What insurers need to know about California's fire, insurance overhaul

More than 9,000 wildfires burned across California in 2017 and destroyed over 10,800 structures. Once the dust settled, policymakers reassessed existing legislation to better protect property owners in the future, prompting significant changes for insurers.

These new bills both add to and further clarify existing policies that call upon insurance carriers to adjust their processes and evaluations. In doing so, they hope to give property owners a timely summary of their coverage and better prepare them for the costs associated with rebuilding. The handful of bills passed from July to September of this year could pave the way for renewed regulation in states facing an increased risk of natural disasters.

The fires in California also shed light on what can happen to reconstruction costs in heated markets during a natural disaster. Favorable interest rates, a healthy economy and low unemployment have driven up demand for housing along with associated costs. These conditions require carriers to recalculate reconstruction costs, preferably before a natural disaster occurs. Unfortunately, many carriers were not proactive in re-evaluating these costs, resulting in a large number of underinsured policyholders during the 2017 wildfire season. Carriers must recognize this growing issue to prevent additional property owners from facing underinsurance or the inability to rebuild after surviving a natural disaster.

Insurance-related regulations rises in California

In August, Governor Jerry Brown signed Assembly Bill (AB) 1797 into law to combat some of the issues revealed by the 2017 wildfire season. AB 1797, due to take effect on July 1, 2019, requires insurers to conduct a reconstruction cost estimate every other year. This bill aims to improve the information available to policyholders so they can make sound and informed decisions concerning how much coverage to buy. Carriers need to re-evaluate their replacement cost systems to stay within the law and to ensure they are providing accurate estimates promptly.

Lawmakers also addressed policyholders’ confusion regarding their coverage with two pieces of legislation. AB 1799, which Gov. Brown approved on July 9, 2018, entitles a property-owner to a copy of their entire policy. In several cases, property owners received just the declarations page without the rest of the policy language, making it difficult to recover after a total loss. The bill also enables the owner to receive an electronic copy even if they have not elected to do so in prior communications with the insurer. Similarly, the goal of AB 2229, set to take effect on January 1, 2020, is to make property owners aware of discounts provided by carriers and to motivate them to take proactive steps to improving fire safety such as removing brush or by installing fire-resistant building materials.

Both of these bills were designed to promote clear, definitive information between carriers and policyholders. Insurers can embrace this new legislation by enhancing internal processes and using technology that alleviates the burden of regularly updating reconstruction cost estimates. Insurers should also create informational materials that clearly outline how carriers generate policyholders’ limits and what they cover. Ultimately, carriers should allow property owners to take ownership of their coverage limits and not discourage customers who elect to increase their amounts.

AB 1800, approved on September 21, 2018, clarifies that an insurer must pay the full extended replacement cost and building code upgrade coverage, regardless of whether the policyholder chooses to rebuild at the same location, rebuild at a new site or purchase an already-built home. This bill increases a carrier’s responsibility for coverage. Another bill that significantly increases liability for carriers is AB 2594, also passed on September 21, 2018, extends a policyholder’s right to sue their insurer following a declared disaster from 12 months to 24 months.

Policymakers wrote AB 1875, another bill approved on September 21, 2018, in an attempt to ease confusion about extended replacement cost coverage and require insurers who do not provide at least 50 percent coverage above the policy limits to direct customers to another agent within the same zip code as the property. Some insurers will need to either change their policy or risk losing competitive advantage in the market. The bill also includes a provision creating a home insurance finder to help consumers locate possible residential property insurance options. Carriers who have denied coverage or canceled a homeowner’s policy are required to direct the customer to the California FAIR Plan website.

These policies not only increase liability for carriers but also create the potential for more direct competition among providers. This new regulatory environment underscores the importance of offering more accurate coverage rather than competing on lower policy prices. Getting customers in the door is only the beginning — keeping them happy and protecting them in the event of an unexpected disaster is critical, which is why greater transparency, communication and education for customers is so important.

A new insurance reality

With factors like changing building practices and an increase in housing development in areas prone to wildfire risk, predicting wildfire insured losses is difficult. However, today, carriers have access to risk models and tools to ensure they can provide the most accurate calculations and estimations to their customers.

California has always been a first mover when passing legislation that increases protection for property owners. Carriers can expect other states that experience natural disasters to be watching how this unfolds and follow suit.

These changes don’t have to be a heavy burden for insurers. With the right tools and systems in place, carriers can better prepare for changes that can impact the services carriers provide their policyholders.

Guy Kopperud (gkopperud@corelogic.com) is the industry solutions principal for CoreLogic.

See also: 10 things your clients need to know about wildfires