We are in need of wide range set of revisions in California insurance regulation to better protect consumers in a way that is fair to insurance companies.
How is Homeowners Insurance in California Broken and How Can it be Fixed?
The Problems Plaguing Consumers
Here are the big problems plaguing California consumers, each of which has been clearly present in the aftermath of each of the latest major community fires in California:
- Canceled Policies and an Inability to Get Insurance other than From California’s Insurer of Last Resort – the California Fair Plan. Many in Pacific Palisades had insurance cancelled just weeks before the fires and many California homeowners seeking insurance are unable to find insurance other than from the California Fair Plan, which provides base level coverage and has a claims payment practices reputation so poor it rivals that of State Farm.
- Underinsurance: Many California homeowners have insurance payment caps built into their insurance policies that are too low. The limits fall far short of the money required to rebuild. In some cases, insurer reps have guided homeowners to taking insurance with caps that are too low. In other cases, caps that were OK when set have become too low over time, and haven’t been updated.
- A Struggle to Get Paid to Policy Limits. State Farm and some other insurers make the entire claims process miserable for customers, leading many to be worn down and give up, taking whatever they can get and stopping there.
- Personal Property Itemization is a Nightmare. State Farm and other insurers insist on a detailed itemization of each item or personal property lost, its value and the date it was purchased. When they get the list, they will depreciate the value of items on the list, giving the insured only a portion of the real cost to repurchase. They may allow the full replacement cost to be reimbursed, without depreciation, once the lost item is actually replaced by the insured, but how reasonable is it to require someone who has lost their home and won’t need new furniture, garden furniture and thousands of other items until they have rebuilt their lost home, if ever? Home replacement will take years. It makes no sense to buy furniture and lots of other personal property ahead of a rebuilt home being complete. You see the problem.
- Getting Full Rebuild Cost is a Struggle. Getting rebuild money is hard and the process is slow. State Farm and other insurance companies often require homeowners to pass through a maze of complicated requirements. It starts with a requirement to prove up what their lost home was like. Did it have laminate kitchen counter tops or slab marble? Were the bathrooms tile on the floors only, or on walls as well. Etc., etc. Then, to prove up the cost of replacement of the home itself. Insurance companies hire independent consultants to act as their rebuild cost estimators and put them on the task, but these estimators, along with often being painfully slow to provide an estimate or even respond to questions, generally use a software program that sets the cost of components way too low, causing estimates to be way too low. And even after estimators engaged by the insurance companies have come up with their unrealistically low estimates for rebuild cost, State Farm will, apparently, unilaterally and arbitrarily reduce the estimates without doing any further work to verify cost. One individual who lost a beautiful home in Pacific Palisades was told by the estimator engaged by State Farm to estimate the rebuild cost of his home that the estimator would like to provide a realistic estimate of the cost to rebuild his home, but he believed that if he did so State Farm would never hire him again. In other words, estimators engaged by State Farm understand that State Farm doesn’t want an accurate estimate of rebuild costs, it wants a low estimate. The end result: many who lose their homes give up. They take what they can get from their insurance company and they give up on rebuild. Home lots are scraped and cleared, and are either resold or sit empty, often for years on end. A painful result for those who lost their homes and for the entire community that won’t fully recover without a full rebuild.
- A Host of Aggravations. Add to the above a host of small but meaningful aggravations. Claims adjusters and estimators who treat those who are suffering badly. Claims adjusters and estimators who give out inaccurate information – or who are there one day and then replaced by someone new the next day, with to quality handoff, requiring those who have lost to recount what they have lost yet again.
- Inadequate Disclose Upfront Means Shock When Tragedy Strikes and Insurance is Needed. And, just as tragic as each of the above, a complete lack of up front disclosure to policy holders of what they can expect if they lose their home in a community wildfire and need to make a claim. Homeowners are told in insurance company marketing that the insurance company will be there for them in their time of need, and instead, in their time of need, they feel they are be handled by a demon, not a savior. Insurance companies hide behind dense insurance policy contracts that were, without doubt, intentionally written to be hard for homeowners to decipher. Designed to keep those buying insurance in the dark as to what the actual treatment they will receive will be if they have a loss. What has been seen over and over again in the Palisades and in the Eaton communities was a second shock – an aftershock following the initial shock of news of a home lost – a life turned upside down. The aftershock was nearly as strong as the first shock. It was the shock that came as an understanding sank in as to just how hard and how miserable the insurance claims process would be for them. In some ways the aftershock was more debilitating. A wildfire can be written off as a freak event. Working day to day with people who are messing with you is disturbing in a very different way. These are people making you miserable. They’ve chosen, one has to conclude, from the CEO down, to make you miserable. That’s hard to take. It also could be so easily avoided. I come from the world of online sales and online disclosures that help ensure that consumers will be well informed before they make a purchase decision, not shocked later, after it’s too late.
- Lack of Certainty that Insurance Will be Available After a Rebuild – or Whether it Will be Affordable if it is Available – Keeps Those Burned Out From Moving Forward With a Rebuild. Those who have just lost their homes and are struggling to get the insurance payments they expected and now need are understandably skeptical as to whether insurance will be available for their new home if they rebuild – and how much it will cost them if it is available. For most who lost their homes in Pacific Palisades, there isn’t yet any clear answer on this. That’s doing a lot to delay and to block rebuild decisions.
The Problems Plaguing Insurance Companies.
For insurance companies, the problem comes down to four things:
1) Payment obligations, especially following community fires, can be enormous.
2) Climate change appears to be creating larger and more frequent catastrophic events.
3) Catastrophic events are devilishly hard to predict, making them hard to cost into insurance pricing.
4) Reinsurance markets, which are reactive to 1 through 3 above, can freeze up, especially during periods after catastrophes when insurance companies are working their way through huge payout obligations.
The Reforms Needed – The Fixes
Here are a set of reforms that should be adopted to move California out of the homeowner insurance crisis it is currently in.
1. CAL Reinsure – One Simple Change to End the Insurance Crisis and Logjam Gripping California
Adopt a New State Sponsored Reinsurance Regime – CAL Reinsure – Specifically Targeted to Cover Risk from Community Fire Providing Insurers Who Write Homeowner Policies in California 100% Reinsurance Coverage for Losses Due to Community Fire, To Take That Specific Risk – Which is Currently Wreaking Havoc on the Entire California Homeowner Insurance Market – Out of The Mix or Risks Insurers Take on in Writing Homeowner Policies in the State of California.
Read the full proposal CAL Reinsure.
2. New Legislation Requiring 100% Payout to Policy Limits in the Event of a Total Loss (or Constructive Total Loss Due to Community Fire
This reform gets those who lose their homes due to community fire the money they need to rebuild their lives, without the stress of the post fire claims handling practices many insurance companies currently subject their customers to. It ensures that money is available quickly, so rebuilding of homes – and entire communities – can be started quickly and accomplished quickly. It also radically simplifies the work insurers need to do post fire, significantly reducing their costs in handling claims after a fire.
The reform entails the enactment of new legislation requiring all insurers writing home insurance policies covering damage due to community fire to pay out 100% of policy limits on each category of insurance provided to all homeowners who suffer a total loss or a constructive total loss (where a constructive total loss is one which renders the home uninhabitable and in need of demolition and reconstruction, or reconstruction at a cost estimated at 75% or more of a full rebuild cost, due, for instance, to severe smoke damage), without any requirement of proof of loss, rebuild or replacement cost. Payments must be made within 30 days of loss, or, in the event doing so would overstress the short-term financial resources of the insurance company, in installments over a period not to exceed one year from date of loss on a schedule approved by an Administrative Law Judge engaged by the California Department of Insurance charged with oversight of the payment schedule.
To those who would say that this reform will be too expensive for insurers, the simple answer is that insurers can control their risk exposure in setting policy limits. Rather than writing a policy for $1 million in personal property coverage, and then paying out only 65% of it, for instance, they can simply write a policy for $650,000. That will have the additional important advantage of aligning customer expectations with the treatment they will actually receive.
3. New Legislation Requiring the California Department of Insurance to Establish a Rebuild Cost Estimate Task Force Charged With Promulgating Rebuild Cost Estimates and Obligating Insurers to Inform Insureds of the Estimates.
This reform entails new legislation obligating the California Department of Insurance to establish a Rebuild Cost Estimate Task Force that will be charged with engaging a highly qualified independent consultant (such as the Rand Corporation of Santa Monica) to prepare and publish, annually, an estimate of California home rebuild costs, by Zip Code, showing estimated rebuild cost ranges by square foot for different types of homes grouped into 10 different home categories designed to allow homeowners to easily assess their potential insurance needs to rebuild in the event of a loss of their home. The legislation will also require insurers writing home insurance policies in California to provide their policy holders an annual notice reminding them of their policy limits, informing them of the most recent CDI Rebuild Cost Estimates for their Zip Code and specifically stating the gap, positive or negative, as applicable, between each home category and the insured’s policy limits.
This legislation will help eliminate the huge underinsurance problem that has been so tragic for so many consumers and that has made it so difficult for communities to be rebuilt.
4. New Legislation Requiring the Promulgation of Minimum Standards for Fire Prevention to be Maintained by Cities, Counties and the State of California
This legislation, which we also explain in this post, requires the California Department of Insurance to promulgate minimum standards for fire protection to be maintained by cities and counties in the State of California and to be maintained by the State of California itself. It is designed to reduce fire risk generally and, specifically, to prevent a repeat of the type of urban fires that destroyed Pacific Palisades and Altadena and other communities in January of 2025. Under the legislation, statutory immunity from liability will be removed for any city or county and for the State of California itself should they fail to meet the minimum standards. The minimum standards shall be established in consultation with highly qualified independent consultants (such as the Rand Corporation of Santa Monica), shall take into consideration recommendations included in post fire reviews that have followed the Woosley and other fires, shall be updated on a regular basis to reflect new information and science on best fire protection practices and shall be subject to public hearings prior to adoption.
5. New Legislation Requiring Insurance Companies to Clearly and Specifically Obtain Consumer Consent to Key Homeowner Insurance Terms the Promulgation of Minimum Standards for Fire Prevention to be Maintained by Cities, Counties and the State of California
This legislation will ensure consumers are informed, as they should be, of key insurance terms when they buy and when they renew policies. It will reverse the current situation where insurance companies hide behind complicated insurance contracts written to confuse, rather than explain and will require specific disclosures in plain simple language and specific consent to key terms.
6. An Overhaul of Existing Insurance Laws and Regulations to Address the Myriad of Bad Practices some Insurance Companies Engage in When Handling Claims.
California has some rules intended to protect consumers from bad practices by insurance companies in handling claims under home insurance polices, but the existing rules are clearly deficient and in need of overhaul. This legislation tightens existing regulations and add new ones to address the myriad of struggles insured have due to rotating adjusters, incompetent adjusters and other ills.
7. New Legislation Giving Those Who Lose Their Homes Due to Community Fire A Right to Continue to Buy Insurance from the Company Providing Their Insurance at the Time of the Fire for Their Rebuilt Homes for a Period of Ten Years Following the Fire at a Price Adjusted Only for a Change in the Square Foot Size of the Rebuilt Home and for Inflation
We need an update in our insurance laws to remove worries about the insurability of a rebuilt home from the things that can keep those who lose their homes from rebuilding. This fix goes against the general idea that insurers are entitled to discontinue coverage, but total loss of a home is an exceptional circumstance and requires exceptional terms from insurance providers.