SB 40: Big Changes for Underwriting California Insurance Policies

By Karl Susman

On November 5, 2019 a notice came out from the California Department of Insurance regarding immediate changes to insurance company underwriting guidelines and claims handling resulting from a bill signed by California Governor Gavin Newsome.   This bill called SB 240 and among many things adds a new California Insurance Code section 1406(a)(1) which immediately impacts both how insurance companies in California can underwrite insurance policies and how claims must be handled.  Below are the top five most significant changes to how an insurer may underwrite insurance policies in California:

1. Time limit to Collect Additional Living Expenses (ALE)  – In the event of a covered loss relating to a state of emergency, coverage for additional living expenses (or loss of use) shall be for at least 24 months from the inception of the loss, but shall be subject to other policy provisions. An insurer shall grant an extension of up to 12 additional months, for a total of 36 months, if an insured acting in good faith and with reasonable diligence encounters a delay or delays in the reconstruction process that are the result of circumstances beyond the control of the insured. Circumstances beyond the control of the insured include, but are not limited to, unavoidable construction permit delays, lack of necessary construction materials, and lack of available contractors to perform the necessary work. Additional extensions of six months shall be provided to policyholders for good cause.
2. Rebuilding in Current Location or Rebuilding or Replacing in a New Location – An insured may use their replacement cost insurance coverage to (1) rebuild at the current location, (2) rebuild at a new location, or (3) purchase an already built home at a new location. Replacement cost coverage shall include payment of the building code upgrade coverage, even if the insured does not incur building code upgrade costs if the insured chooses to purchase an already built property in another location. However, the payment shall not exceed the replacement cost, including the building code upgrade cost, and any extended replacement cost coverage, if applicable, to repair, rebuild, or replace the insured structure at its original location.
3. Ability to Combine Coverages – In the event of a claim relating to a state of emergency, an insured under a residential property insurance policy shall be permitted to combine payments for claims for losses up to the policy limits for the primary dwelling and other structures, for any of the covered expenses reasonably necessary to rebuild or replace the damaged or destroyed dwelling, if the policy limits for coverage to rebuild or replace the primary dwelling are insufficient.
4. Non-Renewal After a Declared Disaster – The insurer shall offer to, for at least the next two annual renewal periods, but no less than 24 months of coverage from the date of the loss, to renew the policy in accordance with paragraph (1) if the total loss to the primary insured structure was caused by a disaster, as defined in subdivision (b) of Section 1689.14 of the Civil Code, the loss was not also due to the negligence of the insured, and losses have not occurred subsequent to the disaster-related total loss that relate to physical or risk changes to the insured property that result in the property becoming uninsurable.
5. Non-Renewal or Cancellation within Fire Perimeter – An insurer shall not cancel or refuse to renew a policy of residential property insurance for a property located in any ZIP Code within or adjacent to the fire perimeter, for one year after the declaration of a state of emergency, based solely on the fact that the insured structure is located in an area in which a wildfire has occurred. This prohibition applies to all policies of residential property insurance in effect at the time of the declared state of emergency.

Because this Bill was an Urgency Bill, it means that its provisions were effective immediately.   These changes affect existing insurance policies that have previously been priced and sold by insurance companies throughout California.  For this reason insurers now have larger financial exposure than they did a matter of days ago.  With the property insurance market in a tailspin from multiple years of catastrophic wildfire claims, it remains to be seen how this additional financial exposure bestowed on them with the stroke of a pen will affect California insurer’s ability to offer insurance policies going forward.  These new provisions are designed to assist consumers and in the short term that may certainly be the case, however it fails to address the greater picture of how the private insurance industry can or will pay for these additional wildfire losses and seemingly inevitable claims that follow.  This band aid approach hopefully will bring to the forefront the desperate need we have to find a way to pay for these yearly wildfires while at the same time maintain profitability for the insurance industry so they may continue to sell insurance products that protect millions of insureds in California.

Karl Susman, owner of Susman Insurance Agency in Los Angeles, California has been helping clients obtain insurance for over 26 years.  He also is an Insurance Expert Witness for complex litigation at Expert Witness Professionals, LLC.