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What Courts Say About Underinsurance of Homeowner’s Coverage in California

Insurance companies take the position that they have no responsibility for the amount of coverage their insureds have in the event of a disaster. That way, they can offer very low premiums to compete in the insurance market. And, if there is a wildfire or other disaster, they will need to pay much less than it might cost to repair or replace your home.

Insurance companies argue that their insureds select their coverage amounts, and if they wanted more, they should have asked. Those of us with homeowners’ insurance are well aware that we are rarely asked if we agree with the insurance coverage offered to us, rarely asked if we want to change the amount offered, and often not informed of the various options we could add to increase our coverage.

Then, when disaster strikes and we need our coverage, we are told that we should have added more if we wanted it. Insurance companies increase the likelihood of systemic underinsurance by relying on 360Value as the software they use to create replacement cost estimates.

360Value is owned by Verisk, the same company that owns Xactimate, the software used by the same insurance companies to estimate repair cost estimates. Verisk uses the same database for both repair and replacement estimates, meaning that the numbers are simply recycled back and forth with no attempt to check them against other sources of information.

Both the Department of Insurance and California courts are becoming savvier about this ongoing attempt to avoid responsibility for the costs of repairing or replacing homes after disasters.

It remains true that insurance companies take the position that an insured selects her own insurance and thus bears responsibility for that decision.

Courts largely agree, but only up to a point.

If an insured asks their insurer or their agent to confirm that they have sufficient coverage for a rebuild, and the insurance company or agent chooses to answer, then the insurance company or agent assumes responsibility for making a reasonable attempt to get that estimate right. If they assure an insured that they are fully covered in the event of a disaster, then disaster strikes, and the insured lacks coverage to rebuild, the insurer can indeed be held liable.

So, look at your insurance coverage.

In most parts of California, it is easily costing $500 per sq. foot or more to rebuild now, because of the materials and labor shortages caused by years of fires. And those price increases are not reflected in your replacement estimate.

  • Do you have extended replacement cost, and is it at 50%? If not, you will want to increase that.
  • Do you have sufficient coverage for code upgrades? Code upgrades are calculated as a percentage of the main replacement cost, usually 10%. But code upgrade costs vary wildly based on the age of the home – for older homes, code upgrades could easily cost 50% of the Dwelling coverage.

Landscape costs are usually 5-10% of the Dwelling coverage as well, but the same percentage is applied whether you have a small city lot or 10 acres in the country. Fencing is often not covered by insurance, even if you have multiple fenced acres.

Also, many insurance policies exclude required intervention to stop erosion, landslides, or other earth movements after a fire or flood. The city or state may require that you put in retaining walls or other interventions to protect against earth movement, but those may not be covered by your policy as written. All these issues may be addressed through an endorsement or insurance riders.

But it requires you to ask.

Kantor & Kantor, LLP, takes on Insurance Bad Faith legal matters. If you are a homeowner and have need of talking with an Insurance Lawyer to see what can be done, please call us for a free case evaluation.