It happens not infrequently.
A consumer comes to a professional independent agent or broker for a homeowner’s insurance quote. The broker-agent dutifully obtains as much information as possible from the homeowner about the condition and construction of the home, its location, as well as an inventory of its contents, and any other readily apparent fact that could influence the broker-agent’s coverage recommendations for the homeowner’s evaluation and insurance decisions.
And then a captive agency company comes in and substantially undercuts the premium—ostensibly justified with an estimate of the replacement cost on “Schedule A” that is substantially below what the independent broker-agent’s tools, and professional experience, suggest.
Only in the rare event of a total loss, and perhaps only in the even more unlikely event of a neighborhood-wide conflagration, will the underestimation come back to haunt the homeowner—although if it does, the impact could be financially and emotionally catastrophic.
In the wake of wildfires or other natural disasters, various well-intentioned public servants—in city and county governments, legislative committees, and in the Department of Insurance—hold public hearings, hear anguished consumer stories, and pledge to take action to solve what they inevitably describe as a widespread phenomenon of “underinsurance.”
And then nothing happens—until the next wildfire happens, and the cycle repeats itself.
It was against this backdrop that then-Insurance Commissioner Steve Poizner developed regulations in 2009 that required all dwelling policy replacement cost estimates to be calculated incorporating the same coverage elements. Last month, the California Supreme Court, in its ACIC v. Jones decision, upheld the Commissioner’s authority to promulgate and enforce the regulations, but remanded the case to lower courts for what could be several additional years of litigation over additional issues.
Many independent agents and brokers are, very understandably, sick and tired of losing business to what they regard as unfair competition: the apparently deliberate under-estimation of replacement cost by certain captive-agency writers; they want to see a solution that ensures consumers are adequately protected in the event of a total loss, and stops rewarding competitors that engage in practices they find unprofessional, unfair and deceptive.
Unfortunately, there is no easy answer to this “problem.”
IIABCal has pursued public policy objectives based upon the following complex considerations.
First, we believe that homeowners themselves are in a better position than any third-party service provider (such as a broker-agent) to know what they own (in real and personal property), what that property is worth, how much risk they are personally willing to assume (in limits and deductibles), and how much they are willing and able to pay for insurance.
One of our non-negotiable tenets must be to ensure the liability for estimation is not foisted upon broker-agents. Far too many broker-agents may be tempted to substitute their own knowledge of local neighborhoods and prices, and judgment, when they find their carriers’ methodologies for determining “Schedule A” amounts insufficient.
Most of these agent-produced estimates are likely more accurate than whatever the insurance company “black box” spits out, but it is equally likely that many of these producers do not realize they are potentially assuming massive liabilities by so doing.
Homeowners’ insurance policies have long been priced on the basis of the estimated cost of total replacement, and those estimates have acted as a limit on coverage provided, both as to dwelling and contents. An almost infinite number of variables can, and do, influence actual replacement cost of any given home, in any given location, at any given time. So any estimate can, and frequently does, vary reasonably between and among professional estimators.
In most places, most of the time, homeowners’ insurance is a very profitable line of business for insurers; as a consequence, there is aggressive price competition among insurers. In a competitive marketplace, with so many variable influencing replacement cost estimations, there are different methodologies for making good faith estimates of replacement costs, and they can be influenced by wildly different marketing strategies—some of which appear to rely upon unreasonably low replacement cost estimations.
Without question, independent agency insurers and producers are disadvantaged by replacement cost "lowballing," and other questionable practices that seem to be favored by some captive agency and direct-writing insurers.
But the Association, for good reason, has long opposed mandatory insurance laws, as well as proposals to mandate particular replacement cost methodologies.
Such proposals, while perhaps well-intentioned, have the unquestioned effect of increasing governmental regulation, decreasing competition, suppressing innovation, and exacerbating the "commoditization" of insurance products--which plays right into the hands of direct writers and has the potential to further impair independent agency system marketshare.
The fact that different consumers reach different conclusions on these questions only creates more opportunities for independent agents and brokers -- but without question also creates more opportunities for "winners" and "losers" in not only the sales process, but also in the event of total losses, when “lowballing” comes home to roost.
IIABCal (then IBA West) was the only insurance industry organization to support then-Commissioner Poizner in his efforts to “solve” the problem of rampant “underinsurance” in 2009-10. The Commissioner reportedly favored, initially, legislation to require all homeowners’ insurers to pay 200% (or some percentage, to be negotiated in the legislative process) of the Schedule A limit. But he quickly realized there would be too much political opposition to that approach.
The Poizner regulations never aspired to “solve the problem.” But they at least tried to improve consumer awareness by requiring all estimates to include the same categories of coverage. And because of our support—in the face of outright opposition by other industry organizations—the Association was successful in lobbying CDI to add provisions to the regulations that effectively immunized broker-agents from liability, provided they adhered to written instructions from their insurers.
Where we broke with the Commissioner, and joined with the entire rest of the industry, was in opposing the legal sophistry the Commissioner’s lawyers then manufactured in an effort to establish the necessary statutory authority for those regulations.
We now know that he had that authority, in the unanimous opinion of the California Supreme Court.
As we continue to search for solutions, it seems to me that the objective of the Association’s advocacy must be to ensure:
(a) that broker-agents are not exposed to liability for estimates selected by consumers, or suggested/mandated by insurers, contractors or other third parties;
(b) that broker-agents who voluntarily assume the responsibility of determining or recommending a replacement cost estimate are doing so on a fully informed and intentional (as opposed to inadvertent) basis;
(c) that consumers are put in a better position to make well-informed and more fully knowledgeable decisions about their insurance needs; and
(d) that any changes are, in practical effect, delivery-system neutral (i.e., does not place independent agency companies or their producers at a competitive disadvantage).
What we would be more reluctant to embrace would be laws that had the practical effect of both inhibiting price competition and forcing people to pay more for homeowners insurance. We do not regard such measures as politically viable—or as beneficial to independent insurance agents and brokers, at least long-term.
However, we hope to continue our dialogue with senior CDI staff and industry colleagues, to keep these issues alive and the door open for whenever the last aspects of the litigation over the regulations are resolved.
Steve Young
Senior Vice President & General Counsel
IIABCal