(a) The curriculum committee shall, in 2006, make recommendations to the commissioner to instruct fire and casualty broker-agents and personal lines broker-agents and applicants for fire and casualty broker-agent and personal lines broker-agent licenses in proper methods of estimating the replacement value of structures, and of explaining various levels of coverage under a homeowners' insurance policy. Each provider of courses based upon this curriculum shall submit its course content to the commissioner for approval.
(b) A person who is not an insurer underwriter or actuary or other person identified by the insurer, or a licensed fire and casualty broker-agent, personal lines broker-agent, contractor, or architect shall not estimate the replacement value of a structure, or explain various levels of coverage under a homeowners' insurance policy.
(c) This section shall not be construed to preclude licensed appraisers, contractors and architects from estimating replacement value of a structure.
(d) However, if the Department of Insurance, by adopting a regulation, establishes standards for the calculation of estimates of replacement value of a structure by appraisers, then on and after the effective date of the regulation a real estate appraiser's estimate of replacement value shall be calculated in accordance with the regulation.
The policy underlying the proposed action is to assure that homeowners receive from Department licensees more accurate replacement value estimates regarding their insured structures. The Department and the California Legislature received a significant number of complaints by homeowners who lost their residences in the Southern California wildfires of 2003. Since 2003, California has experienced significant wildfires in 2007 and 2008 leading to the loss of a high number of residential structures. After each of these fires, fire survivors complained about problems including their experience that after the fire they learned that the replacement value estimates made in setting coverage limits for their homes was too low, causing underinsurance issues to arise during efforts to rebuild or replace their residences.
The significance of the replacement value being accurate is particularly important given that other than a limited number of homeowners who qualify for guaranteed replacement coverage offered by only a small number of insurers, the vast majority of homeowners have one of three kinds1 of insurance coverage on their home: Limited Replacement Cost Coverage With an Additional Percentage which pays replacement costs up to a specified amount above the policy limit; Limited Replacement Cost Coverage With No Additional Percentage which pays replacement costs up to policy limit only; Actual Cash Value Coverage which pays the fair market value of the dwelling at the time of the loss, or the cost to repair, rebuild, or replace the damaged or destroyed dwelling with like kind and quality construction up to the policy limit. The necessity of having an accurate estimated replacement value that is updated regularly is paramount. The use by agents, brokers and insurers of replacement value estimation software that does not take into consideration factors including costs to replace the foundation of the structure, debris removal and demolition expenses, overhead and profit, engineering reports, and architect's plans is one source of the underinsurance problem.
The regulation clarifies the terms "replacement value" and "replacement cost" to create a more consistent, comprehensive and accurate replacement cost calculation; sets forth training standards for agents and brokers who sell homeowner's insurance; requires that licensees follow certain standards when using replacement cost calculators; and establishes record-keeping requirements. The regulations also impose certain requirements on other kinds of construction costs estimates.
Further, Insurance Code section 790 et seq., the Unfair Practices Act, provides that certain acts are defined as unfair and deceptive. The regulation makes it clear that when setting, recommending or communicating about a policy limit on a homeowners' insurance policy to characterize using the word "replace" or "replacement" any estimate of construction costs not comporting with the applicable provision of the regulation will constitute making a statement with respect to the business of insurance which is misleading and which by the exercise of reasonable care should be known to be misleading, pursuant to Insurance Code section 790.03.
The proposed regulations provide specific definitions applicable to the regulation and to Insurance Code Section 1749.85. They provide the recommended curricula required under Insurance Code 1749.85. The proposed regulations will establish the course requirements and the training on specific subjects, including how to estimate replacement cost and construction costs, necessary for those seeking to sell dwelling fire or homeowners' insurance.
The proposed regulations establish new record keeping requirements for those licensees who calculate estimated replacement cost and construction costs.
The proposed regulations provide standards for real estate appraisers who want to estimate replacement value for homeowner insurance policy purposes.
The proposed regulations provide standards to be used when a licensee estimates replacement cost and construction costs. These standards require that certain components and features be considered in estimating replacement cost or constructions costs, mandating that cost calculators factor in the costs of each feature and component. They require that licensees advise consumers if all of the features and components that are defined to make up a replacement cost estimate are not used in the calculation. If all of the components are not considered, the licensee may not call the calculation an estimated replacement cost. The regulations impose various restrictions on and requirements for construction cost estimates, including those not qualifying as a replacement cost estimate, as defined. Further, the regulations require that licensees should regularly evaluate their methods for estimating replacement cost and construction costs to ensure that these estimates are up-to-date.
