Is Your Homeowners' “Replacement Cost Coverage” Really Enough To Cover A Rebuild?

After many homes were destroyed by California wildfires, thousands of homeowners learned to their surprise that they were underinsured.  Although their homeowner policies included “replacement cost coverage,” the costs to rebuild exceeded their policy limits. In response to numerous complaints from underinsured homeowners, the Department of Insurance investigated this epidemic and discovered, among other findings, that the replacement cost coverage limit recommended by insurance companies had understated to its insureds the necessary costs to rebuild over 80% of the time.

To address this underinsurance crisis, the Insurance Commission promulgated a regulation setting forth how insurers are to calculate and communicate to consumers the costs of rebuilding or replacing a home in its entirety. The regulation does not require an insurer to recommend a particular policy limit or provide a replacement cost estimate when it issues or renews a policy; however, if an insurer chooses to opine on replacement costs (which often it does), the regulation specifies how that estimate is to be calculated and what factors it must include. In response, the Association of California Insurance Companies and other groups challenged the Commissioner’s authority to do so. The trial court held that the Commissioner exceeded his authority under the Unfair Insurance Practices Act and the Court of Appeal affirmed. 

Nearly six years after the enactment of the regulation, the Supreme Court of California reversed and ruled in favor of policyholders. Insurers are now required to communicate “complete” replacement cost estimates to insureds.[1] The reasonable expectations of insureds should now correspond with the replacement cost coverage of their homeowner’s policy. Although the replacement cost estimate will not always be correct, these regulations help bridge the gap between an insurer’s reasonable expectations and actual coverage of a policy.   

[1] Ass’n of Cal. Ins. Cos.’ v. Jones, 2 Cal. 5th 376 (2017)