Many insurance policyholders who have lost homes in the devastating California wildfires call our firm and ask, “Can my insurance company really deduct the value of the land under the replacement home I purchased from my claim payment?” This is a great question because this is now an unlawful tactic by the insurance companies that has unfortunately pervaded this state recently. Finally, last week the California Department of Insurance officially agreed and issued a bulletin explaining why.1 The bulletin is not legally binding, so insurers can still refuse to comply, requiring litigation.
Insurance companies support their deductions of land value by misconstruing a law already unfavorable to insureds. Under California law, the insurance company cannot refuse to provide coverage if an insured replaces their home by buying a new one elsewhere instead of rebuilding at the loss site. However, the insurance company never has to pay more than the amount it would have cost to rebuild the home at the loss site, even if buying a replacement home elsewhere would cost the insured hundreds of thousands of dollars more.2
Unfortunately, this cap on the insurance company’s liability almost always results in policyholders getting loss home than they started with. That is because when an insured rebuilds, they are only paying for the cost of the structure. When an insured buys a new home, they pay for the land and the structure. And it is not always a choice for the insured. For example, the entire town of Paradise was destroyed in the recent Camp Fire, and the water sources are now tainted. Obviously, rebuilding at the loss site is not a realistic option for the vast majority.
As if the law was not already bad enough for insureds, insurance companies have been finding a way to add insult to injury lately: they are allocating a portion of the new home’s purchase price to the land and refusing to pay that amount. Thus, not only are insureds ending up with less house than they originally had, they are not being fully reimbursed for the amount they are spending to purchase the lesser house. In other words, the insured gets less house and must go out of pocket for the land.
This practice is, in our view, flat out unlawful. As bad as the law is, it does not permit that the insurance company to deduct the value of land from its payment. It says instead that the insurance company must pay the insured the cost to purchase the new home, up to the amount it would have cost to rebuild the old home. Purchasing a home necessarily involves purchasing land. That should be the end of the story, right? Leave it to insurance companies to find even more ways to pay less.
Finally, the California Department of Insurance has taken a position on this. Thanks in big part to the efforts of pro-policyholder non-profit United Policyholders (of which Chip and I are board members), the Insurance Commissioner recently issued a bulletin opining that deducting the value of land from the claim payment is improper. According to the bulletin:
Policyholders should not be penalized for exercising their right to replace their destroyed home by purchasing an existing home at a new location. Accordingly, in the case of a total loss to an insured’s home, I am requesting all residential property insurers not apply a deduction for the value of the land from the purchase price of a replacement home.
The Insurance Commissioner’s bulletin is unfortunately not binding law, so it is up to insurance companies to decide whether to comply. But our opinion is steadfast that his bulletin is consistent with the law as written and land deductions remain unlawful and subject to lawsuits.
The Commissioner’s bulletin makes a few practical points to help convince insurance companies to adopt his approach. The primary reason is this gives insureds greater incentive to replace by buying a new home, which can be done more quickly, saving the insurance company from having to pay extended loss of use or additional living expense benefits during a rebuild. The Commissioner also emphasized the ongoing problem that many insureds do not have enough coverage, so they will never be able to fully rebuild.
This is just one of the many unfortunate tactics insurance companies are employing in California. While the Insurance Commissioner’s bulletin is a step in the right direction, we have seen insurance companies refuse to honor the commissioner’s suggestions before. If your insurance company is insisting on deducting the value of land from your replacement home purchase, or if you feel you are being treated unfairly in any other sense, call us for a free consultation. We have attorneys across Northern and Southern California.
2 Insurance Code section 2051.5