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Settlement options could fix the 'appearance' problem

AT FIRST, or even second or third glance, the wording seems fairly straightforward in the 4/91 version of the ISO Homeowners 3 Form. Under “Section I - Perils Insured Against,” the first sentence reads: “We insure against risk of direct loss to property described in Coverages A and B only if that loss is a physical loss to property.” Then, under “Section I - Conditions,” the form says losses will be settled in part as: “b. Buildings under Coverage A or B at replacement cost without deduction for depreciation....”

What has me rereading these particular policy segments is another question regarding the dreaded “matching materials” scenario. In my June 1999 column, I discussed a claim involving hail damage to only two sides of a house. The insured wanted siding on the two undamaged sides of the house replaced as well, so all four sides would match. As much as I understood the insured’s desire, I was forced to conclude, mainly due to the wording cited above, that the insurer must replace only the property suffering a “direct loss.” I also pointed out some carriers may in fact pay for all four sides, and that was great, but there was no wording in the policy that required the carrier to do so.

So now on my desk lies a plaintive cry from an agent whose client has suffered hail damage to a few roofing shingles, and she wants ammunition to force the carrier to replace the entire roof, again because otherwise the undamaged shingles no longer will match the replaced ones, and the insured will feel as if he’s living in Jed Clampett’s pre-Beverly Hills digs. With the wonders of e-mail, several of my trusted fellow coverage mafia members from IIAA’s Virtual University also have weighed in on the subject, and one has been good enough to forward a PLRB (Property Loss Research Bureau) bulletin that addresses this subject for 39 pages! You’d think with all that firepower being brought to bear, we’d arrive at an inarguably precise answer before which any adjuster, insured or agent would be forced to bow in sheer awe at its brilliance and clarity.

Nope.

Although the consensus is in agreement with my previous siding argument, all expressed varying amounts of sympathy with the insured, and several argued persuasively that the carrier must at least be reasonable in addressing the “appearances” and “matching materials” problem. The fact is that replacing six damaged shingles with new ones while leaving the rest of the roof with the older, faded shingles is going to leave the roof looking like a patchwork quilt. And such a roof, while fine for the home of Raggedy Ann and Andy, generally will not cause real estate agents or prospective home buyers to shout, “How quaint! I must have it!”

The term is “aesthetics.” And that is what brings us to the loss settlement provision. Because while “appearance” issues have nothing to do with the term “direct damage,” they have everything to do with what the average insured is going to consider as “replacement cost.”

For a term that could lead to so much misunderstanding, you have to wonder why it’s not defined in the form. But in this homeowners form, there are two provisions that might at least clarify intent.

The first is a continuation of the loss settlement language quoted above, where the policy states that if the co-insurance requirement is met, “we will pay the cost to repair or replace, after application of deductible and without deduction for depreciation, but not more than the least of the following amounts: (a) The limit of liability under this policy that applies to the building; (b) The replacement cost of that part of the building damaged for like construction and use on the same premises; or (c) The necessary amount actually spent to repair or replace the damaged building.”

The second is a little-cited condition named “Our Option.” It reads: “If we give you written notice within 30 days after we receive your signed, sworn proof of loss, we may repair or replace any part of the damaged property with like property.”

So it would appear the form’s intent, despite the apparently straightforward promise of “replacement cost” at the beginning of the loss settlement condition, is to give the carrier the option to repair or replace, as long as it’s with “like” property. In my Webster’s Encyclopedic Unabridged Dictionary, the first definition given for “like” reads “of the same form, appearance, kind, character, etc.”

Let’s get a bit legalistic for a moment. Assume the roof shingles are 12 years old and weathered appropriately. Combining the form language allowing “repair” with the definition of “like,” wouldn’t the carrier be within its rights to find shingles of the same age and appearance as the undamaged ones and use those to repair the roof? After all, what could be closer to the “same form” and “appearance” of a 12-year-old shingle than another 12-year-old shingle? Where in the policy does it specify the repair or replacement materials have to be new? This conclusion, in effect, would turn the entire argument over such  “matching” and “appearance” issues on its head. The problem doesn’t arise from the carrier being too stingy but from being too generous! After all, why give an insured six new shingles—and get castigated for not replacing the 500 older ones that no longer match— when the carrier is within the policy language to replace the damaged shingles with six old shingles that match the other 500 perfectly! And notice this solution still meets the policy promise of “without deduction for depreciation” since the insured would receive full “repair or replacement” of the damaged property.

Just to follow this line of reasoning a bit further, I was intrigued that the word “new” wasn’t mentioned in several of the court cases I’ve seen cited on this issue. The arguments all centered on whether the insured was entitled to “matching” carpeting (or siding or shingles or whatever). The arguments for full replacement of both the damaged and undamaged property centered on the loss of value resulting to an insured with property that no longer “matched.” In other words, lousy appearance resulting from partial replacement should be considered as part of the direct damage. And in every case, this lousy appearance resulted from the carrier using new property to make the repair or replacement. One has to wonder, in the cases where this argument proved persuasive, what the result would have been had the carrier used materials identical to the undamaged property, and if after the repair everything matched perfectly.

For those of you still with me, there is a good reason for working through the preceding somewhat pedantic analysis. (Hey, once you own a dictionary, you have to throw in a word like “pedantic” once in awhile just to justify the investment. OK, I’ll close it now.) Knowing what the coverage form actually requires helps us move on to the real issue: What do we do if we don’t like it?

As stated earlier, we all can sympathize with an insured who thinks he or she is getting a raw deal. We also know it’s of little consolation to approach such an insured with the form and say, “See, it says it right here that we have the legal right to screw you!” Oh, that will make the insured feel better!

When issues like hail damage to siding and shingles cause such heat and pain, we simply can rehash all these arguments of what is covered or not every time such claims arise, throw court cases at each other, and peruse 39-page dissertations that are interesting to some of us but that basically boil down to “try to be fair.” And the insureds will continue to think they are getting the short end of the stick.

So must we resign ourselves to the depressing thought that our children who go into this business will be having this same discussion 30 years from now? No way! I’m sure there are many possibilities, but as a start I’d like to suggest two ways we might break the cycle of pain.

First, we need to consider coverage forms with varying levels of claims settlement. As of now, the industry tendency is to continuously expand coverage, and as a result continuously expand the expectations of insureds as to what they will receive after a loss. Sure, there are several different homeowners forms, but they differ mainly in the perils covered, not in how the losses are settlement.

But, you may argue, there are policy provisions that indicate that actual cash value may be paid instead of replacement cost. That’s not what I’m suggesting. Loyal readers of this column know my desire to eradicate the term ACV from the lexicon since there are few insureds on this planet (and few agents or adjusters) who truly understand the whole “depreciation” issue, much less how to apply it in any way that doesn’t sound like the insured is getting the shaft. Besides, even replacement cost provisions technically allow for older property to be used in repairs if available and adequate. So any argument that ACV means “old” while replacement cost guarantees “new” is out the window.

What I’m suggesting is using the term “replacement cost” in all the forms, but defining it differently based upon the form level, and pricing the form accordingly. For example, a “basic” HO-3 could promise functionally adequate repairs (“We’ll patch your roof so it quits leaking”), with specific disclaimers as to appearance or matching issues. A “regular” HO-3 could provide for repair “with like kind and quality” of the damaged materials, specifically defined to allow for “used” materials as long as they are equivalent to the damaged materials in appearance and quality. (“We’ll use shingles that match, even if we have to replace an entire section of the roof to make the appearance adequate.”) Then there would be a “deluxe” HO-3 that specifically promises repair or replacement with new materials, including language that defines the loss to include replacing any undamaged property necessary to assure proper matching and appearance. (“If you have a loss, we give you a new roof! Guaranteed!”)

Why would any insured opt for anything but “deluxe”? For the same reason everyone doesn’t buy the million-dollar mansion, or drive a luxury car, or wear a Rolex—price and value. If I’d rather spend my money on clothes or travel than a fancy insurance policy (and hey, as long as you patch the leak in the roof that the tree made when it fell on it, I’m happy), then why shouldn’t I have the option to buy such a policy? I have the choice to pay what I want to get the loss settlement I’m willing to live with.

Note that under our current system, everyone assumes they are getting the deluxe form anyway, and those expectations are what drive the demand for full replacement of undamaged as well as damaged property in our hail scenarios. At least under my suggested options, if I decide to buy a clunker policy instead of the deluxe version, I can mutter under my breath if I have to live in a house with a checkerboard roof, but I know I got what I paid for. Everyone would have the opportunity to understand up front whether they  are getting the basic or the best.

Even fast food restaurants offer small, medium, large and “super-size it!” Only in insurance do we sell them one size cup and then argue over whether they got enough Coke in it.

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