Replacement Cost Regulations Lawsuit


Two insurance company trade associations have filed suit here to overturn new California Department of Insurance (CDI) regulations establishing minimum standards insurers must follow in calculating “replacement cost” in homeowners’ policies. (See Replacement Cost Regulations story below for more information on the regulations.)

The action, filed June 8 by the Association of California Insurance Companies (ACIC) and the Personal Insurance Federation of California (PIFC) against Insurance Commissioner Dave Jones in Los Angeles County Superior Court, contends does not have the statutory authority to impose mandatory underwriting criteria of the kind required by the regulations, which take effect June 27.

Pursuant to those regulations, any insurance company selling homeowners’ insurance policies providing “replacement cost” coverage are required to calculate that replacement cost using mandatory criteria.  In addition, insurers or their broker-agents are required to provide detailed documentation showing how the mandatory factors were applied to produce the replacement cost estimate.

By June 27, all broker-agents who sell residential property insurance policies are required to have completed a one-time-only three-hour continuing education (CE) class on estimating replacement cost, and insurance companies are required to provide written training to their broker-agents on how to comply with whatever methodology the insurer has selected to conform to the new requirements.

The ACIC litigation does not challenge the Commissioner’s authority to impose the CE requirement; that requirement is expressly authorized by Insurance Code Section 1749.85.  But it does challenge the authority for the requirement that insurance companies adhere to one mandatory system for calculating “replacement cost.”

“Perhaps in recognition that he has no authority to regulate underwriting […],” ACIC said in its Complaint, “the Commissioner contends that he is authorized to mandate a single, detailed method for estimating replacement costs for homeowner insurance by a statutory provision that prohibits insurance companies from making untrue, deceptive, or misleading statements about the business of insurance.

“The Commissioner’s premise is that only one way exists to prepare an estimate of the replacement cost of a house and that any deviation from any of the multi-faceted details set out in [the regulations] results in a faulty estimate that is misleading when communicated to an insured or an applicant for insurance.  The adoption of [this requirement] is a transparent attempt to impose on all homeowner insurers a single method—the Commissioner’s method—for preparing an estimate of the replacement cost of a house.  The Commissioner […] lacks authority to impose such a method; hence he atetempts to circumvent the absence of authority by characterizing any estimating methodology other than his as a misleading statement.  His attempt fails. The statute (regulating unfair and deceptive statements in the business of insurance) does not provide authority for (the regulation dictating replacement cost methodology).”

IBA West General Counsel Steve Young said IBA West was supportive of what the Department of Insurance was trying to accomplish with its regulations, but also shared the concern articulated by the trade associations in the litigation that the Department of Insurance may have grossly exceeded its statutory authority.

To review the Complaint, click here