Opinion ID: 4117706
Heading Depth: 2
Heading Rank: 1

Heading: The Replacement Cost Regulation

Text: The replacement cost regulation under review here is codified at California Code of Regulations, title 10, section 2695.183 (the Regulation; further regulation references are to tit. 10 of this code). The Regulation does not require an insurer to set or recommend a policy limit or to provide an estimate of the cost to rebuild or replace a home. (Cal. Code Regs., § 2695.183, subd. (m).) But if the insurer does choose to opine on replacement costs, the Regulation specifies how that estimate is to be calculated and communicated. In particular, it bars the insurer from communicating a replacement cost estimate in connection with an application for or renewal of a homeowners‘ insurance policy ―unless the requirements and standards set forth in subdivisions (a) through (e) below are met.‖ (Cal. Code Regs., § 2695.183.) Subdivision (a) requires a replacement cost estimate to account for ―the expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety,‖ which must include ―at least‖ the cost of labor, building materials, and supplies; overhead and profit; the cost of demolition and debris removal; and the cost of permits and architect‘s plans. (Reg., § 2695.183, subd. (a)(1)-(4).) The estimate must also consider ―components and features of the insured structure,‖ including 11 specific items relevant to a typical rebuild, such as the type of foundation and framing, the roofing and siding materials, the square footage and number of stories, and the structure‘s geographic location. (Id., subd. (a)(5)(A)- (K).) The estimate must be based on ―the cost to rebuild or replace the structure taking into account the cost to reconstruct the single property being evaluated‖ — and not the cost to build multiple or tract dwellings. (Cal. Code Regs., § 2695.183, subd. (b).) The estimate shall exclude the resale value of the land or the amount of any outstanding loan balance, and shall not include a deduction for 5 physical depreciation. (Id., subds. (c), (d); see Ins. Code, § 2051.5, subd. (a) [―replacement cost . . . is the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less‖].) At least annually, the insurer must ―take reasonable steps‖ to verify that estimate methods are updated to reflect changes in the costs of rebuilding, including changes in the costs of labor, building materials, and supplies, taking into account a structure‘s geographic location. (Cal. Code Regs., § 2695.183, subd. (e).)1 1 The Regulation provides in pertinent part: ―No licensee shall communicate an estimate of replacement cost to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, unless the requirements and standards set forth in subdivisions (a) through (e) below are met: ―(a) The estimate of replacement cost shall include the expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety, including at least the following: ―(1) Cost of labor, building materials and supplies; ―(2) Overhead and profit; ―(3) Cost of demolition and debris removal; ―(4) Cost of permits and architect's plans; and ―(5) Consideration of components and features of the insured structure, including at least the following: ―(A) Type of foundation; ―(B) Type of frame; ―(C) Roofing materials and type of roof; ―(D) Siding materials and type of siding; ―(E) Whether the structure is located on a slope; ―(F) The square footage of the living space; ―(G) Geographic location of property; ―(H) Number of stories and any nonstandard wall heights; ―(I) Materials used in, and generic types of, interior features and finishes, such as, where applicable, the type of heating and air conditioning system, walls, flooring, ceiling, fireplaces, kitchen, and bath(s); ―(J) Age of the structure or the year it was built; and ―(K) Size and type of attached garage. (footnote continued on next page) 6 (footnote continued from previous page) ―(b) The estimate of replacement cost shall be based on an estimate of the cost to rebuild or replace the structure taking into account the cost to reconstruct the single property being evaluated, as compared to the cost to build multiple, or tract, dwellings. ―(c) The estimate of replacement cost shall not be based upon the resale value of the land, or upon the amount or outstanding balance of any loan. ―(d) The estimate of replacement cost shall not include a deduction for physical depreciation. ―(e) The licensee shall no less frequently than annually take reasonable steps to verify that the sources and methods used to generate the estimate of replacement cost are kept current to reflect changes in the costs of reconstruction and rebuilding, including changes in labor, building materials, and supplies, based upon the geographic location of the insured structure. The estimate of replacement cost shall be created using such reasonably current sources and methods. ―(f) Except as provided in subdivision (k) of this Section 2695.183, the provisions of this article are binding upon licensees, notwithstanding the fact that information, data or statistical methods used or relied upon by a licensee to estimate replacement cost may be obtained through a third party source. Any and all information received by the Department pursuant to this article shall be accorded the degree of confidential treatment required by section 735.5 of the Insurance Code or Chapter 2 of Part 1 of Division 3 of Title 2 of the Government Code, commencing at section 11180. ―(g)(1) If a licensee communicates an estimate of replacement cost to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, the licensee must provide a copy of the estimate of replacement cost to the applicant or insured at the time the estimate is communicated. However, in the event the estimate of replacement cost is communicated by a licensee to an applicant to whom the licensee determines an insurance policy shall not be issued, then the licensee is not required pursuant to the preceding sentence to provide a copy of the estimate of replacement cost. In the event the estimate of replacement cost is communicated by telephone to an insured, the copy of the estimate shall be mailed to the insured no later than three business days after the time of the telephone conversation. In the event the estimate of replacement cost is communicated by telephone to an applicant, the copy of the estimate shall be mailed to the applicant no later than three business days after the applicant agrees to purchase the coverage. (footnote continued on next page) 7 (footnote continued from previous page) ―(2) An estimate of replacement cost provided in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis must itemize the projected cost for each element specified in paragraphs (a)(1) through (a)(4), and shall identify the assumptions made for each of the components and features listed in paragraph (a)(5), of this Section 2695.183. ―(h) If an estimate of replacement cost is updated or revised by, or on behalf of, the licensee and the revised estimate of replacement cost is communicated to the applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis, the licensee shall provide a copy of the revised or updated estimate of replacement cost to the applicant as provided in paragraph (g)(1) of this Section 2695.183, or to the insured simultaneously with the renewal offer, as the case may be. This subdivision (h) shall not apply when the update or revision to the estimate of replacement cost or the policy limit results solely from the application of an inflationary provision in a policy or an inflation factor. This subdivision (h) shall not obligate a licensee to recalculate an estimate of replacement cost on an annual basis. ―(i) Licensees shall maintain (1) a record of the information supplied by the applicant or insured that is used by the licensee to generate the estimate of replacement cost, and (2) a copy of any estimate of replacement cost supplied to the applicant or insured pursuant to paragraph (g)(1), or subdivision (h), of this Section 2695.183. If a policy is issued, these records and copies shall be maintained for the entire term of the insurance policy or the duration of coverage, whichever terminates later in time, and for five years thereafter. However, if the estimate of replacement cost is provided to an applicant to whom an insurance policy is never issued, the records and copies referred to in the first sentence of this subdivision (i) shall be maintained for the period of time the licensee ordinarily maintains applicant files in the normal course of business, provided that such period of time shall be at least sufficient to ensure that the licensee is able to comply with the provisions of this subdivision in the event the policy is issued to the applicant. ―(j) To communicate an estimate of replacement value not comporting with subdivisions (a) through (e) of this Section 2695.183 to an applicant or insured in connection with an application for or renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis constitutes making a statement with respect to the business of insurance which is misleading and which by the (footnote continued on next page) 8