Colorado Division of Insurance Introduces Updates to Homeowner Insurance Coverage and Disclosure Requirements

On June 10, 2024, the Colorado Division of Insurance announced updates to homeowner insurance coverage regulations under Code of Colorado Regulations 3 CCR 702-5, reflecting legislative changes prompted by the December 30, 2021, Marshall Fire. These changes aim to ensure homeowners are better informed about their insurance options and the protections available to them.

One of the most important updates is the adoption of Regulation 5-1-25, which focuses on homeowner coverage disclosure requirements. This regulation was established under the authority of HB 23-1174, mandating that insurers offer specific percentages of Extended Replacement Cost and Law and Ordinance coverages. The goal is to enhance transparency and provide policyholders with crucial information that can impact their recovery process after a loss.

Extended Replacement Cost (ERC) coverage is a feature included in many homeowners insurance policies that provides additional financial protection beyond the standard dwelling coverage limit. Essentially, ERC coverage ensures that if the cost to repair or rebuild the home exceeds the policy’s dwelling coverage limit due to factors such as increased construction costs or inflation, the insurer will cover a specified additional percentage of those costs. For example, if a home is insured for $500,000 and has 50% ERC coverage, the insurer would cover up to an additional $250,000, providing a total of $750,000 to rebuild the home.

Guaranteed Replacement Cost (GRC) coverage, as defined by the new regulation, goes even further. GRC coverage guarantees that the insurer will pay to repair or replace the dwelling to its original specifications, regardless of the costs, without being limited by a specific percentage. This means that in the event of a total loss, the insurer will cover the full cost of rebuilding the home as it was, even if it exceeds the initial coverage limit. This type of coverage provides homeowners with the highest level of protection against unforeseen rebuilding costs.

Regulation 5-1-25 sets forth clear disclosure requirements for insurers. Effective July 30, 2024, all insurers issuing replacement-cost homeowner’s insurance policies in Colorado must comply with these new standards. Insurers are required to offer ERC coverage of at least fifty percent of the dwelling limit and law and ordinance coverage of at least twenty percent. This applies to both new policies and renewal offers. If a policyholder decides not to purchase these coverages, the insurer must include a prominent notice on the policy declarations page, in bold, 12-point font, informing the policyholder of their choice and encouraging them to review the available options.

Additionally, insurers must provide a separate notification alongside the new or renewal policy. This notification should identify the coverages the policyholder has opted not to purchase and explain the associated premium costs, either as a percentage or a dollar amount, in accordance with the insurer’s rate filings.

These regulatory updates represent a significant step towards ensuring that homeowners in Colorado have the necessary information and options to adequately protect their properties. The Division of Insurance’s proactive approach following the Marshall fire highlights the evolving landscape of property insurance and the critical need for comprehensive coverage.