Since the McCarran-Ferguson Act of 1945, insurance has been regulated by the states. Knowing the differences in laws and regulations is important for insurance professionals across state lines. These state-to-state differences include fundamentals, such as determining replacement cost and real cash value.
Check out Chip Merlin’s latest blogs, The Devil Is in the Details When Making a Decision with Church Mutual Insurance Companyand California Requires Real-Time Payment by Codeto better understand why this topic is ready for discussion.
In particular, this blog follows Victor JacobellisMarch 2019 post, California Low Energy Use – Understanding the Guidelines. At the time of Victor’s blog, the California legislature was preparing a bill that was enacted on January 1, 2020. Instead, it amended California Insurance Code § 2051 to require a uniform method for determining the Fair Cash Value of construction and personal property, regardless of whether there was total or partial loss: Real Value of Money = Exchange Rate – Depreciation. That was a major change from allowing appraisals of lost homes — a process that leaves many policyholders without insurance because rebuilding costs often exceed the home’s market value. This is especially true when calculating the amount of demand after a general accident. Here is a comparison of §2051’s previous (implied) language and current (expressed) language:
To help determine the so-called “reasonable and reasonable reduction in depreciation,” California has adopted regulatory laws, which also provide protection to policyholders. 10 CCR 2695.9(f) states:
(f) When the amount claimed is changed due to improvement, depreciation, or salvage, all reasons for the change must be in the claim file. Any change can be identified, measured, selected, and expressed as a dollar amount, and will clearly show the cost of improvement, reduction, or savings. Any change in price or depreciation will reflect a measurable difference in market value depending on the property’s condition and age and applies to a property that often needs to be repaired and replaced during the property’s use. The basis for any change will be fully explained to the complainant in writing.
(1) Under the policy, according to California Insurance Code Section 2071, where the insurance company must pay the cost of repairing, rebuilding or replacing the property that was destroyed or damaged by other things of the same nature and quality, the measure of restoration is determined by the actual value of the property damaged or destroyed, as set forth in California Insurance Code Section 2051. Excluding labor costs included in the cost of manufactured products or goods, labor costs necessary to repair, rebuild or replace. Covered goods are not part of the physical depreciation and should not be discounted or regulated.
Four aspects of this legal framework require further attention. First, a representative or attorney should not be faced with conflicting information when discussing interest rates on depreciation, often an imperfect science. In California, insurers are required to record and share their claims, by writing, on the basis of tangible, measurable, intangible, and dollar amounts for each change. The property is insured, not the owner.
Second, changes in value in California must reflect a measurable difference in market value both age and culture. While most states allow insurers to rely on depreciation charts based on age alone, California requires that this area be considered. Therefore, no size of any kind should be used. For example, a 20-year-old grandmother’s sofa with a plastic cover on it may be cheaper than a one-year-old sofa for a family with five children and three pets. It is important to remind translators that this problem must be taken into account, especially if they are coming from abroad.
Third, the rule repeats language in the statute that allows depreciation only for the amount that must be repaired and replaced during the property’s useful life. Therefore, parts of the property, such as the foundation, should not be changed to decrease.
Finally, in recent years, courts across the country have been examining whether insurers in their states can downgrade services by calculating actual costs. In fact, we have several blogs on the subject.
California has a simplified method of uncertainty and makes it clear in its statutes that “expenses for work necessary to repair, rebuild or replace covered property are not part of the depreciation and shall not be amortized or amortized.”1
Don’t leave cheap money on the table. Ask for reasons for lower prices, provide proof of the condition of your home and property, and do not accept changes in the value of unrelated property or operating expenses.
1 Cal. What Regs. 10 CCR 2695.9(f)(1).