It is the Insured’s Responsibility to Maintain Adequate Coverage Limits

Recently I’ve been approached by several public adjusters regarding coverage limit and underinsured issues with their clients’ insurance policies after a loss. Specifically, I’ve been asked if an insured has any recourse when the insured’s policy falls short, leaving the insured effectively underinsured.

My answer is always the same—it depends on the facts and the circumstances surrounding those facts. In California, insurance brokers and agents may be responsible for coverage issues on policies purchased through the broker or agent. However, these types of cases against brokers and agents are very specific as to whether or not the broker/agent provided the right type of coverage, understood the needs of the insured and explained the policy. In instances of straight underinsurance, typically, it is difficult to find the insurer or the broker/agents responsible.

Many California insurance policies have a “value protection clause” or an “inflation coverage provision”. The value protection clause automatically protects increased property values and enables the insurer to increase premiums accordingly. Usually, this means that premiums are adjusted yearly to reflect such things as the increased costs of construction. This type of clause is usually available as an endorsement to overcome code upgrade or replacement cost coverage limitations. See Fire Ins. Exch. v. Sup. Ct.(2004) 116 CA4th 446, 469). The “inflation coverage provision” allows the increase of policy limits as specified in the declarations page and may have a same or similar effect of a value protection clause. See Everett v. State Farm Gen. Ins. Co.(2008) 162 CA4th 649 at 660.

Despite these two provisions, the insurer is not bound to set “adequate” policy limits. It is up to the insured to determine sufficient coverage for his or her needs. Essentially, the California Courts recognize that many insureds take a calculated risk and simply do not purchase enough insurance to keep the annual premiums low and therefore cannot fault insurers or their representatives. As a consequence, it is good for all insureds to review their policies on a yearly basis to determine if the amount of coverage purchased meets their current needs.