Homeowners file lawsuit alleging insurance companies misled them ahead of disaster: 'Their coverage was little more than an illusion'

A group of California fire victims is suing homeowners insurance companies for grossly misrepresenting insurance coverage for policyholders over the years, the Los Angeles Times reported. 

Only after the tragic series of fires that broke out in California in early January did homeowners realize that the insurance premiums that they had been paying, in some cases even with extended coverage fees, would not be sufficient coverage for house repairs or replacement costs, allegedly leaving homeowners stranded and homeless. 

What's happening?

The plaintiffs argued that USAA and two insurers under AAA had used flawed software to recommend coverage and, among other problems, were so focused on profiting from insurance policy subscriptions that they intentionally misled policyholders.

The insurance companies quoted the homeowners for much lower rebuilding prices — closer to between $300 and $400 per square foot, for cases cited by the Times. However, when the homeowners received actual estimates from rebuilding contractors, they were shocked to learn that the true rebuilding costs were closer to double or triple the amounts that the insurance companies had quoted. 

In other words, the insurance premiums, even in cases with the additional coverage these homeowners had been paying for over the years, still did not provide adequate coverage for recovery.

"When disaster struck, they learned their coverage was little more than an illusion," said attorney Gregory L. Bentley, per the Times. 

Why is rising homeowners insurance concerning?

Extreme weather events, such as the wildfires that swept through parts of California, are becoming more intense and generally more frequent because of rising global temperatures that are caused by burning dirty fuels. 

Burning coal, oil, or gas releases harmful pollutants in the air that trap heat in the atmosphere and lead to rising planet temperatures. 

With more frequent yet often unpredictable extreme weather events impacting local communities, homeowners are at higher risk of losing their homes, causing insurance companies to either drive up premiums or drop coverage altogether. 

What's being done about rising homeowner insurance?

California's FAIR Plan (Fair Access to Insurance Requirements) provides last-resort insurance coverage for homes that traditional insurance companies won't take on. 

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The plan provides basic fire insurance coverage — funded by private licensed insurers, according to its website — that typically comes at a higher premium for subscribers, per Bankrate. The program markets itself as a temporary solution for insurance coverage, and therefore, subscribers should regularly attempt to shop for insurance coverage on the private market, which could result in a lower premium compared to what is available through the FAIR Plan. 

Some insurance companies may offer coverage or lower-cost premiums for homeowners who invest in home hardening. Cal Fire has extensive resources on ways to prepare your home against wildfires.  

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