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Read all of the PD's fire coverage here

Hundreds of Sonoma County residents who lost their homes in the October wildfires say they are finding themselves underinsured and many are pressing their cases with their homeowners’ insurance carriers.

Many displaced homeowners are discovering that they will likely have to pay tens to hundreds of thousands of dollars out of pocket as they process their claims, according to fire victims and attorneys. One attorney estimated that some policyholders could be out more than $1 million in costs.

About 97 percent of the more than 200 fire victims whose policies were examined by the Friedemann Goldberg law firm were found to be underinsured, either for coverage of their structure or personal property, said John Friedemann, managing partner of the Santa Rosa firm.

In Sonoma County alone, policyholders have filed 14,686 residential property claims, resulting in almost $7 billion in damages, according to the state Insurance Department. There were 4,785 residences completely destroyed. Insurance companies have paid out almost $2.4 billion so far.

At issue is whether the carriers have underpriced their policy limits on the overall cost of rebuilding replacement homes to the detriment of their customers, or whether policyholders have opted on their own for their lower coverage — and lower premiums — and should have to live with the choices they made.

The debate is not new. In fact, California lawmakers have wrangled over the issue of rebuilding to no avail since the 1991 Oakland Hills fire, though the enormity of the recent wildfires that struck in Sonoma County has put the issue back again in the spotlight, especially given the expected rise in the cost of building materials and labor.

Policyholders are trying to apply pressure on their insurance companies to compensate them fully for their claims, whether going to court or mounting a public relations campaign to force insurers to offer more money on their quest to rebuild their homes. In the aftermath of the nation’s costliest wildfires, insurance claims throughout the region have already totaled more than $9 billion.

“We are finding the numbers are so grossly insufficient,” said Michael Bidart, a Claremont lawyer who has consulted with more than 200 local residents who lost their homes in the fires.

Bidart is preparing to sue USAA, alleging that the carrier underestimated the coverage limits needed to build a new home and then used a software program, Xactware, to cut its exposure during the claims process — “a double whammy for USAA policyholders” he wrote in a Dec. 5 letter to the company.

One nonprofit group, United Policyholders, surveyed Californians who lost their homes in 2007 wildfires. Its survey showed that only 26 percent had enough coverage to rebuild their homes. “The vast majority of people are underinsured,” said Amy Bach, executive director of the San Francisco-based consumer advocacy group.

In fact, the situation was so bad that a 2008 survey by the state Department of Insurance found that those with extended replacement coverage — policies that can pay out as much as 150 percent of the overall limit in some cases — still ended up paying out-of-pocket costs in 57 percent of the cases.

In 2010, the state Insurance Department tried to implement a regulation to improve the environment. The rule did not require an insurer to set or recommend a policy limit for rebuilding. But if the carrier did issue such an estimate, the regulations spelled out how they were to be calculated and communicated to the policyholder.

Read all of the PD's fire coverage here

The industry sued to block the rule, arguing that it was too prescriptive. “It was a one size fits all,” said Mark Sektnan, vice president of the Property Casualty Insurers Association of America.

A state judge and appellate court ruled for the industry, but the California Supreme Court in January unanimously backed the department, noting in its ruling that the commissioner had the authority to issue “reasonable rules and regulations” under state law to spell out the duties for carriers who provided such estimates. The court also noted that guaranteed replacement coverage was the norm up to the 1990s, but only a small subset of insurers even offer it now.

State Insurance Commissioner Dave Jones said in an interview his hands were tied because the state legislature has not passed legislation mandating a replacement cost estimate be provided. The department has received fewer than a dozen complaints as of last week regarding underinsurance, according to a spokeswoman.

“The best I was able to do is issue a regulation that when insurers offer a replacement cost estimate that it would be a complete and comprehensive estimate,” Jones said. “The insurers didn’t even want that.”

That’s not much solace to fire victims such as Robert Bivin, a USAA policyholder who lost his $1.2 million Fountaingrove house in the fire. Bivin had his home under California Capital Insurance, but switched this summer to USAA so his auto and home policies would both be with one insurer.

Bivin’s previous policy limits were higher and when he inquired, he said he was assured by the USAA representative that the new level was adequate, with an estimated rebuild cost of slightly more than $621,000. “The message I was getting was that I was essentially overinsured,” Bivin said of the USAA representative.

He said he now finds himself likely hundreds of thousands of dollars underinsured, with a reimbursement of $177 per square foot from his policy for his dwelling, while rebuilding estimates for some Fountaingrove homes start around $400 per square foot. “They said your coverage is your coverage,” Bivin said when he inquired about the discrepancy in the cost for rebuilding.

In a statement, USAA said its goal is to insure their policyholders’ homes “in an appropriate amount, not underinsuring, but also not overinsuring.”

The Xactware software provides an estimate of the minimum cost to rebuild their home, USAA said. The company recommends that its customers insure their homes for 100 percent of the estimated minimum and that it also explains the difference between the rebuild cost and current market value.

“If the member agrees to insure for at least 95% of the minimum estimated rebuild cost, we offer an endorsement that provides up to 25% additional coverage in the event of a total loss,” USAA said.

Most of the USAA customers who filed a claim in the fires had the additional 25 percent coverage, the company said, which helps cover such things as a contractor shortage.

“This situation has understandably led some residents to worry about underinsurance. We are working with all of our members and any contractors they’ve been able to hire to determine their costs and promptly pay any additional amounts owed,” the company’s statement said.

About 150 policyholders of CSAA Insurance Group, the AAA insurer for California, have formed a group as they realized that the vast majority of them are likely underinsured, said Matt Quan, a CSAA policyholder who lost his Fountaingrove house in the fire. Many in the group are finding that their extended replacement policy that covers up to 150 percent of the limit is still insufficient, he said. Quan said three bids he received suggest he is likely to owe one-third of the cost of rebuilding his home out of pocket after the insurance claim is paid. He added he rechecked his policy with the CSAA representative about two years ago to make sure his coverage levels were sufficient.

“Policy limits for certain insurance companies were set artificially low somehow,” said Quan, who is trying to press for more information on his claim.

Many CSAA policyholders are delaying getting a detailed appraisal from a contractor, which can cost in the thousands of dollars, because they realize that the amount they are underinsured is so vast that some are questioning if they can actually rebuild, Quan said.

In a statement, CSAA said it was working individually with its customers to address their policy questions, but could not publicly discuss specific cases. It also noted that it provided coverage of up to 150 percent of the home rebuilding limits.

CSAA added that it was “hopeful that rebuilding estimates, as they come in from contractors, will give customers some peace of mind regarding their limits.”

The insurance industry is stressing that the price quotes currently being issued are likely not to be the true cost of rebuilding, and could very well decrease as time passes. For instance, they point to the offer by local builder Gallaher Homes to rebuild new homes in Coffey Park for a total of a lesser cost of $280 a square foot. Those new homes would be limited to certain floor plans.

“It’s very difficult to estimate the cost of the rebuild at this point,” said Sektnan.

Sektnan did not comment on whether the industry is being driven by carriers that can provide the lowest quote to a potential policyholder. But he did say such a strategy would not be feasible given the risk carriers would assume. “There is no incentive for an insurance company to underinsure a home,” he said.

Carriers have certain add-ons, such as an extended replacement policy and a building code upgrade, that can be purchased to ensure that customers do not find themselves underinsured, Sektnan said.

In the end, the responsibility for the amount of coverage lies with the customer, Sektnan said. “The level of insurance, whatever your policy is...that is determined by the policyholder,” he said.

But Bidart, who is representing USAA policyholders, disagrees and said the contracts he has reviewed are at odds with what customers have been told.

“The relationship between an insurer and insured is a fiduciary-like relationship, wherein the insurer is duty bound to conduct itself with the utmost good faith for the benefit of the insured,” he wrote in his letter to USAA. Bidart said other carriers processing fire claims have assumed such a duty as well.

Friedemann, the Santa Rosa lawyer, noted suing insurance companies is often difficult.

“I don’t want to give people false hope about it,” he said. “It’s a hard case to make.”

You can reach Staff Writer Bill Swindell at 707-521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.

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