State Farm to Cap Replacement Payments on California Policies

State Farm Insurance Cos. on Wednesday said it will stop offering unlimited replacement coverage on California homeownership policies beginning in March and will transfer its 1.5 million homeownership insurance customers in the state into a separate company.

The announcement by State Farm, which covers one in four insured California homeowners, drew immediate fire from consumer groups, which complained that the giant insurer is reducing its risk at the expense of California policyholders.

“They are limiting their risk and putting more of a burden on policyholders,” said Bill Ahern, senior policy analyst for Consumers Union.

State Farm said it is making the changes to “simplify policyholders’ coverage choices” and “better comply with the state’s regulatory process,” according to a news release.

Starting in March, Californians who hold policies with State Farm Fire & Casualty--the company’s national property-insurance division--will no longer be able to renew their policies when they expire.

Instead, they will be offered coverage through State Farm General Insurance Co., a separate subsidiary that will handle only California policies.

In addition, the California subsidiary will offer a single homeowner policy instead of the three separate forms now offered. As part of the change, the company will eliminate its unlimited “guaranteed extra coverage” of replacement costs. Instead, under an option available to customers, State Farm will cap payments for unexpected increases in rebuilding costs to 20% above current coverage levels.

Under an unlimited replacement coverage policy, a customer who files a $300,000 claim to replace a damaged home and contents would be fully compensated by the insurance company even if the homeowner had bought only $200,000 worth of coverage. However, under State Farm’s new policy, the company would be obligated to pay only 20% above the amount of coverage purchased.

In this case, the homeowner would receive a maximum of $240,000 and would have to absorb the rest of the loss.

Candysse Miller, regional director of Western Insurance Information Service, an industry-supported group, said companies began to drop unlimited replacement cost policies after the October 1991 Oakland Hills fires. Insurance companies discovered that many of their Oakland customers had failed to increase their amount of coverage over the years, leaving the insurers to pay much larger than expected claims under the unlimited replacement cost policies.

State Farm’s changes were supported by State Insurance Commissioner Chuck Quackenbush, who said the cap on replacement coverage will require homeowners to buy adequate insurance.

Quackenbush was also in favor of shifting all of State Farm’s homeowner policies into a separate company because it would make it easier to determine State Farm’s cost of doing business in the state. Those costs are used to decide whether to approve or deny rate increases, he said.

But Ahern of Consumers Union said the move leaves California policyholders with less protection by cutting them off from State Farm’s nationwide financial resources.