Many policyholders who have lost their home in the devastating California fires, call our company and ask, "Can my insurance company actually deduct the value of the land during the replacement home I purchased from mine Payment Requirements? " This is a good question because this is an illegal tactic from the insurance companies that unfortunately has permeated this state recently. Finally, last week, the California Insurance Department officially agreed and issued a bulletin explaining why. 1 The bulletin is not legally binding, so insurers may still refuse to follow and demand disputes.
Insurance companies support their deduction for land value by incorrectly making a law that is already unfavorable to insurance. According to California law, the insurance company cannot refuse to provide coverage if an insured replaces his home by buying a new one elsewhere instead of rebuilding at the loss site. The insurance company never however, has to pay more than the amount it would have cost to build the home at the loss site, even if one bought a home elsewhere would cost the insured hundreds of thousands of dollars more. 2
Unfortunately, this protection on the insurance company's responsibility almost always means that the policyholders become home than they started with. This is because when an insurer rebuilds, they only pay the cost of the structure. When an insured buys a new home, they pay for the land and the structure. And it's not always a choice for the insured. For example, the entire Paradise City was destroyed in the latest Camp Fire, and the water sources are now contaminated. It is obvious that remodeling at the loss site is not a realistic option for most people.
As if the law was not bad enough for insurance, insurance companies have found a way to add injuries lately: they distribute part of the new home purchase price to the country and refuse to pay that amount. Thus, not only are insureds ending with smaller houses than they originally had, they are not fully refunded for the amount they spend to buy the smaller house. In other words, the insured gets smaller houses and has to leave the pocket for the country.
In our opinion, this exercise is illegal. As bad as the law is, it does not allow the insurance company to deduct the value of land from its payment. Instead, it says that the insurance company must pay the insured cost of buying the new home, up to the amount it would have cost to build up the old home. Buying a home necessarily requires buying land. It should be the end of history, right? Leave it to insurance companies to find even more ways to pay less.
Yet, California Insurance Department has taken a stand on this. Thanks in large part to the efforts of policyholders without profit-making United insurance policyholders (of which Chip and I are board members), the insurance commissioner recently issued a notice that deductions for the country's value from the claim payment are incorrect. According to the bulletin:
policyholders should not be penalized for exercising their right to replace their home by purchasing an existing home in a new location. Consequently, I request that all home insurance companies not deduct the value of the land from the purchase price of a replacement home. In case of a total loss to the policyholder's home
The insurance committee's bulletin is unfortunately not binding law, so it is up to insurance companies to decide to follow. But our opinion is that his bulletin is compatible with the law as written and land deductions are illegal and subject to legal proceedings.
The commissioner's bulletin contains some practical points that help convince insurance companies to adopt their approach. The main reason is that this gives insurance companies a greater incentive to replace by buying a new home, which can be done faster, which means that the insurance company does not have to pay extended loss or supplementary costs in the event of a stay during a refurbishment. The commissioner also stressed the ongoing problem that many insured persons do not have sufficient coverage, so that they will never be able to fully rebuild.
This is just one of the many unfortunate tactics the insurance companies employ in California. While the insurance commissioner's bulletin is a step in the right direction, we have seen insurance companies refuse to honor the Commission's proposal earlier. If your insurance company insists on deducting the value of land from your home settlement or if you feel that you are being treated unfairly in any other sense, call us for a free consultation. We have lawyers in Northern and Southern California.
1 http://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss- view / upload / WFLandValueDeduction-Notice.pdf
2 Insurance code section 2051.5