CDI Proposes Final New "Replacement Cost" Regulations

The California Department of Insurance on Wednesday filed revised proposed regulations with the California Office of Administrative Law (OAL) that, if approved, would establish new mandatory criteria for producing "replacement cost" calculations in homeowners' insurance policies.

The proposed regulations, intended by Insurance Commissioner Steve Poizner to reduce what he has described as a chronic problem of "underinsurance," would require insurers and broker-agents to provide significant new documentation to policyholders on how their replacement cost calculation was determined.

The regulations would also implement a California Insurance Code provision from 2005, in Section 1749.85, that requires broker-agents selling dwelling coverages to complete a one-time continuing education (CE) course "in proper methods of estimating the replacement value of structures, and of explaining various levels of coverage under a homeowners' insurance policy."

Public comment on the proposed revisions is being accepted for 15 days; thereafter, OAL will determine whether the proposed regulations meet California Government Code standards for promulgation.

The proposed regulations have been controversial within, and opposed by most of, the insurance industry because of concerns that the CE law arguably does not authorize the Commissioner to mandate mandatory rules for insurer calculation of replacement costs.  CDI lawyers have attempted to address that concern by tying the proposed new rules to other statutes that prohibit the making of false or deceptive statements in the business of insurance--and declaring that a replacement cost calculation is deceptive if it is not based on the new requirements.

Unlike other industry groups, IBA West has previously expressed "qualified" support for the Commissioner's proposals.

"We firmly believe that enhanced disclosure of how replacement cost calculations are made is a means to insulate broker-agents from liability for insufficient replacement values," said IBA West General Counsel Steve Young.  "These regulations affirm the general rule that consumers, and not producers, need to decide how much insurance they need and want to purchase, and the more information consumers have in that regard, the better.

"In addition," Young said," we believe that better disclosure coupled with standardization could have the effect leveling the playing field between independent agency insurers and captive agency insurers."

IBA West has had extensive discussions on these proposed regulations over the last year with several senior members of the Commissioner's staff.  As a direct result, the proposed regulations (in Section 2695.183(k)) include a provision that exempts broker-agents from liability so long as they comply with whatever instructions/training
insurers provide.

The following is a link to the text of the proposed regulations. Click here to view the background information CDI filed Oct. 27 with OAL.