ASSEMBLY THIRD READING

ATR Bill Id:AB 2436

Author:(Bloom)

As Amended Ver:May 19, 2020

Majority vote

SUMMARY:

Mandates the inclusion of building code upgrade coverage in every policy of homeowners' insurance.

Major Provisions

1. Requires every policy of homeowners' insurance to include a provision covering the costs incurred to repair a home to a condition that complies with new building code requirements that were not in effect at the time the home was originally built.
2. Specifies that this coverage be at least 10% of the coverage that is applicable for the primary structure on the insured premises, and that it is in addition to that coverage amount.
3. Provides that the coverage mandated by this bill applies to the building codes that are in effect at the time of the loss.
4. Amends the standard homeowners' disclosure form to reflect these changes in the law.
5. Provides for a delayed implementation of this bill's coverage mandate to allow insurers to complete the rate filing process with the Department of Insurance.

COMMENTS:

1. Code upgrade coverage. To understand building code upgrade coverage, it is necessary to understand how so-called "replacement" cost insurance operates. In general, property insurance is designed to return you to the position you were in prior to the loss. If your 5-year old car is totaled, you are entitled to compensation for a "like kind and quality" vehicle, not a "new" model of your vehicle. This principle does not work well for homeowners, as one can't replace a 20-year old home that has burned down. All of the new building materials are new, not 20 years old. The concept of "replacement" cost has long been included in homeowners' policies. You are entitled to have your home "replaced" (subject to policy limits) with new materials so that you have the "same" home you had before the loss, even though it could be deemed technically "better" than the old home. For example, code now requires solar systems on new construction. To rebuild, a solar system is a necessary expense, but it is something the destroyed home may not have had.

As noted, you are only entitled to have replaced what you already had. A typical replacement policy did not entitle you to funds that give you "more" than you had. But because building codes continue to add new requirements, you must rebuild to current code – which includes things your destroyed home did not have. Building code upgrade coverage has developed as a way to fully fund the realities of new construction to replace an old home that was destroyed. It provides additional coverage for so-called "betterment" that is mandated by local building codes in the rebuilding process.

1. Proposition 103. The Legislature has been hesitant to adopt mandated coverage in the property-casualty sector because of concerns that there is no guarantee that the rate review process will provide an insurer with an adequate rate by the time the law mandates new coverage. Nonetheless, insurers have withdrawn opposition in part due to a delayed implementation date that would allow an insurer that does not already have rates approved for the scope of coverage mandated by the bill to complete a rate application. To benefit from the delayed effective date, an insurer would have to file its rate application by April 1, 2021.

According to the Author:

AB 2436 would help consumers comply with applicable building codes in place after a major property loss by providing Building Code Upgrade coverage to homeowners that would help cover the cost of building codes that are in effect at the time of rebuild, not at the time of loss, and require fire policies to include a minimum of 15% of primary dwelling limits ("Coverage A") as an additional amount available for replacement costs of the insured structure.

Homeowners affected by the 2017, 2018 and 2019 catastrophic wildfires are in the midst of rebuilding their homes, but state and local authorities continue updating and adding building codes. These building codes will apply to the rebuild and are unlikely to be covered by their insurer. This leaves many unsuspecting homeowners forced to pay out-of-pocket to cover the cost of compliance with the updated/newly-added building codes or risk jeopardizing the rebuild altogether.

Insurers currently offer Building Code Upgrade coverage as an option that homeowners can purchase to help cover the additional cost of repairing their home up to code after it has been damaged or destroyed.

Arguments in Support:

One of the arguments in support of this bill is that it addresses a critical problem faced by homeowners' whose loss occurs in a disaster scenario. For a range of reasons, notably "demand surge," many homeowners find that rebuilding after a wide scale disaster is more expensive than expected. By requiring code upgrade coverage on top of normal limits, the bill proposes to offer more coverage for one of the leading causes of underinsurance.

Arguments in Opposition:

While insurers have withdrawn opposition as a result of the recent amendments, it remains true that this bill will require all policies to include a coverage that currently not everyone buys. As a result, this bill mandates increased costs on at least some policyholders.

FISCAL COMMENTS:

None. This bill is keyed non-fiscal by the Legislative Counsel

VOTES:

ASM INSURANCE: 13-1-0

YES: Daly, Mayes, Berman, Bigelow, Robert Rivas, Chen, Cooley, Cooper, Frazier, Gipson, Grayson, Kamlager, Wood

NO: Voepel

UPDATED:

VERSION: May 19, 2020

CONSULTANT: Mark Rakich / INS. / (916) 319-2086 FN: 0002769

Date of Hearing: May 7, 2020

ASSEMBLY COMMITTEE ON INSURANCE

Tom Daly, Chair

ABPCA Bill Id:AB 2436 (

Author:Bloom) – As Introduced Ver:February 19, 2020

SUBJECT: Residential property insurance

SUMMARY: Mandates the inclusion of building code upgrade coverage in every policy of homeowners’ insurance. Specifically, this bill:

1. Requires every policy of homeowners’ insurance to include a provision covering the costs incurred to repair a home to a condition that complies with new building code requirements that were not in effect at the time the home was originally built.
2. Specifies that this coverage be at least 15% of the coverage that is applicable for the primary structure on the insured premises, and that it is in addition to that coverage amount.
3. Provides that the coverage mandated by the bill applies to the building codes that are in effect at the time of rebuilding.
4. Amends the standard homeowners’ disclosure form to reflect these changes in the law.

EXISTING LAW:

1. Provides for the regulation of homeowners’ insurance by the Department of Insurance (DOI), including rate regulation, notice and disclosure rules, and contract language as specified in statute in the standard form fire policy.
2. Establishes a comprehensive homeowners’ insurance disclosure form that details the various types of homeowners’ insurance that is available in the market.
3. Prohibits an insurer from selling any policy of homeowners’ insurance unless the rate for that insurance has been approved by the DOI.
4. Recognizes building code upgrade coverage, but does not require that it be offered by insurers or included in homeowners’ insurance policies.

FISCAL EFFECT: Legislative Counsel has determined that this bill is non-fiscal.

COMMENTS:

1. Purpose. AB 2436 would help consumers comply with applicable building codes in place after a major property loss by providing Building Code Upgrade coverage to homeowners that would help cover the cost of building codes that are in effect at the time of rebuild, not at the time of loss, and require fire policies to include a minimum of 15% of primary dwelling limits (“Coverage A”) as an additional amount available for replacement costs of the insured structure.

Homeowners affected by the 2017, 2018 and 2019 catastrophic wildfires are in the midst of rebuilding their homes, but state and local authorities continue updating and adding building codes. These building codes will apply to the rebuild and are unlikely to be covered by their insurer. This leaves many unsuspecting homeowners forced to pay out-of-pocket to cover the cost of compliance with the updated/newly-added building codes or risk jeopardizing the rebuild altogether.

Insurers currently offer Building Code Upgrade coverage as an option that homeowners can purchase to help cover the additional cost of repairing their home up to code after it has been damaged or destroyed.

1. Code upgrade coverage. To understand building code upgrade coverage, it is necessary to understand how so-called “replacement” cost insurance operates. In general, property insurance is designed to return you to the position you were in prior to the loss. If your 5-year old car is totaled, you are entitled to compensation for a “like kind and quality” vehicle, not a “new” model of your vehicle. This principle does not work well for homeowners, as one can’t rebuild a 20-year old home that has burned down. All of the new building materials are new, not 20 years old. The concept of “replacement” cost has long been included in homeowners’ policies. You are entitled to have your home “replaced” (subject to policy limits) with new materials so that you have the “same” homer you had before the loss, even though it could be deemed technically “better” than the old home. For example, code now requires solar systems on new construction. To rebuild, a solar system is a necessary expense, but it is something the destroyed home may not have had.
   
   As noted, you are only entitled to have replaced what you already had. A typical replacement policy did not entitle you to funds that give you “more” than you had. But because building codes continue to add new requirements, you must rebuild to current code – which includes things your destroyed home did not have. Building code upgrade coverage has developed as a way to fully fund the realities of new construction to replace an old home that was destroyed. It provides additional coverage for so-called “betterment” that is mandated by local building codes in the rebuilding process.
2. Underinsurance. One of the arguments in support of the bill is that it addresses a critical problem faced by homeowners’ whose loss occurs in a disaster scenario. For a range of reasons, notably “demand surge,” many homeowners find that rebuilding after a wide scale disaster is more expensive than expected. By requiring code upgrade coverage on top of normal limits, the bill proposes to offer more coverage for one of the leading causes of underinsurance.
3. At the time of rebuilding. The bill provides that the mandated coverage it creates would apply “at the time of rebuilding.” Insurers have strenuously objected to this standard. Insurance premiums are based on approved rates, developed based on known risks. An insurer can plan for the building codes currently in place, but cannot know what new codes might be adopted in the 2 to 4 years after a disaster. Since disasters tend to spur new ideas concerning proper building codes, and the rebuilding process after disasters can take several years, the “at the time of rebuilding” standard poses problems. The author has agreed to an amendment to apply an “at the time of the loss” standard for the expanded building code upgrade coverage.
4. Proposition 103. The Legislature has been hesitant to adopt mandated coverage in the property-casualty sector because of concerns that there is no guarantee that the rate review process will provide an insurer with an adequate rate by the time the law mandates new coverage. Currently, the bill does not contain a delayed implementation date that would allow an insurer that does not already have rates approved for the scope of coverage mandated by the bill to complete a rate application. According to DOI, 55% of the market is served by insurers whose policies would be in compliance with the bill. But for the remaining market (many smaller market share companies), a delay is necessary. The author has agreed to an amendment that would delay the bill until July 1, 2021, or until 75 days after a rate application has been approved.
5. Mandate to offer? Insurers have generally objected to mandated coverage because it has the effect of eliminating consumer choice and increasing costs for everyone. For example, insurers wonder why a policyholder who has just purchased a newly constructed home with a replacement cost of $500,000 would need to buy $75,000 of code upgrade coverage. (In theory, this issue would be addressed in the rate filing, where the price for the coverage on a new home would be insignificant in relation to the price for coverage on an old home.) Some insurers have proposed that, in lieu of a mandated coverage, they simply be required to offer this extended code upgrade coverage. In addition, there has been discussion of a hybrid of a 10% mandated coverage, with a requirement to offer more. These discussions are ongoing.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Realtors (support if amended))

City of Malibu

Insurance Commissioner Ricardo Lara

Opposition

American Property Casualty Insurance Association

National Association of Mutual Insurance Companies

Pacific Association of Domestic Insurance Companies

Personal Insurance Federation of California

Analysis Prepared by: Mark Rakich / INS. / (916) 319-2086