April 27, 2018

 We all know about the historic wildfires affecting the American west, particularly California, in 2017. Many insurance issues arose from those events. Insuring to value was one, where once losses were being settled many insureds discovered much to their dismay that they did not have enough coverage to replace their dwelling or contents. There are many reasons why an insured may be underinsured which we will not detail here; The Ever Present Insurance to Value Issue provides a discussion on underinsurance. The fact is that many affected insureds discovered after losing all their possessions that they did not have enough coverage to rebuild.

 The standard policy language requires, in event of a loss, an insured is to provide an “inventory of damaged personal property showing the quantity, description, actual cash value and amount of loss. Attach all bills, receipts and related documents that justify the figures in the inventory.” This is standard wording from the ISO HO 00 03, and most forms use similar or identical language. Further along in the policy is a requirement to send to the carrier within 60 days of its request a signed, sworn proof of loss that includes the inventory as described. This is fine for many losses, but when the house has been burned to the ground, creating such inventory, and providing documentation and receipts, is often impossible. Most insureds do not have inventories of their property that are kept offsite for safekeeping, if they have inventories at all.

 Carriers have been holding insureds to the standard policy provisions. Inventories are important to prevent insurance fraud, an enormous issue for the industry that, according to the FBI, costs an estimated $400 billion a year. False or exaggerated claims during disasters are a known source of fraud. An area is devastated, adjusters are swamped, and deceitful insureds see it as an opportunity to take advantage of the carrier.

 Because of the underinsurance and enforcement of standard policy language, many insureds have complained to the insurance department, and Senators McGuire and Dodd have both proposed bills to help insureds through these disasters. Senator McGuire's bill, SB 897 addresses payment of additional living expenses and a grace period for premium payments. This is not a problem. However, for losses related to a declared state of emergency, the bill would require an insurer to accept an inventory in any reasonable form, allow grouping of certain items, and offer a payment of no less than 80% of the policy limit for contents without an itemized claim. The carrier is required to provide an advanced payment of no less than 25% of the policy limit for contents without the completion of an inventory. The insurer is to advise that the insured may make a further claim for benefits by completing a full inventory. This leaves carriers open for extensive fraud and padding of claims; without having to verify that an insured actually owned certain property, insureds can claim the best furniture, clothes, china, and other possessions and ensure they use the full amount of policy limits.

 The Dodd bill, SB 894 addresses renewals and time to collect replacement cost, but allows the insureds who have suffered a loss due to a declared emergency to combine policy limits for the dwelling, other structures, contents, and additional living expenses and use the combined amounts for any of the covered purposes. If an insured has no other structures, but has exceeded the limits for personal property, then the insured could use the amount for other structures to cover personal property. This allows insureds to be underinsured and still be compensated for some of the loss. These bills apply only in case of disasters, and are an attempt to do right by the insureds who paid their premiums and at the time of a disaster lost all their property only to discover that they were significantly uninsured. With predicted increases in catastrophic losses over time, the commissioner and senators are trying to ensure homeowners have some peace of mind in similar events.

 Unfortunately, the combination of these bills can be detrimental to the industry and make insurance fraud far more likely. With insureds not having to provide inventories, and being allowed to use all the limits however they like, it becomes incredibly easy for insureds to falsify the extent of their loss.

 The insurance industry strongly opposes these bills because of the significant potential for fraud and artificially inflated claim payments that will have to be paid that violate the policy language and standard industry procedures. When the underinsurance issue became apparent, carriers indicated that the insureds selected the amount of coverage they had. Insureds claimed that the carriers led them to believe that they were properly covered for any loss.

 The bills passed the Senate Insurance Committee yesterday. The bills next go to the full Senate for a floor vote no later than June 1. It's easy to understand Commissioner Jones' position in trying to assist insureds. It's also easy to understand the insurance industry position. It will be interesting to see how this is ultimately resolved.

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