Last month, California passed legislation that requires residential property insurers to take specific measures to review the estimated cost of rebuilding or repairing structures insured under residential property insurance policies. Assembly Bill 1797 added section 10103.4 to California’s Insurance Code. With certain, limited exceptions, under the new statute, residential property insurers must, at least biennially, at the time of renewal of a policy, offer to provide the insured an updated estimate of the cost to rebuild or replace the insured structures, or offer updated coverage limits based on an inflation factor that reflects the cost of construction in the policyholder’s geographic area.

Effective the first of July 2019, section 10103.4 states, in its entirety:

(a) An insurer that provides replacement cost coverage in accordance with Section 10102, except an insurer that satisfies the requirements of subdivision (b), shall, on an every other year basis, at the time an offer to renew a policy of residential property insurance is made to the policyholder, provide an estimate of the cost necessary to rebuild or replace the insured structure that complies with Sections 2695.180 to 2695.183, inclusive, of Article 1.3 of Subchapter 7.5 of Chapter 5 of Title 10 of the California Code of Regulations, as those sections provided on January 1, 2018.

(b) An insurer that satisfies either of the following is not subject to subdivision (a):

(1) The policyholder has requested, within the two years prior to the offer to renew the policy, and the insurer has provided, coverage limits greater than the previous limits that the policyholder had selected.

(2) The insurer has, in connection with its annual offer to renew the policy, done both of the following:

(A) Offers, on an every other year basis, the policyholder the right to have a new estimate of the replacement cost for the insured dwelling, that is compliant with Sections 2695.180 to 2695.183, inclusive, of Article 1.3 of Subchapter 7.5 of Chapter 5 of Title 10 of the California Code of Regulations, as those sections provided on January 1, 2018, provided the policyholder provides the necessary, requested information.

(B) Offered the renewal of the policy and the dwelling coverage limit in the renewal offer is based on an inflation factor that reflects the cost of construction in the policyholder’s geographic area. This paragraph applies whether or not the policyholder has elected to accept that coverage limit.

(c) This section shall not be deemed to limit or preclude an insurer and insured from agreeing to provide coverage for a policy limit that is greater or lesser than the estimate of replacement value provided in accordance with subdivision (a).

(d) This section is not intended to change existing law with respect to the duty of the policyholder or applicant to select the coverage limits for a policy of residential property insurance.

(e) This section shall become operative on July 1, 2019.

The new statute is intended to reduce the incidence of underinsured homeowners, a problem that has plagued the state in recent years. Notably, subsection (d) of the statute states that the statute is not intended to alter the existing law with respect to the duty of the policyholder or applicant to select the coverage limits.

  • Frank Lombard

    The statute does not address (or maybe it does) whether the replacement cost is determined “prior to the structure being damaged”- what the current policy terms refer to as “replacement cost”? Or is it an estimate of what it might cost to rebuild the structure ” after it has been damaged”, what is often referred to as “reconstruction cost”?

    There is a big difference between the two; often 30-50% or more. How does one estimate with any accuracy the cost to rebuild after a loss to a single home compared to the cost to rebuild after a catastrophic loss like the recent wildfires? Different conditions could result in costs increasing 200-300%?