Source: https://www.plaintiffmagazine.com/recent-issues/item/wildfire-victims-insurance-fight
Timestamp: 2019-04-20 18:22:10+00:00

Document:
The experiences of victims of the 2017 California wildfires has again revealed a simple truth: No one ever calls their homeowners insurance agent and asks to be underinsured. Surveys are showing that to the surprise of the victims, a significant majority are substantially underinsured. The post-fire revelation that they are seriously underinsured is a second devastation for these fire victims. According to the California Department of Insurance, insurers have received nearly 45,000 insurance claims totaling more than $11.79 billion in losses from the devastating wildfires that burned across California in October and December 2017 damaging and destroying more than 32,000 homes. The tally from the more recent 2018 wildfires is ongoing.
The California Supreme Court recently stated that wildfires are a fact of life in California. The court noted in the years prior to 2017, “Recommended coverage nonetheless understated what was actually needed to rebuild the insured’s home over 80 percent of the time. Even when the homeowner had purchased extended replacement-cost coverage, 57 percent of these policies still underinsured their policyholders relative to the cost of rebuilding their homes.” (Association of California Insurance Companies v. Jones (2017) 2 Cal.5th 376.) The recent fires show the problem is continuing. The San Francisco Chronicle reported that consumer group United Policyholders surveyed 2017 North Bay fire victims and found 66 percent said their dwelling was underinsured.
The California Department of Insurance has attempted to address the ongoing underinsurance crisis by drafting regulations governing replacement- cost values given homeowners when they purchase or renew policies. The fight over requiring more accurate estimates was at the heart of the Jones decision. The Supreme Court, citing legislative analysis, found, that, “In case after case, California residents whose homes had been damaged or destroyed explained why they had believed their homeowners insurance would enable them to rebuild their dwellings. Once they presented their claim to their insurance company, though, these homeowners discovered that their coverage fell well short of what they needed – sometimes by hundreds of thousands of dollars – to rebuild their homes.” (Jones at 382.) The Supreme Court went on to cite a Department of Insurance review that noted that the serious ongoing underinsurance problem existed even though the policy limits in question matched what was indicated by the insurer’s own coverage calculator.
As a result of this ongoing problem, the Department of Insurance issued a regulation governing replacement-cost calculations. The replacement-cost regulation was codified at California Code of Regulations, title 10, section 2695.183.
Homeowners do, however, have some enforceable rights that they can personally apply to underinsurance problems. Insurance agents have an obligation to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. Agents who transmit mistaken information or fail to follow instructions can open themselves and the insurer up for liability. Issues that should be reviewed include whether the agent promised to obtain additional or different insurance prior to the disaster. Another issue is whether the agent provided the insured with a broader interpretation of the policy than the language contained in the policy form. Marketing material or cover letters that accompany the policy should be carefully reviewed as they may contain descriptions of coverage that differ from the policy’s language.
An agent’s failure to deliver the agreed-upon coverage may constitute actionable negligence. The failure can be the proximate cause of an injury claim applied against both the agent and the insurance company. One basis for holding the insurance company responsible for the promises of the agent is the doctrine of ostensible authority. Ostensible authority is authority that “[a] principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess.” (Civ. Code, § 2316 (Deerings 2015).) California insurance policies have for the most part eliminated full replacement-cost coverage and substituted actual cash value or replacement cost with caps. The ostensible authority doctrine, however, can sometimes be used to bind an insurance company to full replacement-cost coverage. One such example is where an agent makes promises that an insured later finds are not contained in the written language of the policy.
Coverage problems also occur because of conflicts between coverage language and exclusions. Insurance policies on homes destroyed by mudslides following the 2017 wildfires illustrate this conflict. Homeowner policies cover destruction caused by fire. The same policies exclude coverage for damage due to earth movement or mudslides. Some commentators expressed concern that there would be no coverage for homeowners who lost their homes in the slides that followed the wildfires because of the earth movement exclusion. California law however does not support such a summary denial of coverage.
When there are two causes to a loss and one is covered and the other is not, courts will look to the most important cause, the so called “efficient proximate cause” of the loss to determine whether or not there is coverage. (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395.) In simplified terms, if the chain of causation is a line of dominos that has fallen, California looks to see which coverage domino set the rest of the dominos in motion.
In California, homeowners and insurers must evaluate the “efficient proximate cause” of the loss. When a mudslide occurs the winter after a major fire has denuded the hillside, the question is whether the loss is due to the mudslide (excluded under the earth movement exclusion), or is it due to the fire that caused the vegetation to be removed and the soil to become vulnerable? The Court of Appeals addressed this issue in Howell v. State Farm Fire & Casualty Co. (1990) 218 Cal.App.3d 1446 and concluded in a “Garvey” type analysis that the insurer may not exclude coverage when a covered peril is the efficient proximate cause of loss even though an excluded peril has contributed to or is necessary for the loss.
It is also important for the homeowner to prepare a thorough reconstruction cost estimate for the repair of the loss. Initial insurance company-generated estimates are frequently too low. One reason for the low estimates may be their source. The companies that own the estimating program used by most insurers have long-standing ties to and were originally owned by the major insurers.
The Xactmate construction estimator is used by the majority of insurance adjustors. The parent of Xactmate is Xactware. The parent of Xactware is Verisk Analytics, Inc. Verisk is also the parent of Insurance Services Office, Inc. (ISO) which publishes standardized policy forms used by many insurance companies. Verisk raised $1.9 billion in a 2009 IPO for several of the large casualty and property insurance companies including AIG, Travelers and Hartford. According to Verisk, more than 80 percent of insurance repair contractors and service providers with computerized estimating systems use Xactware pricing data.
Often the standardized valuation models fail to consider specific problems or issues in a homeowner’s claim. For example, following mass disasters, such as wild fires, there may be a shortage of labor and materials and a strong demand (and associated higher labor rate) for services. Xactware’s August 2018 price list updates for more than 460 regions in the United States and Canada available on its website notes, “Since actual market prices can vary and change rapidly, and since many factors can affect the cost of a project (including – but not limited to – labor, equipment, and material costs as well as the rates and application of sales tax), we strongly recommend customers monitor their local markets for any such changes and adjust their estimate pricing as deemed appropriate.” An interesting question is whether the material and labor costs used in pre- and post-fire computer estimating models carefully followed the advice to monitor the local market and whether the models used conformed to the standards required by the California Insurance Department for replacement-cost estimating.
A competent and trusted contractor or architect estimating on behalf of the homeowner can help assure that each component is thoroughly considered and that every necessary component and specification is included in the reconstruction plan. When creating a post-disaster replacement-cost estimate, it is important to carefully select the same construction materials and finishes that existed in the home prior to the disaster. Reconstruction estimates have hundreds or thousands of individual components.
An additional pitfall for homeowners is the deduction for physical depreciation that insurers take when calculating their initial actual cash value payment. Most insurance policies provide that the homeowner receives the actual cash value of a loss initially, and only receives more than that if and when they actually repair or replace the damaged or destroyed property. The initial actual cash value payment can be critical in either paying off or otherwise dealing with a mortgage holder. It can make a significant difference in assisting a homeowner with repair or replacement of their home.
When paying the actual cash value on a component, such as a roof, the insurer may look at the remaining useful life of the component and make a deduction to adjust for the amount of wear that has already occurred.
Furthermore, depreciation cannot be based solely on age. Insurance Code Section 2051 requires consideration of condition. An insurer may not depreciate structural components that are not normally repaired and replaced during the useful life of a structure. (c.f. Alexander v. Farmers Insurance Company, Inc. (2013) 219 Cal.App.4th 1183, 1197.
Given the above problems with underinsurance, California does have in place the “made-whole rule.” Where, a homeowner was underinsured or, for other reasons, was not fully “made whole” through their insurance policy, that insured can sue for recovery from the third-party tortfeasor. An insurance company may not enforce a right to subrogation until the insured has been fully compensated, in other words, made whole. (Progressive West Ins. Co. v. Yolo County Superior Court (2005) 135 Cal.App.4th 263, 274. Being aware of and pointing out this protection can oftentimes prevent an insurance company from engaging in overly aggressive subrogation tactics at the insured’s expense.
Getting fair compensation for a homeowner following destruction of their home is complicated by the crushing emotional and financial loss they have suffered. It is critical that the issues mentioned above are carefully reviewed to provide the best path for recovery.

References: v. 
 § 2316
 v. 
 v. 
 v. 
 v.