Larry Spanier’s dream house was in Fountaingrove, California, near Santa Rosa. It was where he had chosen to retire after a career as an aerospace executive. In 2017, though, record-setting wildfires ravaged the area. The home was destroyed. Spanier relied on a policy from the insurer, CSAA Insurance Exchange, a branch of the well-known auto insurer AAA, to cover replacement of the structure. He was let down.
The insurance company estimated replacement cost at $1.3 million. That was a full million dollars less than what Spanier was quoted. At wit’s end, after much back and forth, he decided to sue. He soon discovered he wasn’t the only policyholder with that problem.
Spanier and a group of several other Santa Rosa-area homeowners sued CSAA in December 2018 alleging that the company systematically underinsured them by low-balling the replacement value of their houses. The insurer also allegedly made a change in June 2016 to policies that put more of the risk of major losses on customers’ shoulders without properly informing them.
Policies previously guaranteed that they would cover 100 percent of replacement cost, based on the insurer’s calculations, according to the lawsuit, filed in California state court. In June 2016, the insurer made a subtle, but devastating, change to that wording. Instead of the insurer being responsible for making sure the policy would cover full replacement cost, policyholders were handed that responsibility.
Spanier and others were not made aware of that change, and had no idea that they were suddenly expected to possess the skills of a trained actuary.
Lawyers for Spanier and other homeowners accused CSAA of acting in bad faith. Bad faith, in an insurance law context, is a claim that an insurer deceptively or dishonestly attempted to evade obligations owed to policyholders. In this case, the obligation is that in exchange for premiums, the insurance company had promised to provide coverage as specified in the policy. Any material change to that policy was also expected to be made known to the customer.
Insurance is a numbers game run by experts, and there is always an incentive to underpay the policyholder. That’s why bad faith is often an issue in insurance disputes. Sometimes insurance companies will impose unreasonable delays in providing policy benefits. Sometimes they will unreasonably deny claims. Sometimes they will low-ball the value of claims. Every nickel and dime shaved off, or delayed, can earn a higher return in investment markets for the insurer.
Bad faith can crop up any time, but it often occurs after major disasters, when insurance companies are trying to prevent big hits to their capital positions and bottom lines. The wildfire seasons of 2017 and 2018 both set records in California for insured losses. It’s unfortunately unsurprising to see cases like Spanier’s.
Following a devastating disaster, an insurer denying a claim for a seemingly illogical reason can add substantial grief and frustration. It can easily make you feel like a David up against an enormous Goliath, which is prepared to crush you like a bug in court. But there are some things you, as a policyholder, can do to protect yourself in the event of bad faith.
Here are three basic tips:
- Document your claim thoroughly. Make an inventory of all of your possessions and save receipts for any items you need to purchase. Save all correspondence with your insurance company as a reference.
- Keep track of expenses related to finding other accommodations as a result of the disaster, and relating to handling the damage. Many insurance policies allow for recovery of indirect losses, such as the expense of hotel stays, and alternative transportation, such as Uber rides or car rentals, in the event that primary vehicles are destroyed or otherwise rendered inoperable.
- Consider proactively hiring an attorney. If you have substantial losses, it’s possible the insurer will have the incentive to fight you or obstruct the timely payment of claims. Having a lawyer respond to correspondence can be a way to keep the insurer on its toes, and to handle your claim appropriately.