State Farm accused of ‘illegal scheme' that left California wildfire survivors underinsured
In a complaint filed Monday with the Los Angeles Superior Court, attorneys alleged State Farm's California subsidiary and one of its agents 'deliberately' misused reconstruction cost estimation programs to undervalue how much its policyholders' homes would cost to rebuild after a disaster. That allowed them to offer cheaper policies while deceptively marketing those policies as providing '100% replacement cost' coverage.
The tactics formed part of a 'race to the bottom' pricing strategy, through which State Farm captured more than 20% of the California insurance market, according to the complaint.
'Lower coverage limits correspond to more attractive premium rates, but leave homeowners unwittingly exposed to serious underinsurance when faced with a total loss following a natural disaster,' attorneys for the wildfire survivors wrote. 'This has severely undermined Plaintiffs' efforts to rebuild their lives in the aftermath of this tragic event.'
This lawsuit and others follow a Chronicle investigation published in April that found that companies representing at least 40% of California's home insurance market all rely on one software program, called 360Value, to recommend policy limits to their customers. Insurers have failed to disclose 360Value's specific flaws to policyholders.
Reporters found that the tool relies on faulty data and methods to determine its reconstruction cost estimates, often incorrectly guessing a home's features or drawing from outdated records. Agents for major insurers, including State Farm, rarely take the time to examine and correct the pre-populated data. Additionally, the information 360Value uses to price building materials and labor does not adequately account for California's higher costs.
Taken together, these shortcomings have driven widespread underinsurance among California policyholders, the Chronicle investigation found, leaving them with coverage limits that can be hundreds of thousands of dollars too low.
In the State Farm lawsuit, attorneys allege that the company deliberately misused the software to save time and operating costs. Over the past decade, the insurer required agents to input and validate fewer home characteristics by hand, instead relying increasingly on the 'assumed data' and skewing reconstruction estimates downward.
What's more, State Farm may have attempted to use the incorrect data its agents prefilled into the tool against its own policyholders, soon after their homes burned down. According to the complaint, when some policyholders questioned the adequacy of their policies following the fires, State Farm 'demanded' their clients answer detailed questionnaires about their homes. Attorneys alleged these questionnaires were designed to help insurers claim that homeowners had provided incorrect information about their homes at the point of sale, giving State Farm an excuse to deny their claims and 'escape liability.'
Most of the policyholders named in the lawsuit are underinsured by $1 million or more, according to the complaint. In one case, a couple purchased their home in April 2021 and signed up for a new State Farm policy. Their agent, using cost estimation software, set their coverage limit at $1,005,400. When the couple inquired about the adequacy of that limit, their agent responded in writing that the figure 'does cover the rebill (sic.) of your home.' However, after the couples' home burned down in the Eaton Fire in January, they learned it would cost well over $3 million to rebuild their home — meaning they are likely underinsured by at least $2 million.
The State Farm underinsurance lawsuit follows others filed by Los Angeles wildfire survivors against USAA as well as the Interinsurance Exchange of the Automobile Club and CSAA, the two AAA-affiliated home insurers for California. The Chronicle's reporting also spurred a May hearing by the California State Board of Equalization, the state's agency tasked with overseeing property taxes and recommending legislation.
The California Department of Insurance previously investigated State Farm for its replacement cost estimation methods following the California wildfires of 2015 and 2017. In a 2022 report summarizing that investigation, the state regulator identified 31 destroyed homes whose policies were set using 360Value replacement cost estimates, finding that half were underinsured by 25% or more. An additional five were underinsured by 40% or more.
The department also found instances where State Farm's agents deliberately manipulated the 360Value program to lower the price of policies. In one case, an agent reran 360Value 26 different times, dropping the home's quality grade to 'economy' to generate a lower rebuild cost and thus cheaper coverage. The policyholder ended up being underinsured by $86,000.
Representatives for State Farm did not immediately respond to a request for comment. In previous statements to reporters and to the Department of Insurance, however, it has attributed underinsurance to policyholders' failure to adequately assess how much their homes are worth.
'It is the customer's responsibility to select the appropriate limits,' the company wrote to regulators in 2022.
In the lawsuit, however, attorneys argue that the average State Farm policyholder could not possibly know more about the cost of rebuilding homes in California than the insurance giant, which collects and analyzes reams of data on construction pricing each year.
'The determination of coverage amount occurs in the context of extreme information asymmetry,' wildfire survivors' attorneys wrote. 'While State Farm writes over a million California homeowners insurance policies each year by generating reconstruction cost estimates, the consumer typically only owns a single home and has no experience or knowledge of how to generate or evaluate the accuracy of a reconstruction cost estimate.'
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