Association Of California Insurance Companies v. Jones

2 Cal. 5th 376 (2017)

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Nature of the Case

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Facts

Legislators discovered through public hearings that in case after case, California residents whose homes had been damaged or destroyed by wildfires explained why they had believed their homeowners insurance would enable them to rebuild their dwellings. Upon submission of their claims, these homeowners discovered that their coverage fell well short of what they needed-sometimes by hundreds of thousands of dollars. The Legislature took several steps to address the divergence between homeowners' expectations of insurance coverage and the actual scope of coverage. In 2008, the Department of Insurance's market conduct division conducted an investigation of the four largest insurers-ones that together accounted for approximately half the market covering these losses. The survey revealed that for a majority of the policies examined, coverage limits matched what was indicated by the insurer's own coverage calculator. But the recommended coverage nonetheless understated what was actually needed to rebuild the insured's home over 80 percent of the time. These victims were underinsured by an average of $240,000. D sought to improve the accuracy of replacement cost estimates. Although estimates for labor, building supply costs, and other costs of rebuilding a home may or may not turn out to be accurate, D found that even the most careful estimate would be deficient and misleading if the estimate failed to consider the complete range of tasks necessary to repair or rebuild the home, such as the costs of replacing the foundation, debris removal and demolition expenses, and overhead and profit, as well as engineering reports and architectural plans. Obviously, such estimates must reflect the home's size, materials, square footage, wall heights, slope, and location; the type of frame, roof, and siding; the number of stories; and its age. D proposed new regulations and amendments to existing regulations. The proposed regulation standardized the components of a replacement cost estimate “to create a more consistent, comprehensive, and accurate replacement cost calculation.” D solicited public comment, announced the time and date for a public hearing, and analyzed the potential economic impact of the regulations. D issued a “final statement of reasons” on November 17, 2010, and identified the specific statutes authorizing the adoption of the regulations and listed the statutory provisions “being implemented, interpreted, or made specific” by each section of the regulations. The Office of Administrative Law approved the regulations. The regulations became effective on June 27, 2011. If the insurer does choose to opine on replacement costs, the Regulation specifies how that estimate is to be calculated and communicated. It bars the insurer from communicating a replacement cost estimate in connection with an application for or renewal of a homeowners insurance policy “unless the requirements and standards set forth in subdivisions (a) through (e) below are met.” Subdivision (a) requires a replacement cost estimate to account for “the expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety,” which must include “at least” the cost of labor, building materials, and supplies; overhead and profit; the cost of demolition and debris removal; and the cost of permits and architect's plans. The estimate must also consider “components and features of the insured structure,” including 11 specific items relevant to a typical rebuild, such as the type of foundation and framing, the roofing and siding materials, the square footage and number of stories, and the structure's geographic location. At least annually, the insurer must “take reasonable steps” to verify that estimate methods are updated to reflect changes in the costs of rebuilding, including changes in the costs of labor, building materials, and supplies, taking into account a structure's geographic location. Ps challenged the validity of the regulation and asked for declaratory relief. Ps claims that the Regulation exceeded D's authority. The trial court found that the regulation exceeded D’s authority by defining acts as misleading that were not expressly defined by the state’s legislature. The trial court reasoned that an estimate of replacement costs is “inherently inaccurate” but could not be deemed misleading unless one were to claim or imply that the estimate was accurate. The court of appeals affirmed. It found significant that the Legislature had specifically defined the advertising of insurance that the insurer does not sell as an unfair and deceptive act or practice” (§ 790.036, subd. (a)) but had failed to define incomplete replacement cost estimates. D appealed.