California Department of Insurance Cracking Down on Wildfire Underinsurance

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In the past few years, the California Department of Insurance (“DOI”) has received thousands of complaints related to underinsurance. And it is starting to act.

It has found misrepresentations and failure to pay claims against several insurers, as summarized below in their ongoing series of investigations, all titled “Following the Wildfires of 2015 and 2017.” While the DOI regularly responds to complaints with Market Conduct Reports, it is unusual for them to target a particular issue like wildfires.

And usually, such reports result in identifying additional payments needed in the $100,000 range or less. As you can see below, the DOI found that some insurers had to pay their insureds millions of dollars in additional payments.

What does this mean for insureds?

It means that you have additional evidence that your underinsurance was due to your insurer’s poor communication, lack of adherence to California law, and general bad faith. All of the reports discussed below can be found here:

http://www.insurance.ca.gov/01-consumers/120-company/09-mcexam/index.cfm

Allstate: On June 30, 2021, the DOI released its Market Conduct Report examining the conduct of Allstate. Per the report, Allstate has identified $7,455.697.29 in additional claims payments that it required Allstate to pay to its insureds related to the 2015 and 2017 wildfires. What did Allstate do wrong? A significant number of its claim files showed underinsurance problems. The coverage quotes and renewals failed to comply with California insurance regulation Section 2695.183, which states what information the insurer or broker needs to provide an insured when reviewing an estimate of coverage. And it failed to provide disclosures required by California law.

USAA: On August 24, 2020, the DOI announced that USAA identified $4,503,312.50 in coverage that USAA owed its clients, on top of the $1,099,776.58 that USAA had already agreed to pay based on the DOI’s review.

What did USAA do wrong?

USAA changed to use 360Value as its estimation software. That tool requires additional information related to the quality grade of the home. USAA failed to obtain that information from its insureds, resulting in underinsurance. There were errors in USAA’s information about the home that their underwriters did not catch. USAA did not routinely increase Coverage A dwelling amounts.

USAA could not explain why some of its insureds failed to have extended replacement coverage, as they no evidence the insured ever asked to remove it. USAA often failed to provide any written copies of estimates, much fewer estimates that included all the requirements under Section 2695.183 of the California insurance regulations. It failed to maintain clear and consistent written underwriting guidelines.

Nationwide: On December 7, 2020, the DOI announced that Nationwide and its affiliates were ordered to pay $22,415,810.77 in additional claims payments and return $165,441.99 in premium payments.

What did Nationwide do wrong?

First, it failed to comply with a 2005 Market Conduct Report that required a checkbox in its application interface to confirm that extended replacement was discussed and offered, resulting in failures to offer it to insureds. Then it had a number of homes that were underinsured even after extended replacement coverage was applied.

The DOI concluded that Nationwide failed to have procedures in place that result in insuring homes to their reasonable value. The annual renewals failed to list all the information about coverages, making it difficult for insureds to know if they had enough coverage or not. It had over $500,000 in payments that it calculated incorrectly, failed to send, or addressed incorrectly. It could not demonstrate that it provided written replacement cost estimates when it communicated such estimates.

The estimates it did provide often failed to include the cost of demolition and debris removal and failed to address whether the dwelling was on a slope. Nationwide failed to include disclosures about the extended replacement cost coverage available and chosen, and the ordinance and law coverage.

Nationwide failed to comply with state-mandated timeframes related to seeking replacement value and failed to maintain standard calculations for the closure of a claim such that an insured would know the deadline to file suit. They also have no consistent method of determining the amount of time it will pay for fair rental value.

CSAA: On August 24, 2020, the DOI confirmed that CSAA was required to pay over $40 million in additional claim payments, as well as $65,848.60 in premium payments returned to insureds.

What did CSAA do wrong?

Its insureds were routinely underinsured. It failed to take into account differences in local costs when estimating cost increases and inflation. CSAA took no responsibility for providing a copy of a replacement cost estimate and placed responsibility on its agents. CSAA, which uses 360Value to estimate costs, explained that the estimate would be automatically sent to its document imaging system and then emailed to insureds.

But the DOI could find no evidence that the estimates were actually sent. It failed to regularly check the adequacy of insurance for older homes that had been insured by CSAA for many years, resulting in significant underinsurance. It failed to include required disclosures about building code upgrade coverage and extended replacement coverage, as required by California law. It provided no written training materials to its agents on how to use 360Value and what information to include in estimates.

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