Emergency-specific property insurance rules: Key state laws for wildfire recovery

In the wake of the destructive fires that raged across the Southern California foothills, property owners will soon need to think about rebuilding or repairing their homes. For most, the first step will be filing claims under their property insurance policies. Whether they have private insurance or a policy through the California FAIR Plan, policyholders should be aware of significant California laws and guidance from the Department of Insurance that may impact their rights to recovery.

One of the most important rules applies to coverage limitations. Virtually all policies limit coverage by category, including dwelling, other structures, personal property, and loss of use. Under normal circumstances, these coverages cannot be combined to produce an increased limit. However, under Cal. Ins. Code § 10103.7(a), policyholders may combine dwelling and other structures coverage limits if their property was damaged during a declared state of emergency. The community-leveling scale of the recent LA wildfires will strain materials and labor supplies, likely increasing the cost of rebuilds, but this state-of-emergency rule should provide some relief.

As for personal property, another emergency-specific statute should ease the burden on insureds. Under normal circumstances, insurers may require policyholders to demonstrate their personal property losses with itemized lists. However, in the event of a total loss during a state of emergency, insurers must release 30% of the personal property coverage to the insureds without itemization, which can be supplemented by further demonstration of loss. See id. §§ 10103.7(b), 8558. In addition, insurers must not require insureds to use company-specific inventory forms and must allow insureds to group items by category like clothing or electronics, rather than listing individual items. See Cal. Ins. Code §§ 2061(a), 8558. Finally, the insurer must grant the insureds at least 36 months from the date of first payment to submit claims for contents. Id. § 2051(b)(1-2).

Significant rules also impact loss of use coverage, often called Alternative Living Expense (ALE) coverage. Most notably, following a loss during a state of emergency, insurers must issue advance payments of no less than four months of living expenses. Id. § 2061(a). This is a substantial departure from non-emergent claims where payments are typically issued on an as-incurred basis. Moreover, while most policies limit loss of use coverage to 12-months, that period is statutorily extended to 24-months, plus an additional 12-months upon a showing of delays despite reasonable diligence. Id. § 2060(b)(1).

Naturally, some homeowners will be wary of rebuilding their homes in place, whether for fear of a repeat loss or the hassle of a massive construction project. Helpfully, California protects their rights to rebuild in a different location, or to purchase a new policy entirely, subject to their policy limits. Id. § 2051.5(c)(1). A homeowner who elects to build elsewhere or purchase a new home can still collect their code-upgrade coverage and their replacement cost coverage and will not face a deduction for the difference in land value. Id. While this rule is not limited to declared emergencies, it will likely see increased usage in the coming months and years as homeowners flee fire-prone areas.

Given the much-maligned departure of insurers from the state in recent years, many homeowners may fear policy cancelation. However, a few sections of the California Insurance Code should allay some concerns. Specifically, the Code prohibits carriers from canceling a policy within one year of a total loss, which extends to two years if the loss was due to a declared disaster. Id. § 675.1(a)(2-3). And, for those policyholders in zip codes within or adjacent to fire perimeters, carriers may not cancel policies for 12 months solely because they were in a fire zone. Id. § 675.1(b)(1)

For those homeowners who find themselves uninsured or underinsured, state and federal resources will be available to offset their losses. While the details of those programs are still emerging, it would be wise for such homeowners to file claims for disaster relief with FEMA. Those claims will operate like typical insurance claims, to some extent, likely requiring site visits from FEMA representatives, coverage determinations, and some claim negotiation.

Finally, for anyone preparing to file insurance claims, it is important to note that insurance claims are negotiable transactions up to policy limits and advocacy is critical. The insurers--like their insureds--face spectacular financial burdens and may be understaffed for the incoming deluge of claims. Moreover, many adjusters may not be familiar with these rules, so it is likely that many policyholders will face significant challenges in their efforts to obtain full coverage. Therefore, it would be wise to document losses as thoroughly as possible. Even after the first wave of insurance claims subsides, litigation will continue for many years. Good record-keeping may prove essential to obtaining complete relief.