New California home insurance rules take aim at fine print

Daniel Workman

Imagine that your house burned to the ground in a wildfire. You submit an insurance claim, only to find out that your home is underinsured by $250,000.

Three-fourths of home insurance claimants from San Diego and San Bernardino counties faced that shocking scenario, according to a 2008 survey from industry watchdog United Policyholders. That same survey reported that those wildfire victims were underinsured by an average of $240,000.

California has introduced new regulations that seek to alleviate underinsurance troubles in the Golden State. The new rules take effect in the summer of 2011.

Different types of home insurance

One root cause of under-insurance is that some Californians fail to understand the more restrictive types of home insurance available -- and therefore insure their homes for their cash value rather than their replacement cost.

Replacement-cost home insurance pays for the cost of rebuilding or replacing your home, regardless of its current market value. According to California's insurance code, there are three main types of replacement-cost home insurance.

• Guaranteed replacement-cost coverage: Guaranteed replacement-cost coverage offers the broadest protection. Under guaranteed replacement-cost coverage, the full cost to repair or replace a residence is payable for eligible risks described in your home insurance policy.
• Extended replacement-cost coverage: Like guaranteed coverage, extended replacement-cost coverage pays repair or replacement costs beyond basic policy limits. Extended replacement-cost coverage is capped by additional dollar or percentage amounts.
• Basic replacement-cost coverage: Basic replacement-cost coverage has a single set of limits for home repairs or replacement, often much lower than the upper range in extended or guaranteed replacement-cost policies.

By contrast, actual cash-value coverage (although it can be less expensive) can leave homeowners under-insured. Actual cash-value coverage deducts your home’s physical depreciation from eligible repair costs. If your home is destroyed, actual cash-value claims are limited to the fair market value of your dwelling at the time of loss, regardless of how much it costs you to rebuild. Reconstruction expenses can be much higher than what your home was worth. Also, cash-value policies have strict limits that can further hamper the repair or replacement of your home.

New California home insurance regulations

For years, Californians were legally responsible for determining whether their properties were adequately insured. That obligation, as well as coverage maximums, limitations and exclusions, was buried in the fine print of home insurance contracts and application materials.

Steve Poizner, who was California's insurance commissioner, witnessed the fallout from under-insurance after the Southern California wildfires in 2007, according to the California Department of Insurance. Poizner teamed up with then-Gov. Arnold Schwarzenegger on new state insurance regulations to help make sure Californians were adequately cover in case of fire.

Above all, the Golden State’s new home insurance law makes property insurers responsible for accurately estimating the replacement values of their policyholders’ homes.

The new regulations, which go into effect in June 2011, also require that:

• Agents and brokers take three-hour training courses on estimating home insurance values.
• Insurers, agents and brokers inform consumers in writing of sources and methods used to estimate those values.
• Replacement cost estimates are complete and are based on California Department of Insurance standards.

New property disclosure form

Another aspect of California home insurance reform is Assembly Bill 2022, which was signed into law in September 2010. The law introduces changes to the California Residential Property Disclosure form, which insurers already are required to give to policyholders.

Unlike the highly technical older version of the form, the new form uses plain language and a checklist to present the different types of home insurance available to consumers. The form also highlights the fact that guaranteed replacement-cost policies provide the highest level of coverage.

Along with the new disclosure form, the law also compels insurance companies to supply a simplified version of the California Residential Property Insurance Bill of Rights, which outlines the information that customers must receive with their policies.