Timing of Loss Computation, Your Policy, and the California Insurance Code

CAPIA, the California Association of Public Insurance Adjusters, held its annual meeting last week, and I was fortunate enough to be given an opportunity to attend. Along with meeting some of the finest policyholder advocates in the state, there were multiple informational and thought-provoking presentations related to the industry.

One topic that garnered a handful of comments related to the timing of loss computation and its effect on policy benefits owed. Following a widespread disaster, such as a wildfire, the claim adjustment and rebuild timeline is likely to be stretched further than a standalone loss due to factors such as demand surge.¹ The more time that passes between the date of loss and the date of rebuild, the higher the chance of increased variance of rebuilding costs. This past year has provided us a prime example as we have seen the price of lumber climb to over $1,600 per thousand board feet in May, just to plummet back to previous levels by the end of the Summer months.

This begs the question, for insureds who lost their homes in a 2020 wildfire but are starting to rebuild in May 2021 – are they owed for the rebuild costs at the time of loss or the time of rebuild? Like the answer to so many other questions you’ll ask an insurance professional, it depends on the language of your policy.

Interplay of Policy Language and the California Insurance Code

It is important to remember that the language of your policy may not actually be in the policy itself. The California Insurance Code includes many provisions that set minimum standards for insurance policies in the state. Cal. Ins. Code § 2070, for instance, requires all fire policies provide substantially equivalent coverage or coverage more favorable than the standard fire policy form, which can be found at Cal. Ins. Code § 2071. Other insurance code statutes have a similar effect and are generally incorporated as follows:

All insurance policies issued in California are governed by the provisions of the Insurance Code. [Citation.] When insurance coverage is required by law, the statutory provisions are incorporated into the insurance contract. The obligations under an insurance policy are measured and defined by the pertinent statute, and the statute and the policy together form the insurance contract.²

Regarding timing of loss computation, Cal. Ins. Code § 2051(a) states the following:

Under an open policy, the measure of indemnity in fire insurance is the expense to the insured of replacing the thing lost or injured in its condition at the time of the injury, the expense being computed as of the time of the commencement of the fire. (emphasis added).

However, this statutory language often sets the low bar of what the policy must include, and an insurer can provide terms more favorable to an insured. Despite this, there was an observation raised at the CAPIA meeting that insurers were considering the language of Cal. Ins. Code § 2051(a) a mandate, with insureds being harmed by the loss computation at the time of loss instead of at the time of rebuild. However, this practice is contrary to how statutory terms should be integrated, as stated above, and that same court said, “[t]his general principle is subject to the condition that statutory provisions may not be read into a policy to the insured’s detriment, even where the statutory language appears mandatory.”³ This seemingly leaves the door open for a policyholder to argue that if the insurer does not include the “low bar” language in the policy that the loss be “computed as of the time of the commencement of the fire,” the standard contract interpretation canons will apply and the expense should be computed at the time of rebuild instead of the at the time of loss.

This is further supported by California courts’ interpretation of policy language that tracks the statute’s minimum standards. For example, in Safar v. Allstate Insurance Company,⁴ the court interpreted Cal. Ins. Code 2051 and stated,

Because this language mirrors that in the Policy, the interpretation and meaning of Section 2051 is instructive. Cf. Cheeks v. Cal. Fair Plan Ass’n, 61 Cal. App. 4th 423, 426 (1998) (where loss settlement provision was “equivalent” to the provisions in the standard form fire insurance policy, parties were “bound” by interpretations of the standard form). Neither party has argued that Section 2051 does not apply, or that a different construction of this language was intended.

Again, the door is seemingly open where the language in a policy does not track the statute and a party argues that a different construction than the minimum standard in Cal. Ins. Code 2051 should apply.

Recent Related Legislative Proposals

The issue related to timing of loss computation is not one being overlooked by insurers. This was apparent as legislation made its way through the California legislature last year pertaining to mandatory code upgrade coverage.

As a brief background, on February 19, 2020, California Assembly member Bloom introduced AB 2436. In part, it provided for mandatory code upgrades to be included in residential policies at 15% of Coverage A (later decreased to 10%) and notably included the following language in its digest, which was tracked closely in the body of the bill:

The bill would require building code upgrade coverage to be based on the increased costs associated with building ordinances and laws at the time of rebuilding, and not at the time of the loss. (emphasis added)

However, on May 19, 2020, an amended/substituted version was submitted, with notable differences. The corresponding substituted language, read as follows:

Building code upgrade coverage is provided based on the increased costs associated with building ordinances or laws in effect at the time of loss or rebuilding, up to policy limits for this coverage. The policy may denote restrictions, if any, on coverage for compliance with applicable building codes which take effect after the date of loss but prior to the issuance of required building permits. (emphasis added)

Although not related to primary stated coverages, these changes indicate that this is an issue insurers are privy to and understand the potential differences costs delays in rebuilding may have on policyholders. The language of this bill was ultimately enacted in AB 2756, containing the language allowing insurers to denote restrictions on compliance with applicable coverage. Stay tuned for more on this subject.
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¹ See e.g. How Demand Surge After Natural Disasters Impacts the Cost and Timing of Recovery.
² California Fair Plan Assn. v. Garnes (2017) 11 Cal.App.5th 1276, 1305, as modified on denial of reh’g (June 14, 2017) (citing Witkins)
³ Id.
⁴ Safar v. Allstate Ins. Co., No. 2:18-cv-04031, 2021 WL 4721895, at *8 (C.D. Cal. May 19, 2021).