Xactimate is not the law: How insurers use one software program to underpay wildfire claims

California's recent wildfires have affected tens of thousands of homeowners, forcing many of them into contested claims and/or protracted litigation with their homeowner's insurance carriers. For the individual homeowners, the quintessential issues are almost always the same: repair scope and cost. This article discusses the latter issue (i.e., cost), and how carriers are stacking the deck against their insureds through a third-party estimating program. 

If you represent any of the thousands of California homeowners affected by the recent wildfires, then you've undoubtedly seen the repair estimate generated through Xactimate. These estimates are often based on inaccurate price data that can be further manipulated by individual adjusters to drive down the cost of repair and deflate the value of an insured's claim. Carriers will often rely on their Xactimate estimates, without any consideration of actual repair cost or the specific policy terms, to set the value of a specific claim. Understanding what Xactimate is, who controls it, and how adjusters misuse it is essential for any attorney handling property insurance claims in California.

Xactimate is estimating software used by the overwhelming majority of property insurers to calculate repair and reconstruction costs of a covered loss. It is owned by Verisk Analytics, a company that traces its origins to the Insurance Services Office, a not-for-profit association created by insurers in 1971 to pool actuarial data and set industry standards. Verisk went public in 2009, but its primary customers remain the property and casualty carriers whose claims are valued using Xactimate.

Xactimate presents a few unique and potentially disastrous problems for individual homeowners making a claim for property damage following a natural disaster.

First, Xactimate's pricing data regularly fails to capture actual market conditions. Following a major natural disaster, such as the Los Angeles wildfires, thousands of homeowners in a specific region find themselves in immediate need of similar construction services, labor and supplies at the exact same time. The immediate spike in demand, coupled with disruptions to the supply chain typically caused by a natural disaster, often results in increased prices. As a result, actual contractors ready and willing to perform the necessary repairs are pricing emergency conditions into every bid. Xactimate, a historically based pricing system, will not reflect these market conditions. As a result, the carrier's repair estimate will bear little relationship to actual cost of repairing, restoring or rebuilding the property.

Second, adjusters can manipulate Xactimate to drastically reduce the total value of a repair estimate. For instance, Xactimate includes two "Labor Efficiency Options," Restoration/Remodel and New Construction. These efficiency options fundamentally change how labor hours and costs are calculated and can have a significant impact on the total value of a repair estimate. In addition, adjusters can manipulate Xactimate at the specific line-item level by inputting a minimum scope, omitting damaged components that require judgment to identify, bypassing applicable code upgrade requirements and substituting lower-grade materials without disclosure. The result is an estimate that projects precision while resting on a series of undisclosed decisions and adjustments that uniformly reduce the insurer's exposure.

Third, Xactimate was primarily designed for standard, tract style homes with common insurance claims involving typical construction materials and methods. As a result, Xactimate struggles to accurately calculate repair costs for premium high-end properties, premium or specialty materials and custom elements (such as one-of-a-kind cabinetry).

Despite this, carriers regularly use Xactimate repair estimates to set the maximum value of a particular claim. When insureds push back, they are regularly told their carrier "uses Xactimate" as though it is a policy requirement. Generally speaking, it isn't, and nothing in a standard California homeowners policy authorizes an insurer to limit its obligations to whatever figure a third-party program generates.

For policyholder's counsel, the practical response starts with obtaining the native (.ESX) Xactimate files--as opposed to the printed estimates--in discovery. This will allow counsel to see all settings, changes and specific line-item adjustments applied to the estimate. The native files should also show any notes or comments the carrier or its representatives made inside the estimate. PDF printouts may obscure and/or omit much of this information, so it is imperative to press for the native files. This is doubly true if counsel is handling or is considering an insurance bad faith action against the carrier.

Counsel should also obtain an independent estimate from a contractor who is either Xactimate-certified or familiar enough with the software to compare line by line. The goal is to document exactly where the insurer's figures diverge from actual market costs and to identify the specific omissions or pricing decisions driving the gap.

The insurer's Xactimate estimate is a number. It is not the measure of the insured's covered loss, and it is not the limit of the insurer's contractual obligation. The policy is. In a reconstruction market where costs are at historic highs, the distance between those two figures is exactly where this litigation is being fought and won.