California is Not a Valued Policy Law State—California Has a Valued Policy Law for Valued Policies

I always try to keep an open mind when I am told something and I do not think it is right based on experience. Two public adjusters sent me articles saying California is a valued policy law state. California is not a valued policy law state. California has a valued policy law for valued policies.

The California Insurance Code Section 412 says this:

A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specified sum.

California Insurance Code Section 2058, which the articles cite as making California a Valued Policy state, says this:

Notwithstanding any other provision of law, if a loss arising out of fire is rebuilt or replaced, an insured covered by a valued policy shall receive full payment for the loss up to the face amount of the policy. If the loss is not rebuilt or replaced, an insured covered by a valued policy shall receive either the replacement value of the loss or the face amount of the policy, whichever is less. As used in this section, ‘valued policy’ has the meaning set forth in Section 412.

As one can see, California has a valued policy law, but only for valued policies. Sometimes, authors of some legal articles misstate legal application. The devil is in the details regarding law and deciphering insurance contracts.

Valuation Issues in Florida, Part I: The Historical Purpose of Valued Policy Laws, made the following comment:

A valued policy is traditionally defined as ‘one in which the value of the property insured is agreed upon by the parties so that in the case of a total loss, it is not necessary to prove the actual value to recover under the policy.’ 44 Am. Jur. 2d Insurance §1500 (2009). Valued policy laws, or the so-called ‘total loss’ statutes, were first enacted in the United States in the late 1800s, principally as protective measures for insureds. According to the annals of insurance history, the first VPL emerged in Wisconsin in response to a business practice of some fire insurance companies which, acting through their agents, bound policies in excess the value of the property at higher premiums, but when a loss occurred, the carriers would scale down the loss payment to the point of actuarial health and safety, thus over-collecting premiums and underpaying losses.

The Wisconsin farmers of the time were not happy. They were promised more insurable value for their farms and crops and gladly paid the higher premiums to protect their investments, only to be surprised by savings and short-changing clauses and hard fights over the actual value of their properties. Underwriters could not have lived in better times, but the farmers rose up in the name of indemnity, and the Wisconsin legislature adopted a law where, absent proof of crime and in the case of a total loss, a carrier would be forced to pay the bargained face-value of the policy. Many states followed Wisconsin’s grassroots movement. The underwriters panicked. Carriers soon fine-tuned their appraisal and property valuation formulas to protect themselves from the not-so-scrupulous farmers who were waging war on their over-insured policies and intentionally causing their losses. If you are reading this, you probably know that in this business both sides are equally intolerant of windfalls.

One reason I wrote and applauded USAA in a LinkedIn post for paying the full building policy limits for a total loss fire from the recent Los Angeles wildfires was that California does not have a valued policy law requiring USAA to do that. USAA could have waited to make an estimate to determine the replacement cost value. I suspect that 99.99% of all the impacted total losses will be above the replacement cost policy limits. Most will be far underinsured because of the demand surge, which will make construction costs rise significantly. Based on experience, insurers should be paying the building policy limits for total loss fires from the recent California wildfires despite California not being a valued policy law state.

Thought For The Day

“California is always in my mind. I cannot get it out of my heart.”
—John Muir