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Farmers Insurance Called to Task on Homeowner Underinsurance Claims

Farmers Insurance Called to Task on Homeowner Underinsurance Claims

Most homeowner insurance companies in California have been avoiding responsibility for often massive underinsurance in their customer's policies, in the wake of wildfires, by saying that it is up to the insured to select policy limits. Underinsurance has been an issue long enough that now some customers have started asking their insurers and their agents if they have enough insurance in the event of a fire.

When their homes burn down and they are still underinsured, despite the reassurances from the agents and insurers, these customers are understandably upset and believe the onus should be on the agent and insurance company.

Last week in Sonoma County, a judge agreed.

An insured asked his agent, a Farmers' agent if he had enough insurance in the event of a wildfire in 2015, his agent assured him he did. Two years later, his home burned down. After finding out that he was underinsured by well over a million dollars, the insured learned that the 360Value software used to create a replacement cost estimate required specific fields selected for "style" and "quality."

360Value and Farmers provided specific rules for selecting these fields, which the agent did not follow. The house was graded as "above-average" quality when under the guidelines it should have been "custom" or "premium."

That resulted in a dramatically lower replacement cost.

The insured asked about the grading and asked for it to be reformed. Even after Farmers investigated and confirmed that various errors were done by its agent in issuing the policy, it refused to fix the error and recalculate the coverage correctly.

Farmers refused and the insured sued, alleging causes of action for breach of contract, reformation, breach of the covenant of good faith and fair dealing, fraud, misrepresentation, negligence, and violations of Cal. Bus. & Prot. Code 17200.

Farmers filed a motion for summary judgment. They asked the court to rule that Farmers could not have breached the contract because it paid the limits listed in the policy. The court refused and held that an insurer following internal policies and procedures in crafting and administering the policy is part of the contract between the insured and insurer. The court also confirmed that failing to follow those policies and procedures in writing the contract could constitute a breach of the implied covenant of good faith and fair dealing.

It confirmed that an insurer's refusal to reform a contract where a mistake was known to have been made could also breach that covenant. The court also rejected Farmers' contention that its agent could not be liable for fraud and misrepresentation because the question of the future replacement cost is necessarily speculative. The court disagreed, noting that the agent made factual misrepresentations that led to the inaccurate estimate.

Finally, Farmers had attempted to avoid liability entirely by claiming that a one-year contractual limitation on suit barred the litigation. The plaintiff had requested reformation for the first time in July 2019, and then again with additional concerns, in September 2019.

Each time Farmers denied the request and continued to adjust aspects of the claim into 2020. The plaintiff brought a suit in August 2020. Farmers took the position that the July 2019 date controlled.

The court again disagreed. Not only did the extension of court deadlines due to COVID-19 apply, but the court also confirmed that the earliest possible date the limitation could have begun to have run was September 2019 and its continuation of the claims adjustment likely extended it even further.

By denying Farmers' motion, the court confirmed that insurance companies can indeed be held liable for underinsurance when the underinsurance is due to their errors and misstatements. Simply paying the policy limits as written is not a shield from an insurer's liability for its mistakes. Farmers will have to face a jury now and explain their actions.

The decision, issued on February 2, 2022, in Koop v Fire Insurance Exchange, et al., can be read here.