Stricter smoke claim standard proposal lacks specifics, attorney says

Takeaways:

• Bill broadens fire insurance to cover smoke damage
• Legislature should narrow extent of coverage required, attorney says 
• Capping damages might help make coverage viable

A new California bill setting claims standards for smoke damage lacks definitions and cost controls needed to keep insurance affordable in the state, according to an attorney for insurers.

AB 1795, the Smoke Damage Recovery Act, introduced in the state's assembly on February 10, would require a certain level of remediation of smoke damage to be covered by home insurers, according to a press release from the office of insurance commissioner Ricardo Lara.

The bill would broaden the definition of covered fire damage to include smoke damage, which will raise the cost of insurance, according to Michael Coffey, founding partner at Coffey Modica LLP. Coffey predicts it would lead more home insurers to drop policyholders or leave the market, sending more homeowners to the FAIR Plan insurance of last resort.

"You have people who do not understand insurance making major decisions that have impacts," he said. "It's going to make modest smoke cleanup claims into full-scale environmental remediation projects."

AB 1795 will put more pressure on the FAIR Plan, which is the subject of another recently proposed bill, according to Coffey. "You're going to have government at some level start absorbing this cost," he said. "You are not making it more affordable. What you are doing is cost shifting."

The bill, he added, does not consider "the financial ramifications for people whose real wages are not growing as quickly as they'd like to cover insurance increases."

Coffey acknowledged that it is possible to cover a lesser portion of smoke damage, but this requires evaluating actuarial data and narrowing the range of coverage to find a workable premium rate for both policyholders and insurers. 

Another possibility, he added, is a cap on how much value can be covered by a smoke damage claim. As an example, Coffey said, people with million-dollar or greater homes should have to get supplemental smoke coverage for the value over that threshold.

The proposed bill follows on a report by a task force that Commissioner Lara established in July. The task force will make final recommendations in March, which may figure into amendments to AB 1795, according to the commissioner's press release.