A pair of new lawsuits accuse three of California’s largest insurance companies of “systematically” underinsuring homeowners via flawed cost estimation software, leaving survivors of the Los Angeles wildfires unable to rebuild.
The suits, which followed a Chronicle investigation into the issue, were filed Thursday in Los Angeles Superior Court against USAA as well as the Interinsurance Exchange of the Automobile Club and CSAA, the two AAA-affiliated home insurers for California. They allege the three companies knowingly insured homeowners for far less than the rebuild value of their homes through their use of computer programs they’d known for decades were faulty, making it difficult if not impossible for those homeowners to rebuild.
“The carriers are not telling insureds that the number they’re giving them is not even close to the ballpark,” attorney, Gregory Bentley, told the Chronicle Thursday. His firm, Bentley & More, filed the suit and represents the families in both cases. “It’s misrepresentation. It’s fraud,” Bentley said.
The allegations come months after the Chronicle published an investigation into how flaws in the software, called 360Value, and the way insurance companies use it have left many homeowners underinsured after wildfires. The story reported on examinations by the California Department of Insurance, including one into USAA, that found widespread underinsurance following 2015 and 2017 California wildfires related to the insurers’ use of the tool. In response to the department’s report, USAA agreed to pay more than $11 million back to homeowners and implement procedures to prevent future mistakes. Another investigation into CSAA, the AAA-affiliated insurer for northern and central California, led to more than $40 million in additional payments.
USAA is the sixth largest home insurer in California as of 2023. CSAA is the third-largest, and the Interinsurance Exchange the eighth-largest.
A spokesperson for the Interinsurance Exchange said it cannot comment on pending litigation. USAA did not respond to a request for comment. Verisk, the creator of 360Value, is not a named party in either suit. Representatives for Verisk and CSAA also declined to comment.
Industry representatives previously told the Chronicle that homeowners are responsible for selecting their own coverage limits and sometimes choose insufficient limits due to poor research or a desire to keep their premiums low. But the lawsuits allege that the homeowners relied on USAA and AAA’s recommendations and the insurers’ advice that the numbers were adequate. In one case, the complaint specifically alleges that AAA refused to allow a defendant to buy more insurance beyond what 360Value recommended.
The Chronicle’s investigation found that the 360Value tool can underestimate rebuilding costs and rely on incorrect information about a home, such as the wrong number of stories, leaving homeowners with coverage limits that are at times hundreds of thousands of dollars too low.
Verisk representatives previously told the Chronicle that 360Value is simply “an advisory tool” for insurers that attempts to make an objective analysis based off of millions of pricing data points. They noted there are many factors that can unexpectedly influence the cost of building, such as rapid inflation.
The case against USAA alleges three families in the Pacific Palisades and one in Altadena were each signed up for policies ranging between $264 to $538 per square foot to rebuild their homes. However, initial estimates after the fire have put the true cost of rebuilding at $800 to $1,400 per square foot, according to the complaint.
The two families suing AAA — one in Malibu and the other in the Pacific Palisades — claim their homes were insured for $278 and $342 per square foot, respectively, leaving both “drastically underinsured.”
Speaking generally, Dan Veroff, a San Francisco-based lawyer specializing in insurance cases, said it’s typically difficult to hold an insurer legally responsible if policyholders find themselves underinsured after losing their home. California courts have ruled homeowners are mainly responsible for choosing their coverage limits and making sure they are adequate. However, exceptions exist — for example, if an agent explicitly promises that a homeowner is fully insured, or signs a homeowner up for less coverage than they requested.
The Los Angeles fires could reveal a uniquely devastating level of underinsurance. After wildfires, high demand for labor and materials typically causes the cost of rebuilding to rise 15% to 30%, according to research from the data analytics firm Cotality. In Los Angeles, building costs are also rising due to the Trump administration’s tariffs on materials such as Canadian lumber and its crackdown on illegal immigration, impacting the local labor market.
Most home insurance policies provide a buffer for these types of unexpected costs known as “extended replacement cost” which typically provides an extra 10% to 50% of coverage. But if a homeowner’s base coverage limit is too low, then even extended coverage can’t prevent underinsurance.
Late last month, the California Board of Equalization held a two-hour hearing into the causes and consequences of underinsurance , citing the Chronicle’s investigation. Multiple experts recommended potential legislation to require insurance companies to offer 50% extended replacement cost coverage as a means to combat underinsurance. The board is expected to issue a report with recommendations for legislative and regulatory actions later this month.
Bentley said every single one of his firm’s clients in the Los Angeles wildfires is “woefully underinsured.” He said his firm will soon file underinsurance lawsuits against additional carriers in response to the L.A. wildfires.
Reach Megan Fan Munce: megan.munce@sfchronicle.com ; Reach Susie Neilson: susan.neilson@sfchronicle.com
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