California Home Insurance: Laws and Regulations

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California homeowners and renters can purchase residential insurance policies. The state has enacted regulations to protect all parties from homeowners and renters to insurers, insurance agents and brokers. A party who has a question about her rights should review the regulations of the California Department of Insurance. This agency is also where a homeowner or renter should turn if she wants to file a complaint against an insurer, agent or broker.

What Insurance Regulations Cover

Insurance regulations cover a wide range of topics. Subjects vary from limits on broker fees to rules about privacy. The laws do not dictate the premiums and exclusions for an individual contract. Although there are commonalities between limits and exclusions in California home insurance contracts, each contract has the potential to be unique. Ultimately, the insurer and the insured party decide the terms of the contract. California has a number of insurance-related laws that change how insurance laws apply to seniors. The majority of these laws are meant to protect seniors from financial abuse.

Contract Laws Apply

California’s laws regarding contracts are contained in the California Civil Code. These laws apply to the interpretation and administration of insurance policies. Such laws explain the definition of a contract, the elements necessary for a contract to be formed, express and implied contracts, written and oral contracts and the implied covenant of good faith and fair dealing. For example, a court may refuse to enforce an insurance policy that is unconscionable, or that contains terms that are extremely unjust. If the policy contains an unconscionable clause, the court may choose to enforce the remainder of the policy without that clause.

Property Coverage

A homeowner’s insurance policy includes property coverage and liability coverage. Property coverage covers the dwelling and structures on the property that are not attached to the dwelling, like a detached garage. Property coverage also covers personal property belonging to the policyholder and family members who live with him. For example, personal property includes furniture in the home and items in the garage, such as bicycles.

Property coverage also covers loss of use, which occurs when a home is damaged to the extent a party cannot live in it. This coverage helps with living expenses such as temporary replacement housing and meals, as well as warehouse storage. A party should save all receipts for such expenses and submit them to the insurer for reimbursement.

Liability Coverage

Liability coverage covers personal liability, when the policyholder or a resident causes damage to others. The insurer typically provides legal counsel to act in the policyholder’s defense and pays damages to the injured party. Liability coverage also covers medical payments to others when a person is accidentally injured on the policyholder’s property. For example, this coverage would pay for the medical expenses of a neighbor injured on the policyholder’s lawn.

Limits on Coverage

There are typical limits on what a homeowner’s policy will cover. Usually, coverage for other structures is limited to 10 percent of the limit for the dwelling. Coverage for personal property is 50 percent of the limit for the dwelling. There is limited coverage for certain types of property that are more susceptible to loss, like jewelry, firearms and money. Coverage for loss of use is limited to 20 percent of the limit of the dwelling. A party can usually purchase more coverage for any category for an additional premium.

Homeowner’s insurance does not cover intentional acts by the policyholder. It will typically only pay reasonable medical expenses for others. It will not cover the injuries of the policyholder or family members who live in her household. Homeowner’s insurance is not to be used as a substitute for health insurance. Homeowner’s insurance also does not cover injuries incurred in the course of business activities at a home.

Earthquakes, Fires and More

A California homeowner’s policy typically does not cover flood, earthquake, termites, insects, rats or mice. It also does not cover water damage caused by seepage or leaks, mold, neglect and tidal waves. When an insurer offers a policy, it is legally obligated to offer earthquake coverage for an additional cost. Earthquake insurance can be provided by the homeowner’s insurer, a separate insurer or the California Earthquake Authority.

A California homeowner’s insurance policy usually covers fire and lightning, smoke, windstorms, hail, and sudden and accidental water damage. The average policy also covers damage by vehicles, theft and falling objects. A homeowner’s insurance policy may not cover fire damage for items the insured party did not declare or had lied about, such as cannabis plants.

Flood Insurance

A homeowner or renter can purchase insurance to protect a residence and personal property against direct physical loss by flood, loss resulting from flood-related erosion, and damage caused by mudslides. Flood insurance is made possible because of the National Flood Insurance Program (NFIP). Congress created the NFIP in 1968; it is administered by FEMA. It is available in communities that adopt and enforce floodplain management ordinances to reduce future flood losses.

A homeowner or renter in a NFIP community can buy flood insurance through a licensed property and casualty insurance agent or broker who deals directly with FEMA. Alternatively, a homeowner can buy flood insurance with a private insurance company through a program called Write Your Own (WYO). A flood insurance policy takes effect 30 days after the policy is purchased. When an insured party buys a house in a designated high-risk area and receives a mortgage loan from a federally regulated lender, the lender must require the borrower to purchase and regularly renew flood insurance. In this case, the policy takes effect immediately.

Renter’s Insurance Basics

Renter’s insurance, also called tenant’s insurance, covers losses to personal property in the residential property a party rents. Renter’s insurance also provides coverage for loss of use, personal liability protection and medical payments to others. There are typical limits for each type of coverage.

The insured and insurer usually set the amount of coverage for personal property. Loss of use is usually limited to 20 percent of the amount for personal property. Personal liability is generally subject to a minimum of $100,000. Medical payments to others is generally subject to a minimum of $1,000.

Replacement Vs. Actual Cash Value

When a homeowner or renter negotiates a policy, she can choose between replacement cost and actual cash value (ACV). Replacement cost is the cost of replacing the damaged property with a new and comparable version. For example, if a tree limb falls on a bicycle and destroys it, replacement cost would pay for a comparable model at the store. Replacement cost is usually the default option in an insurance contract. It is more expensive than actual cash value.

Actual cash value is the actual cash value of the item. Most items depreciate over time. Insurers use calculations to estimate the value of an item like a couch. Some items, like antiques, appreciate over time. A party who has items that could appreciate should inform the insurer about these items. The party might have to purchase additional coverage to ensure he would get actual cash value for these items.

When a party chooses actual cash value for a dwelling, he will only be paid for the depreciated value of items like the roof, walls, floor and lighting. This means he will need to pay for the cost of repairing or rebuilding such items. A party who chooses ACV should consider purchasing an additional premium to assist with the cost of repairs.

Total Losses

A property is deemed a total loss when it is damaged to such an extent that it cannot be repaired. When a total loss occurs because of an event like a wildfire, theoretically, the insured party can get up to the full amount listed in the policy declarations page. Yet this rarely happens. Insurers are usually hesitant to pay out the total insurable value for a policy.

An insurer will often request proof of loss, as well as a list of all the structures and personal property on the land. This can be difficult for a homeowner or renter who does not have photos or receipts of everything following the disaster. It is also important to remember that if an insured party has chosen the replacement cost option, the insurer will only distribute compensation after the insured party has bought a replacement.

The FAIR Plan

The FAIR Plan is an association in Los Angeles that offers coverage to all California property owners. California’s Fair Access to Insurance Requirements (FAIR) Plan was instituted in 1968 after the brush fires and riots of the 1960s. It was created through legislation to provide basic property insurance to homeowners and renters unable to buy insurance through the voluntary market. The FAIR Plan is a syndicated insurance pool, made up of all insurers licensed to conduct property and casualty business in California. Each member company participates in the profits, losses and expenses of the FAIR Plan in proportion to how much business it does in the state.

Before November 2019, the FAIR Plan primarily covered fire risks. In November 2019, the California Insurance Commission ordered the FAIR Plan to include coverage for non-fire risks by June 1, 2020 and double coverage limits by April 1, 2020. A party can apply for California FAIR Plan insurance on his own or through a broker. A homeowner or renter should use it only after making a diligent effort to buy coverage in the voluntary market. The FAIR Plan recommends that policyholders shop for a different insurer at least once a year to find coverage more comprehensive than that offered by the FAIR Plan.

Insured Party’s Rights

California guarantees an insured party specific rights with regard to cancellations and nonrenewals, premiums and refunds. As to cancellations, after a residential policy for a homeowner or renter has been in effect for 60 days, the insurance company can cancel a policy only for a reason specified by law. Such reasons include fraud or physical changes in the insured property that increase a hazard insured against. An example of a physical change is a garden shed that a homeowner who was not a licensed electrician wired himself. A cancellation or nonrenewal notice must contain the reason for the cancellation or nonrenewal.

With regard to premiums, an insurer has 60 days from the policy’s effective date to verify the rating and underwriting of a new policy. Within the 60-day period, the company must notify the insured party of any error and resulting change in premiums. After 60 days, a notice of change of premium will not be effective. If a company or its agents, or the insured party providing incomplete information, causes an error that results in a premium revision, the insurance company must notify the insured party within 60 days. The insurer may charge the higher premium from the effective date of coverage.

Typically, when a policyholder cancels a policy, the premium is calculated on a short-rate basis. This means the company keeps some of the unearned premium to cover administrative expenses. Some companies calculate the premium on a pro rata policy. The policy states the cancellation provisions. If an insured party used a broker and signed an agreement for the broker’s services, the broker may be entitled to retain the broker fee.