New California Laws Affecting Property Insurance Claims
By Andrew B. Downs
In the wake of the 2017 wildfire season, a number of bills were introduced in the California legislature to change, and in some cases "clarify" the law relating to the duties owed by property insurers to policyholders following a wildfire. We reported on many of these bills last January. The regular 2018 legislative session is now complete and most of those bills have, with amendments, been passed and signed by the Governor, thus becoming law. Some are effective immediately, others not until January 1, 2019 or later.
The most significant changes to California law are (1) Policyholders who suffer a total loss and who are underinsured may combine the dwelling and other structures limits and they are entitled to payment of full replacement cost without a requirement to actually replace (SB 894, adding Insurance Code § 10103.7); and (2) The one year suit time period clause in the statutory fire policy is extended to two years when the loss "is related to a state of emergency" (AB 2594, amending Insurance Code § 2071).
The revisions to California law fall into three categories: (1) Changes in the substantive coverage provided by fire policies; (2) Statutes affecting the substantive rights of the policyholder in coverage litigation; and (3) Changes in the laws governing underwriting of policies.
Major Changes in Substantive Coverage
In addition to the addition of Insurance Code § 10103.7 permitting underinsured policyholders to combine the dwelling and other structures limit and to recover on a replacement cost basis without actual replacement, the new bills extend the minimum time permitted for a policyholder who suffers a loss in a state declared state of emergency (which wildfires generally are) to replace to three years. For non-state of emergency losses, the minimum time for replacement is now 24 months. (SB 894 and AB 1772, both amending Insurance Code § 2051.5).
For insurers who assign a policy limit to the Loss of Use or Additional Living Expense coverage, the allowable time for recovery of losses under those coverages is extended to 36 months when a state of emergency has been declared if the policyholder acting in good faith and with reasonable diligence encounters delays in the reconstruction process beyond the policyholder's control. (SB 894, amending Insurance Code § 2051.5).
California has long permitted policyholders to recover on a replacement cost basis when replacement takes the form of purchasing a different property. One of this year's new laws provides that when the policyholder replaces in that manner, the calculation of replacement cost must include any code upgrade coverage which would have been available had the insured building been rebuilt on site. (AB 1800, amending Insurance Code § 2051.5).
Finally, insurers are now required to provide policyholders with certified copies of policies upon request. (AB 1799, amending Insurance Code § 2084).
Changes Affecting Coverage Litigation
There are two changes that are likely to affect coverage litigation. The first is the extension of the suit time limit to two years for losses arising out of declared states of emergency. This may not be that significant because many insurers have already included two year suit time clauses in their property policies.
The second addresses the efficient proximate cause doctrine by adding Insurance Code § 530.5 (SB 917). Although the bill states it is merely declaratory of existing law, the inclusion of this new section is, on a practical level, a shift in favor of policyholders. It provides: "If a loss or damage results from a combination of perils, one of which is a landslide, mudslide, mudflow, or debris flow, coverage shall be provided if an insured peril is the efficient proximate cause of the loss or damage and coverage would otherwise be provided for the insured peril. Coverage shall be provided under the same terms and conditions as would be provided for the insured peril."
Most of the underwriting changes made by this year's legislation operate to increase the protection policyholders already had against cancellation. SB 824 provides for a one year prohibition on cancellation of residential property insurance policies based solely on the fact the insured structure is located in an area where there has been a wildfire. This includes properties which are adjacent to but outside of the fire perimeter.
Another bill, SB 894, also amends Insurance Code § 675.1 to extend from one year to two years the period during which a residential property insurer must offer renewal to a policyholder who has suffered a total loss in a statutorily defined disaster.
A third bill, AB 1875, requires insurers who do not offer an extended replacement cost coverage equal to at least 50% above the dwelling coverage limit, to disclose that other insurers may offer such policies, and to provide a website link to the Department of Insurance's Homeowners Coverage Comparison Tool. It also requires insurers to communicate to the Department of Insurance whether they offer an extended replacement cost coverage equal to at least 50% of the dwelling limit.
This is an overview of the changes. If you need further information, please contact us.