California Enacts Disaster Recovery Reform Act (SB 876): A Major Shift in Fire and Residential Property Insurance Claims Handling

Wildfire-related insurance claims have become an increasingly frequent feature of the California claims landscape, with wildfire seasons occurring on an annual basis in recent years. This trend is expected to continue shaping claims volume and complexity across the industry.

Governor Gavin Newsom recently signed the Disaster Recovery Reform Act (SB 876), which is set to take effect on January 1, 2028. The legislation has been described as the most significant update to California's claims-handling laws in over 30 years, with a specific focus on fire and residential property insurance practices.

Key provisions of the law include:

• Faster total-loss payouts: For a total loss to an insured structure, insurers must pay actual cash value within 30 calendar days of the loss, followed by payment of the undisputed replacement cost (up to policy limits) within 30 days of a triggering event. Interest accrues if these deadlines are not met.
• Doubled penalties during declared emergencies: Civil penalties for unfair claims-settlement practices increase to up to USD 10,000 per act (or USD 20,000 if willful) during a state of emergency. The Insurance Commissioner may also order insurers to pay restitution directly to policyholders for unfair settlement conduct.
• Extended replacement cost and ALE coverage: Insurers may no longer issue or renew a residential policy without offering extended replacement cost coverage of at least 50% above the dwelling limit (with documented declination if refused), and must similarly offer extended additional living expense (ALE) coverage of at least 50% above the standard limit.
• Building code upgrade costs: In the event of a total loss where the insured rebuilds at a new location or purchases an already-built home, code-upgrade cost payouts must reflect all costs as if the original structure had been fully rebuilt at its original location.
• Adjuster continuity and disclosure: Insurers must send policyholders a status report within 15 days of assigning a new adjuster to a claim.
• Insurer disaster recovery plans: Admitted insurers must submit a detailed disaster-response plan to the Department of Insurance by April 1, 2028 (updated every two years), covering claims handling, customer service continuity, and adjuster training/deployment during declared disasters. The Insurance Commissioner may require post-disaster progress reports.
• ALE clarifications: Insurers must provide a written (paper or electronic) list of items potentially covered as additional living expenses, and policyholders may elect fair rental value in lieu of itemized ALE reimbursement.
• Data reporting: Insurers with USD 20 million or more in California premiums must report residential property claims experience data every two years, beginning April 1, 2028.

These changes represent a substantial recalibration of claims-handling obligations for insurers operating in California's residential property market, with implications for how claims professionals approach timelines, documentation, and communication in fire-related losses going forward.