Insurance Coverage Blog

A reader sent me this fascinating, and pretty good, story from the L.A. Times.  The story looks at recent homeowner losses to wildfire -- where a major problem was homeowners having property insurance for less than the value of the home -- and debates who is to blame for underinsurance, agents and insurers, or homeowners. 

 Like many other fire victims across California in recent years, Newman found out that the value of his insurance had failed to keep pace with the rising cost of home construction. He learned too late that he was underinsured.

Just how widespread this problem has become was highlighted in a survey scheduled to be released today by a consumer group that showed [homeowner Stan] Newman's anger and frustration is far from unique.

He is one of 274 victims of last fall's Southern California fires who took part in a study about their losses. Three-quarters of respondents complained that they didn't have enough insurance to pay their rebuilding costs.

About six weeks ago, the California Court of Appeals decided a case, Everett v. State Farm, that placed the responsibility for adequate insurance -- in the absence of "guaranteed replacement cost" and assuming adequate and prominent notice to policyholders -- on homeowners.  I  wrote about the Everett case in this post from May 8. 

I found it intriguing that, according to the story, the California Insurance Commissioner wants to ask the court to "depublish" the opinion to take away its precedential value.  Although this is not unheard of in a settlement between an insurer and a policyholder, particularly where the insurer lost the case on appeal, I'm not sure under what authority the Insurance Commissioner can ask for depublication.  

California courts, for now, are backing insurance companies. In a recent case stemming from the 2003 Southern California wildfires, a panel of judges from the 4th District Court of Appeal ruled that State Farm General Insurance Co. did not misrepresent its coverage limits when it declined to pay full replacement value to a San Bernardino woman, who lost her home in an October 2003 blaze. [The Everett case].

[Insurance Commissioner Steve] Poizner said he disagreed with the appeals court and planned to ask the judges to "depublish" their April 29 decision so that it would not be considered legal precedent.

An insurance analyst made a good point in the story -- it doesn't make sense to conclude insurers are being deceptive because they would make more money charging more premiums for more home value.  Another point, not made in the story, that follows from this comment: insurers want to place the responsibility on the homeowner to value the house adequately and pay commensurate premiums, rather than bearing the risk of getting too little premium for guaranteed replacement cost. 

The analyst, Brian Sullivan, also made another point that deserves discussion -- he said that some agents may have an incentive to offer insurance at the cheapest rate possible to get the business from a rival agent -- although it seems to me that homeowners have more of the responsibility for such a transaction than agents, because they, not agents, are the ones who will cut corners on insurance to get a lower price.  For the companies that still offer guaranteed replacement cost, usually for not that much more of a premium than without replacement cost, it would be interesting to see how many people take the lower premium, even if it is a relatively small amount. 

Brian Sullivan is an excellent analyst and like you is a former journalist

I hear complaints from customers on virtually a daily basis that "we" have their homes over-insured. That their home isn't "worth" how much it's insured for, or, "I'll sell it to you for that".

I always try to point out articles like this one showing that for the most-part when a disaster hits you hear complaints about being under-insured, not the other way around.

Never-the-less, I frequently encounter customers who want to minimize this issue and purchase less than ideal coverage amounts for their homes.

Often, the knowledge that the insurance company get's more premium for higher amounts of coverage works against the process. Customer's often assume that insurers are recommending higher than needed coverage in order to pad the premium, and in a very wrong-headed negotiation strategy try to reduce the price by buying less coverage than is optimal.

Clients never think that it will happen to them so they cut costs by lowering coverage and then blame the insurance company for the client not having enough coverage. I explain to my clients that it's better to take the appropriate coverage and then take the highest deductible they can afford to save money. The issue is aggravation vs. devastation. Paying a high deductible is an aggravation but lossing a home in a total loss situation is a devastation. My believe is that in most of these cases, that if they would have carried the correct amount of insurance with a high deductible, when the unthinkable occured they would only have suffered the monetary loss the high deductible. Instead they didn't have the correct coverage and had to suffer both aggravation and devastation of lossing their house, paying their deductible and fighting the insurance company in court.

"...he said that some agents may have an incentive to offer insurance at the cheapest rate possible to get the business from a rival agent..."

Makes sense to me. People general buy insurance by getting the cheapest policy possible. For me, it's a matter of shopping around for the best premium on a given set of coverages (not tweaking the coverage to get lower premium). But I could see how that could happen. Add in an insane real estate bubble and eek!

Always by replacement cost coverage. Always always always always...

It happens all the time when people try to get by on the cheap. I've told many people they are underinsured with their current policy but they don't want to hear it. Some areas are more expensive to build than others. You can tell them until you're blue in the face and even show them appraisals and contractors' estimates and it will have no impact.

"Always by replacement cost coverage. Always always always always..."

Rob, that is what we preach where I work as well. Nothing else makes sense.

Most folks want to make payments on a Yugo and expect it to perform like a Mercedes. When paying the premium, we seem to want the least coverage possible. Once the severe loss occurs, we want the most. My insurance agent has advised me the final decision, within a range, is up to me. He recently advised the old Replacement Cost policies (where the company paid to build back regardless of amount) are no longer written. You can get RC but only for up to a percentage over your limits. Was I given bad info? In any event, who better than me to know the amount it will take to build my house back and how much my personal effects are worth?

Sampson: While I would agree with you on your personal effects, I would ask if you are remembering everything, down to your socks? As far as knowing the amount to rebuild your home, unless you are in the construction industry or research material & labor costs as well as building codes on a regular basis, it's very difficult to stay abreast of that. When I started in the industry, you could rebuild most homes for $45 a square foot. I think you may be able to do a pool cage for that now...

Sampson:

I think in some states "guaranteed replacement" policies are available, but by and large (as I understand it) they are becoming a thing of the past, and many states don't have companies that offer them at all. I have never seen one in my neck-of-the-woods. It sounds like your agent most likely gave you "good info".

I know this is off-topic but Poizner seems to be his own person. Last month a fued between him and now-Lt. Gov Garamendi (he was the Insurance Commissioner prior to Poizner) erupted over Prop 103. Here is a link to Garamendi's letter to Poizner:

http://www.garamendi.org/index.php?option=com_content&task=view&id=457&Itemid=200

And here is a link to Poizner's smack-down response (he really does give Garamendi a verbal smack-down):

http://www.insurance.ca.gov/0400-news/0100-press-releases/0070-2008/nr033-2008.cfm

XERAC

Appearances can be deceiving. Poizner is a trial lawyer (the so-called Consumer Attorneys of California or CAOC) Bill Shernoff person. Shernoff sits on the Board of Director of a so-called consumer advocate organization, "United Policyholders." Poizner's request for depublication of Everett parrots the United Policyholders depublication request, posted at: http://pifc.org/media/pdfiles/legal/UP%20request%20for%20depublication%20of%20Everett%20case.pdf Poizner was elected with support of another trial lawyer and so-called consumer advocate, Harvey Rosenfield. http://harveyrosenfield.com/ Poizner is trial lawyer person and anything but "his own person."

Yerac, then how do you think ol' Harvey is feeling about what Poizner did in regards to Prop 103? And in regards to things parroting positions that happens all the time. Sometimes things will be agreed with, sometimes they won't. But Poizner seems to be consumer oriented and not someone who will wait until an election year to do something.

By the way, love your handle. I'm waiting for a Werac to appear.

While searching for legal issues for a paper, I happened upon this Blog. While I have not read all the comments, I would like to clarify some of the items in the article by Marc Lifsher. This may change some of the perspectives floating about.
1. First of all, my policy with AMICA was brand new, 4.5 months before the fires, and had nothing to do with “keeping pace” with inflation or any other factors.
2. Second, AMICA established the values.
3. Third, with regard to values (and the legal ruling talked about here) what do I know about the costs to replace, valuation, let alone about rebuilding a house, I'm not a contractor. Insurance companies have stats, data bases, and tables of risk to properly assess value, not to mention current and historical claims data? Is this not what and how they determine insurability and premium? Is this not their business?
4. Fourth, as I have learned, based upon the policy language, that the insurer purposefully reduces stated policy value to minimize the insurers’ risk. (They tell us it's to keep premiums low) and then they provide an extra percentage that is supposedly available if needed (You have to fight for it), and in the mean time, regardless of responsibility to “replace” as in my case, they defer to your "policy limit" which limits legal entitlement. In short, they are a business, and whatever they can do to minimize claims is in their best interest. Read the stories, “Insurance profits all time high, while payouts are all time low.”
5. Finally, as I have learned, the highest proportion of premium you pay for a policy is associated with the highest degree of risk, in other words, the “stated value” on your policy represents the bulk of your premium. If the insured proposed a higher stated value and if the insurer agreed, (usually they won’t) the difference in premium would be marginal, yet the insured would be properly covered, and yes, the risk would be greater to the insurer, but at less premium.

I dont' think this comment is accurate.... "But Poizner seems to be consumer oriented and not someone who will wait until an election year to do something." I heard Poizner speak a few weeks ago and it was clear that the reason he took the post as Insurance Commissioner was because it was the highest profile elected position in the state that he could obtain. He clearly intends to run for Governor and is already grandstanding as a consumer advocate and issuing press release after press release to let everyone know the "great" things he is doing.