On Monday, the California Supreme Court revived a 2011 insurance regulation designed to protect homeowners from underinsurance because of the insurance company’s use of potentially misleading estimates for home replacement costs. This was a big win for consumers, and will be particularly important for those who lose their homes in natural disasters (in particular fire) where there are few coverage disputes other than the cost to repair or replace.
As background, the Insurance Commissioner enacted the insurance regulation, which laid out detailed guidelines to ensure adequate replacement cost coverage in homeowners policies, with the intent of eliminating the practice by insurers of providing homeowners policies with insufficient limits based in inadequately estimated costs of repair. The effect of the insurers practice was to leave homeowners only partially insured and holding the bag if they wanted to rebuild their homes after an insured loss. This issue was becoming increasingly problematic because of the prolonged droughts suffered in many California communities, and the increasing prevalence of major wildfires. But with the passage of this rule, the Insurance Commissioner hoped to give homeowners some piece of mind by requiring insurers to properly calculate rebuilding estimates. If the insurers violate the regulation, and an insured suffers a loss (because their policy had insufficient limits to actually cover the repair or replacement costs) the remedies include both an enforcement action and also a potential private lawsuit based on this now more precisely defined unfair business practice.
The insurance industry objected that the regulation fell outside of the Commissioner’s delegated authority, and also argued that the regulation restricted their underwriting and violated their rights of free speech. The trial court and appellate court threw out the new regulation on the first ground, that the Insurance Commissioner exceeded his authority in promulgating this new regulation. However, the California Supreme Court reversed, finding that the Commissioner was well within his authority, and sent the case back to for the lower courts to address the other two grounds. The Court rejected gave deference to the Commissioner after a careful review of all the reasons agencies have such authority. In particular, the Supreme Court focused on the public policy behind the enabling statute at issue, Insurance Code 790.03 (b), which bars Unfair Practices in the form of false or misleading statements issued by insurers, and delegates to the Commissioner the authority to issue regulations to enforce the statute.
From a practical perspective, this is a fantastic outcome for consumers. The Supreme Court emphatically endorsed the authority of the California Insurance Commissioner to issue regulations to enforce the Unfair Practices in the business of insurance law.
Losing a home is bad enough, but having to haggle with an intransigent insurance company who issued a homeowners policy with insufficient limits for the replacement costs in the aftermath is even worse. It will be interesting to see if the insurance industry will now provide more accurate, but more expensive limits for replacement cost coverage in homeowners policies.
