Rules for Insurers – Because Insurance isn’t So Sure

In the wake of the Montecito Mudslide, most property owners first turned to their insurance companies for funds, and most of the insurers have responded well. A few have not, and some others are still trying to figure out how to handle the claims. In some cases, insurance adjusters from other states have landed in California to “help.”

Usually it takes months (which have now passed) for homeowners to realize that an insurer is not acting fairly or (gasp!) trying to short-change them. And even if insurers pay out all the policy benefits (money) that they owe to homeowners, there is sometimes not enough to fully compensate for the loss. In other words, you might be underinsured.

This week, I’ll dispense with the legal theories and offer a quick practical guide to some of the insurance issues you might face.

Issue 1. Not enough insurance under the policy you bought. Your most likely remedy is to file an inverse condemnation lawsuit against Edison. Inverse condemnation, which I’ve discussed in earlier articles, is a legal theory that entitles the property owner to “just compensation” under the California and United States Constitutions when government or a utility like Edison damages or “takes” private property for a public use. It’s the flip side of eminent domain: if the public takes your property, then the public needs to pay. It is a simple socialization of your loss. The lawsuits are underway (although there’s still time to file), and the Santa Barbara County Superior Court has transferred all the pending lawsuits against Edison to the Los Angeles County Superior Court (a few blocks from my office on Wilshire Boulevard).

Issue 2. Uninformed out-of-state insurance adjusters. The insurance commissioner authorized non-California licensed claims adjusters to adjust claims in disaster areas if they conform to the California Insurance Code and other insurance laws. But some of the out-of-staters are in unfamiliar territory and need to be educated. For example, various adjusters have told homeowners who suffered a total loss that they had only six or 12 months to collect full replacement cost to rebuild. But they are wrong. Under California law, no insurance policy may have a time limit of fewer than 12 months to rebuild and collect replacement cost. And after a State of Emergency, this time period can be no fewer than 24 months. See Insurance Code section 2051.5(b)(1).

Issue 3. Time limit to collect “Additional Living Expenses”. Your time limit after a State of Emergency (Government Code section 8558) for additional living expenses is generally 24 months. Insurance Code section 2051.5(b)(2).

Issue 4. Rebuilding in current location or replacing in a new location. As a general matter, homeowners may use their replacement cost insurance coverage to (1) rebuild at the current location, (2) rebuild on a new location, or (3) purchase an already built home at a new location. If you suffered a total loss of your home, no insurance policy can limit or deny you payment of the replacement cost if you decide to rebuild or replace somewhere else. You are entitled to the “extended” or “guaranteed” portion of your replacement cost insurance even if you rebuild or replace elsewhere. Insurance Code section 2051.5(c).

Issue 5. Adjusters playing “musical chairs.” If the insurance company assigns new adjusters to be primarily responsible for your claim, the insurer must provide you with a written status report that includes a summary of any decisions or actions related to the disposition of your claim, including the amount of losses and the retention of design of construction professionals. This is important because insurers tend to hire experts (structural engineers and contractors) who know who is buttering their bread – meaning they have a bias for the insurer to low-ball your compensation – and you’ll need to keep on top of their activities. Insurance Code section 2071.

Issue 6. Cancellation of insurance after total loss of your home. The insurer cannot cancel coverage while the primary insured structure (usually the main house) is being rebuilt, with some exceptions contained in Insurance Code section 676. The insurer cannot use the fact that the primary insured structure is in damaged condition as the sole basis for a decision to cancel the policy. Insurance Code section 675.

Issue 7. Adjustment of policy limits on renewal. If you haven’t completed reconstruction of the primary insured structure by the time of policy renewal, the insurer must adjust the limits and coverages, write an additional policy, or attach an endorsement to the policy that reflects the change, if any, to your exposure to loss. Insurance Code section 675.1(a).

Issue 8. Non-renewal after a declared disaster. With a few exceptions, the insurance company is required to offer, at least once, to renew the insurance policy if the total loss to the primary insured structure was caused by a disaster that wasn’t at least partly your fault.

This last issue is a significant concern. What happens when you’ve rebuilt your home and your insurer won’t give you insurance? It can affect your ability to get a mortgage or sell your home. Who would buy an uninsurable home? That would significantly reduce the value of your property, and who is going to pay for that? Hint: Thomas Alva ___________. Answer: See Issue 1, above.

Finally, California law holds insurers to a high standard and while some have acted admirably, others are not shy about trying to shirk their obligations. If you have problems with your insurer, it might pay to have a lawyer write some letters for you. And if that doesn’t work, the courts exist to help you.

This is the 11th in a series of articles about legal issues arising out of the Montecito Mudslides. To read the other articles, go to MontecitoJournal.net or my own website, cal-landslidelaw.com, or email me at blum@blumcollins.com.