To round out our discussion of pertinent updates in 2021 California legislation, this post highlights Assembly Bill 2756. (In case you missed it, check out our previous blog posts on Senate Bill 872 and Assembly Bill 3012.)
Acknowledgements and Disclosures
Recently, Daniel Veroff posted a blog titled, Negligence by Captive Agents Is on the Rise Because They Don’t Understand the California Fair Plan But Are Now Brokering Them By the Truckload. I highly encourage you give it a read – and I’m not just saying that because he’s my boss. In his post, he points out that some big-name insurance companies are “selling their usual homeowners policies with a twist – exclusions for fire losses.” As Dan points out, we have unfortunately seen errors in procuring proper and adequate coverage, even from agents, and many homeowners are not made aware that a potential coverage gap exists until it’s too late. The result is that homeowners are left underinsured by hundreds of thousands of dollars in the midst of annual, record-breaking wildfires.
Assembly Bill 2756 seeks to shrink the information lopsidedness that exists between the sellers and buyers of insurance. It requires an insurer to obtain a signed acknowledgement from an applicant or insured if the insurer issues a residential property insurance policy on or after July 1, 2021, that does not provide coverage for the peril of fire. Further, the bill adds section 10103.6 to the California Insurance Code, requiring the declarations page for a policy that does not provide coverage for the peril of fire issued or renewed after July 1, 2021, to prominently disclose a statement in bold, uppercase letters in no less than 12-point type:
THIS POLICY DOES NOT COVER THE PERIL OF FIRE. THERE ARE OTHER RESOURCES FOR FINDING FIRE COVERAGE, INCLUDING USING THE CALIFORNIA DEPARTMENT OF INSURANCE’S HOME INSURANCE FINDER OR PURCHASING COVERAGE FROM THE CALIFORNIA FAIR PLAN ASSOCIATION.
The bill also requires an offer of renewal stating a reduction of limits or elimination of coverage to identify the specific limits being reduced or eliminated.
Required Code Upgrade Coverage
Common homeowners policy language entitles an insured to monies equaling the cost of restoring a dwelling to its pre-loss condition, but may exclude the cost of legally required improvements to bring the property into compliance with current building codes. Building codes set out guidelines meant to protect the safety and general welfare related to the construction and occupancy of the dwelling. Building codes are constantly being updated and are published on the federal, state, and local level. For instance, new editions of the California Building Standards Code (CBSC) are published every three years.
The costs to comply with the building codes are referred to as “code upgrades” and they are often substantial. Common items that require upgrades following a loss include foundations and structural members, insulation, wiring, or energy efficient windows, to name a few. While code upgrade coverage is frequently added onto homeowners policies, usually by endorsement, it has not previously been a required coverage. This has again created a coverage gap for certain unsuspecting policyholders who usually only learn they do not have this coverage after a loss occurs, rendering them underinsured.
Assembly Bill 2756 now requires a minimum of 10% additional code upgrade coverage for an open policy of residential property insurance issued or renewed after July 21, 2021. California Insurance Code § 10103(c) has been amended to read:
An open policy of residential property insurance that provides replacement cost coverage shall not be issued or renewed unless it provides additional building code upgrade coverage of no less than 10 percent of the dwelling coverage policy limits. The building code upgrade coverage required by this subdivision shall be additional coverage, and use of this coverage shall not reduce or deplete the dwelling coverage policy limits for the insured property. This subdivision does not prohibit an insurer from offering building code upgrade coverage of greater than 10 percent of the dwelling coverage policy limits, in addition to providing the minimum coverage of 10 percent of the dwelling coverage policy limits.
The bill further requires a policy of residential property insurance that provides replacement cost to include information related to the coverage on the declaration page. For residential property insurance that does not require and does not include building code upgrade coverage, that must be noted on the declarations page, instead.