights under the First Amendment of the United States Constitution.  ACIC also argued that the Regulation was ineffective because it rendered, as unfair and deceptive, estimates that were accurate but not in the format directed by the Regulation while at the same time it did not sanction an inaccurate estimate that complied with its format and content requirements.

After a bench trial consisting of lengthy briefing and oral argument, the trial court sided with ACIC and agreed that the Insurance Commissioner lacked the authority to enact §2695.183.  On behalf of the Commissioner, the Attorney General appealed.  On April 8th, the California Court of Appeal for the Second Appellate District issued an opinion that affirmed the trial court and held that the Insurance Commissioner did not have authority to promulgate the Regulation under the authority delegated to him by UIPA.

The court’s opinion provides an intricate discussion of statutory construction, the extent of legislative authority, and the arguments made both by the insurers that brought the declaratory judgment action and by the policyholders and amici who were defendants.

The appellate court concluded that the California legislature, with limited exceptions not applicable here, was the only body with authority to add new definitions of what constituted a violation of Cal. Ins. Code §790.03.   The court noted that while the legislature could have defined the content and format of replacement cost estimates and could have determined that inadequate replacement cost estimates should be included in the list of unfair and deceptive practices under UIPA, it had chosen not to do so.  Further, the court concluded that UIPA did not give the Insurance Commissioner the authority to regulate the content and format of replacement cost estimates.

We expect the defendants will seek an appeal with the state Supreme Court.

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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