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CALIFORNIA DOI CONSIDERS BROAD EXPANSION OF PRODUCERS’ AND INSURERS’ DUTIES IN ESTIMATING HOMEOWNERS REPLACEMENT COST

On February 11 the California Department of Insurance will hold a workshop to consider possible new regulations governing insurance producers training and business practices in estimating replacement cost for homeowners insurance policies.  This is part of the Department’s continuing focus upon “underinsurance”, a concern that many consumers have inadequate insurance coverage for total loss of their homes. 

The proposed regulations would impose significant new duties and new legal risks upon producers and insurers who sell homeowners insurance.  Under the proposed rules:

• All agents and brokers would be required to complete a 3-hour training course in estimating property replacement costs.
• The specific components of this required training are specified.
• There would be extensive record-keeping requirements for any agent, broker or insurer who provides an estimate of replacement cost.
• Replacement cost estimates would be subject to strict standards contained in the rules.
• The producer or insurer would remain responsible for complying with the regulations “notwithstanding the fact that information, data or statistical methods use or relied upon . . . may be obtained through a third party source.”  In other words, the producer or insurer would be just as liable for an incorrect estimate from using Marshall and Swift as if he or she had performed the estimate personally. 

These regulations would shift much of the legal responsibility for setting homeowners insurance policy limits from the policyholder to the producer or insurer.  If they are adopted as they have been proposed, we should expect every case in which a policyholder proves to have inadequate coverage to generate DOI complaints and litigation over the issue of whether the producer or insurer complied with the regulations. 

The proposed rules would certainly increase a producer’s risk of Errors and Omissions claims.  Under current law it is quite clear that, absent misrepresentation by the producer or insurer, the policyholder has the final legal responsibility for setting policy limits.  By creating detailed requirements for estimating replacement cost, a producer could easily become liable for the adequacy of coverage, not because of misrepresentation, but merely due to technical failure to comply with the regulations. 

Ironically, these regulations could well have the opposite effect from that which the Department says it wants.  One way for an insurer or producer to avoid liability under these rules would be to avoid giving any assistance to policyholders in setting policy limits.  This is how the California FAIR Plan already operates.  Expect this approach to expand if these rules are adopted.  The rules could easily increase cases of underinsurance because policyholders would be left with no help at all in setting their policy limits. 

These rules cannot take effect immediately.  The “workshop” process under the California Administrative Procedure Act (APA) is the very earliest stage of rulemaking.  It is a relatively informal procedure involving give-and-take between the Department staff and interested members of the public.  Adoption of these regulations would also require a formal APA rulemaking procedure, which would follow the workshop and would last many months.  Michelman & Robinson will continue monitoring this process and we will report further developments as they occur. 

The Department of Insurance workshop invitation on this issue is available at http://www20.insurance.ca.gov/ePubAcc/Graphics/138691.pdf.  The text of the proposed regulation is available at http://www20.insurance.ca.gov/ePubAcc/Graphics/138690.pdf.