The California wildfires in November 2018 were devastating. Thousands of homes and businesses were destroyed as well as the infrastructure of certain municipalities. More than 18,000 structures were destroyed in the Camp Fire alone making recovery a long and arduous process. As a consequence, many business owners and home owners have decided to re-locate rather than rebuild at the same location. This raises an issue as to the amount of indemnity owed when an insured decides to purchase a building or rebuild at a different location.

Thanks to changes in the California Insurance Code made in 2018, insurers are now required to indemnify its insureds on a replacement cost basis even if they decide not to rebuild at the damaged site but, rather, purchase a new structure or rebuild at a different location. (California Insurance Code section 2051(c).) Indemnity is still capped at the amount it would have cost to rebuild at the damaged site. Id. Unfortunately, however, some insurers take the position that when a structure is purchased or built at a new location in lieu of rebuilding at the damaged site, the indemnity owed is limited to the purchase price less the value of the land. Insurers reason that if the damaged structure was re-built at the same location, it is only required to pay indemnity for the cost to rebuild the structure. It does not pay for any damage to the land itself.

Therefore, if the insured decides to purchase a building at a new location, it should only be responsible to pay for the building and not the land. This reasoning typically results in providing the insured with less than what they originally had prior to the loss.

A simple example illustrates the point. Assume a business is destroyed by a fire and the cost to rebuild the building is $1 million. The business owners, however, decide to purchase a new building at a different location rather than rebuild. The insurer is obligated to pay the actual amount its insured spends to replace its building up to the $1 million hypothetical rebuild cost.

Now assume the business owners purchase a new building for $1 million. Instead of paying its insured $1 million, some insurers allocate the purchase price between the land and the building. If $600,000 of the purchase price is allocated to land, the insurer would then only pay $400,000 leaving its insured with far less than what they had prior to the fire. This is hardly indemnity.

California Department of Insurance issued a bulletin addressing the issue of deducting the land value when an insured decides to purchase a new home elsewhere. The bulletin points out that by deducting the value of the land under a purchased replacement home at a new location, the insurer is paying less than the full replacement cost of the destroyed home had the structure been replaced at the damaged site. Insureds should not be penalized for exercising their right to replace their destroyed property by purchasing an existing home at a different location. While the bulletin is directed toward homeowners, the underlying reasoning applies to businesses as well.

Learning Point: Recent changes to the California Insurance Code require insurers to pay full replacement cost even if the insured decides to relocate. In the event that you sustain a total loss to your home or business, you should not be required to take less from your insurer because you decide to relocate rather than rebuild.

Please contact Keith Butler at [email protected] or (949) 975-7500 if you have questions about any issue discussed in this article or any other related matter.