Using Extended Replacement Cost Toward Purchasing a Replacement Home

Homeowners with Extended Replacement Cost (ERC) coverage often assume that they must rebuild on the same lot to receive full insurance benefits after a total loss. However, under California law, homeowners can use ERC funds toward the purchase of a replacement home at a different location, provided they meet certain conditions. Recent legislation and legal opinions have reinforced consumer rights, ensuring homeowners receive the full benefits of their policies whether they rebuild or relocate.

It is important to note that the guidelines outlined here serve as broad strokes and general legal interpretations. Every policy, claim, and homeowner situation is different. Given the complexities involved, consulting with a licensed Loti public adjuster is highly recommended. Loti adjusters have specialized experience navigating ERC claims for relocation, a relatively new area of insurance law that most public adjusters and attorneys have little or no experience handling.

This article explores how ERC coverage applies to replacement home purchases, citing Assembly Bill No. 1800, the 2015 legal opinion from the California Department of Insurance (CDI), and relevant case law such as Conway v. Farmers (1994). These are available for download in the Real Estate section at https://loti.com/docs.

1. Understanding Extended Replacement Cost Coverage

Extended Replacement Cost (ERC) is an enhanced insurance benefit that pays above the standard replacement cost if rebuilding expenses exceed the policy’s limit. This coverage provides additional protection against rising construction costs, labor shortages, and code upgrade requirements. We have additional detail and info in the Insurance Rallybacks.

Key Features of ERC Coverage

More info: California Department of Insurance - Replacement Cost Overview

2. Assembly Bill No. 1800: Expanding Homeowner Rights

California’s Assembly Bill No. 1800 (AB 1800), passed in response to wildfire disasters, strengthened homeowners’ rights by ensuring ERC coverage applies when purchasing a replacement home.

Key Provisions of AB 1800

• Insurers Cannot Limit ERC Benefits to Rebuilding at the Same Location – Homeowners must receive their full ERC benefits if they purchase a home elsewhere.

• No Deduction for Land Value – If a homeowner buys a home at a new location, insurers cannot deduct the value of the land from the payout.

• Indemnity Based on Replacement Cost – The insurance payout is based on the original home’s replacement cost, not the cost of the newly purchased home.

3. Legal Precedent: Conway v. Farmers (1994)

The Conway v. Farmers case set a critical legal precedent by affirming that homeowners with replacement cost policies can receive full benefits even if they relocate. The ruling clarified that purchasing a new home qualifies as “replacement” under California Insurance Code Section 2051.5.

Key Takeaways from Conway v. Farmers

• Insurance Companies Cannot Restrict ERC Benefits to Rebuilding – The policyholder has the right to relocate and still claim full benefits.

• The Definition of “Replacement” Includes Buying a New Home – Homeowners do not need to rebuild from scratch to receive coverage.

• Extended Replacement Cost Applies to Relocation – If a homeowner has ERC, they should receive the full additional coverage, even for a new home.

4. The 2015 California Department of Insurance Legal Opinion

In 2015, the California Department of Insurance (CDI) issued a formal legal opinion reinforcing that ERC benefits must be honored whether a homeowner rebuilds or buys a replacement home.

Key Points from the 2015 CDI Legal Opinion

• Homeowners with ERC coverage are entitled to the full payout, regardless of location.

• Insurance companies cannot impose artificial restrictions to limit payments when relocating.

• Policyholders must provide proof of purchase for the new home to receive the full ERC payout.

This opinion provided critical consumer protections against unfair insurer practices.

5. How to Use ERC Funds Toward a Replacement Home

For homeowners looking to use their ERC benefits to buy a new home, the process involves several key steps, and again, please consult with a licensed Loti public adjuster before assuming anything:

Step-by-Step Process

1. File an Insurance Claim – Submit a claim for total loss and confirm ERC coverage in your policy. See our book about understanding your insurance policy.

2. Get an Estimate for the Original Home’s Replacement Cost – Insurers will base your payout on the cost to rebuild the original home, not the cost of the replacement home. See our chapters regarding construction and general contractors.

3. Identify and Purchase a Replacement Home – Provide documentation to your insurer showing the home purchase and final sale price. See our chapter regarding real estate agents and associated documents.

4. Ensure Full ERC Payout – Work with a Loti public adjuster to maximize benefits and navigate insurer pushback.

6. Common Challenges and How to Overcome Them

Despite legal protections, some insurers may attempt to limit ERC benefits when a homeowner chooses to relocate. Common challenges in our experience include:

Potential Issues & Solutions

More info: How to File an Insurance Complaint - California Department of Insurance

Loti can help:

Our public adjusters can help you navigate your claim and understand possible options regarding a total loss for your particular situation. Whether it’s rebuilding your existing home or buying a new home we can help you explore each direction to see what makes sense for you.

Wrap Up

California law ensures homeowners with Extended Replacement Cost coverage can apply their benefits toward purchasing a new home, without unfair restrictions from insurers. However, each insurance policy is unique, and homeowners should work with a Loti public adjuster to ensure they receive the full benefits they are entitled to.

Key Takeaways

• ERC coverage provides additional funds beyond policy limits for rebuilding or replacing a home.

• California law ensures full ERC benefits apply whether a homeowner rebuilds or relocates.

• Insurers cannot deduct land value when ERC is used for a new home purchase.

• Legal precedents confirm these homeowner protections, but insurers may still push back.

• Loti public adjusters have experience navigating ERC claims that most adjusters and lawyers do not.

Given the complexity of ERC claims, homeowners should seek expert guidance to maximize their insurance benefits and secure a replacement home without financial loss.