In the wake of the January 2025 LA wildfires, many homeowners found that they were underinsured. (Credit: Pierce/Adobe Stock)

California homeowners affected by January’s Los Angeles wildfires have filed suits against USAA and AAA, alleging both insurers participated in "systemic" fraud by deceiving policyholders about the extent of their coverage.

The complaints, both filed by law firm Bentley & More, are nearly identical aside from which insurer is mentioned. They claim that both AAA and USAA represent to their insureds that their agents possess the expertise to help determine the cost to rebuild their homes and ensure all of their features are properly covered. However, in the wake of the LA wildfires, many insureds who had taken their advice found that they were underinsured.

Both suits read, in part: “This pervasive underinsurance problem is expressly the fault of the insurance industry and the cost estimator software many insurers use to recommend coverage limits to insureds. Through poor design choices, perverse profit and commission incentives, volume business, and other shortcomings, the insurance industry has essentially guaranteed the issue of underinsurance will continue to impact Californians. Coupled with insurers’ failure to disclose and reasonably warn about the problem, failure to honestly discuss the shortfalls in their estimates, and failures to provide true, ongoing, updated, and renewed estimates during renewals, many insurers have engaged in what can only be described as systemic fraud. Indeed, in recent years, many insurers have tried to push the responsibility for estimate preparation onto insureds, despite the vast disparity in knowledge, experience, data acquisition, and ability. But the prevalence of underinsurance is, if anything, the insurance industry’s intended result – insurers retain additional market share, keep existing insureds with the company, and still get to tout “full” coverage, while knowing many insureds will be left to fend for themselves in the event of a disaster.”

The suits claim both insurers have spent years profiting from these misrepresentations. They assert that USAA and AAA knew, or should have known, that the policy limits recommended to insureds would be insufficient to cover the total replacement cost of their homes.

They state this underinsurance issue emerged in the 1990s and “has never been adequately addressed by the insurance industry, despite most homeowners being more than willing to contract for full replacement cost coverage.”

The suits continue: “Although most insurance policies… talk about “replacement” value or “full” replacement coverage, relatively few provide limits that will actually provide sufficient funds to fully “replace” the lost property, particularly in light of disasters that impact a large number of homes in a localized area, resulting in significantly increased costs of construction. Again and again, California disasters have borne this out.”

The filings also reference a 2008 investigation by the California Department of Insurance that showed most policyholders chose their coverage limits based on the insurer’s coverage calculator. However, they claim these calculators underestimated rebuilding costs more than 80% of the time. This means that even policyholders who purchased extended replacement coverage remained mostly underinsured.

Law.com reports that Bentley & More plans to file additional suits against both USAA and AAA.

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