Consider a scenario in which a structure, such as a new home, is completely destroyed by fire just one day after the owner moves in. In this case, the replacement cost, which undeniably encompasses the general contractor’s overhead and profit, should be a direct reflection of the actual cash value. In fact, according to the example given, the property has not suffered any depreciation.
In light of this, a pertinent question arises: is it justifiable for an insurance company to inform the policyholder that it will not cover the full costs associated with hiring a contractor to rebuild the property if the policyholder chooses not to proceed with the reconstruction? This issue touches on the fundamental principles of insurance indemnification and the ethical obligations of insurers to their insureds, particularly in situations where the loss is immediate and no depreciation has occurred.
Today, that’s exactly what some insurance companies are doing. They are writing replacement cost insurance policies that redefine the term “actual cash value” to pay less than what actual cash value insurance policies traditionally paid before replacement cost policies were developed. mid-20th century. Replacement cost insurance policies, even if they require actual replacement, should at least pay the types of actual cash benefits paid under outdated, standard, actual cash value fire insurance policies. Instead, state insurance regulators approve forms submitted by some insurance companies that pay less than the traditional actual cash value.
An example is a Farmers Insurance replacement cost policy. It sells a form that withholds from a payment in real value the amount of the contractor’s overheads and profits, in addition to fully amortizing the value of the replacement cost. The Pennsylvania Supreme Court allowed the following language to stand:
…However, actual cash value settlements will not include the general contractor’s estimated fees or charges for the general contractor’s services, unless and until you actually incur and pay such fees and charges , unless your state law requires that these fees and charges be paid with actual money. value settlement.1
The Pennsylvania Supreme Court emphasized that amicus brief filed by United policyholders summarized why the policy language was not appropriate:
In its brief, UPH contends that the insurer was obligated to pay replacement costs, which included GCOPs under these policies, because the policy specifically states that the insurer must pay these costs if UPH law State requires it. According to her, after Golden man And Me, when ACV is used in an insurance policy in Pennsylvania, this term is intended to include GCOP. UPH asserts that this position finds support in the courts of the Sixth and Eleventh Federal Circuits, as well as in state court decisions in New York, Texas, Indiana and Florida. Additionally, UPH points to interpretive guidelines issued by the insurance departments of Colorado, Florida and Texas, which indicate that GCOP should always be included in the ACV calculation for these types of policies.
UPH also highlights what it sees as the fundamental injustice of a contrary interpretation, citing as an example a situation in which a newly constructed home covered by a replacement cost policy is destroyed by fire and the owner chooses to do not rebuild. In such circumstances, there is no depreciation to be retained on ACV since the house is brand new; however, if the insurer is allowed to withhold the GCOP from the ACV settlement it offers to the policyholder, which becomes the final insurance payment since the owner has chosen not to rebuild, then the owner will not receive not the full benefit of what he contracted. and paid, i.e. replacement costs which include payment of the GCOP.
Additionally, UPH also asserts that the practice of including GCOP in the calculation of reasonable replacement costs is well established in the insurance industry and cites supporting textbooks and trade publications endorsing this proposition.
He also argues that public policies favor this interpretation, emphasizing that they promote the stability and continuity of society by allowing individuals to recover from considerable life-altering losses and move forward with their lives. Thus, he argues, public policy strongly supports interpretations of insurance policies consistent with the established expectations of the policyholders who depend on them. UPH argues that a contrary interpretation would allow insurers to pay less than the promised benefit by withholding the GCOP, and that this would in effect lead policyholders to purchase illusory coverage – which the law should not accept.2
The Pennsylvania Supreme Court then noted that public policy should be addressed by the executive and legislative branches of government rather than the courts. That’s the point of this post-state era: insurance commissioners, regulators, and legislators need to step up, as they always have when insurance companies start writing policies that undermine the concept of compensation and encourage the public to be wary of the insurance product.
Professor of insurance law Jay Feinman examined this example of a “coverage gap,” which increasingly leaves policyholders underinsured. He defined the coverage gap as follows:
The policyholder is insured, a risk is covered, but the coverage is subject to other limitations. Limitations or restrictions in the insurance policy other than the exclusion of risks prevent full coverage of actual or potential losses.3
He provided other examples:
• Particularly in Midwestern states where wind and hail damage is common, insurers may not offer coverage for the cost of replacing roofs, instead requiring coverage based on actual cash value or replacement schedules. roof damping.
• Similarly, “cosmetic damage endorsements” exclude or limit coverage for damages that arguably affect the appearance but not the function of the property or a specific part of it.
• Matching disputes have been common, in which part of a building element is damaged (such as part of a roof) and the question is whether the insurer can pay only to replace the damaged part or must pay to replace the entire component so that the damaged part matches the undamaged part. Insurers have expanded their policy language to clearly state that they “will not pay to repair or replace undamaged property due to a mismatch between the undamaged materials and new materials used to repair or replace the damaged materials “.
• Many policies contain terms prohibiting or limiting the amount of expenses in the common event that an ordinance or law, such as an updated building code, increases the cost of repairing or rebuilding a home.
Professor Feinman calls for greater government oversight from insurance regulators:
These market corrections could come from market forces themselves. Some insurers may improve consumer information about coverage and quality because they see it as a competitive advantage. Some elements of insurtech’s much-vaunted rise in underwriting and distribution aim to fill gaps in existing systems. But the most likely remedies come from market-correcting and supplemental actions taken by state regulators.
In one of its most important functions, government regulation fills the protection gaps that result from lack of public trust through regulation that establishes the strength of the private market. Insurance company licensing, price regulation, solvency regulation and guarantee funds are essential to the functioning of the market and avoid a protection gap that would result from insolvent insurers.
The government also encourages or mandates market participation, such as requiring insurance for federally insured mortgages and in high-risk flood zones. In residential property insurance in general and in disaster areas in particular, the government is often the insurer of last resort in the event of market failure, through residual market mechanisms such as FAIR plans, the National Flood Insurance Program, the Texas Windstorm Insurance Association and the California. Seismic Authority.
Regulation can also improve the functioning of the market….
The current landscape of insurance policies with significant coverage gaps, particularly with respect to rewriting actual cash value coverage, presents a significant challenge for consumers. This situation arises from a regulatory environment in which public insurance regulators, despite their mandate, appear to be failing in their duty to protect the interests of consumers. The exemption of insurers from antitrust laws, granted subject to effective state regulation, further highlights the essential role that these regulators play. Still, the question arises: Why is there a lack of proactive measures to address these glaring coverage gaps caused by the rewriting of policy language away from traditional protections?
The upcoming National Association of Insurance Commissioners (NAIC) meeting next week in Orlando, Florida, provides a critical platform to address these concerns. With Amy Bach of United Policyholders serving as the NAIC’s consumer liaison, there is a strong consumer rights advocate in the room. It is expected that the meetings will shed light on these issues, sparking much-needed debate on the role of national insurance regulators and the measures needed to close these coverage gaps.
Thought of the day
Consumer protection is not only a question of fairness, but also of market integrity.
2 Identifier.footnote 9.