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Ask An Expert Briefs

IIABA's Virtual University VUpoint Newsletter
Vol. 18, No. 13 - Issue #424 - Friday, June 23, 2017
Copyright © 2017 by the Independent Insurance Agents & Brokers of America, Inc. 

The Virtual University’s Ask An Expert (AAE) service may be our best known member benefit. Daily we receive questions from members wanting help with denied claims, coverage and procedural issues, and agency management concerns. Our faculty includes some of the nation's foremost leading experts in the insurance industry. These volunteer faculty members generally charge for the time they give to our members. Think about that, the insight you get through our AAE service costs nonmembers THOUSANDS!

For the next two weeks, VUpoint subscribers have access to a few of these incredible insights right here. When the next edition of VUpoint is published, this AAE content go back into the members-only vault. And remember, beyond having access to all of our valuable Ask An Expert content, only members are allowed to ask the questions.
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Social Engineering Gap in Crime Coverage Forms

Question...My insured was spoofed through a series of fake emails that resulted in $114,000+ being transferred from his company's bank account. Is this covered by an unendorsed ISO Crime policy?
 

Answer

Faculty Response

You need the CR04171115 endorsement to cover this.

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The insurance carrier has age old exclusions to stand on for their coverage denial. Money and Securities coverage was never designed to cover this type of social engineering loss. There is no coverage for voluntarily parting with your money by deception or any other method.

Theft of Money & Securities was intended as follows:

  • Inside the Premises protects the insured in case of burglary, robbery or destruction at the insured's premises or their bank. The insured could be standing in line at their bank to make a deposit and this would protect those funds.
  • Outside the Premises is used to protect money, securities or the insured's tangible property against theft when it's off premises and in the care of the insured.

Coverage for this type of scenario can be found under the newest coverages for social engineering or something similar to ISO's version of Fraudulent Impersonation CR04171115. 

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You need the new ISO form or a carrier equivalent one. This should be automatically added to every crime policy.

"Wear and Tear" Misuse in the PAP

Question...

We have an insured who suffered hail damage to their home. They have a HO-3 10-06. 

The carrier has agreed to replace siding to about 2/3 of the house, but of course, will not "match"/replace any undamaged siding. Now "neighboritis" has set in as many of the neighbors' insurance carriers are apparently replacing all of their insured's siding. We obviously do not know the details of all of that, but regardless, our insured is not happy.

Today our insured forwarded us an interesting letter from their HOA that was sent to all neighborhood residents. I'll trim it down to the main points:

"Due to the fading of vinyl siding, the HOA will NOT approve the replacement of siding on one side of a house for most vinyl siding colors. The new siding may match the old today, but in a couple years will not. Please use this letter as the official communication of the Association's policy to insurance companies as well."

 It continues...

"Due to the extent of damages in our neighborhood and some non-compliance through the years, the HOA will take a hard line on compliance with this process."

Obviously, the implication that the HOA can just send out a form to the residents demanding that their insurance cover something is laughable. But it did get us thinking, "Ordinance" is not defined in the policy. The standard definition of the word is:

1) a piece of legislation enacted by a municipal authority

2) an authoritative order; a decree

Calling an HOA a municipal authority may be a stretch, but stating that this is letter is "an authoritative order" seems to be pretty accurate.

We forwarded the HOA letter to the adjustor and cited "Additional Coverages," 12a(3), which gives 10% of Coverage A for the "remodeling, removal, or replacement of the portion of the undamaged part of a covered building or other structure necessary to complete the remodeling, repair or replacement of that part of the covered building or other structure damaged by a Perils Insured Against."

The adjustor responded simply, "In regards to the Ordinance or Law coverage: it applies to local ordinances and laws created by a local municipality for the town or city. A direction from a HOA would not constitute an ordinance or law."

I know I'm going deep into what is probably a legal question, but I was just curious if our thinking held any weight. Has anyone had claims scenarios similar to this?

Answer

Faculty Response

Only governmental authorities have ordinances or laws. HOA rules are not ordinances or laws. That said, if 2/3 of the siding is damaged and the replacement siding will not match the existing siding, the carrier will be liable for replacing the siding on the entire house – depending on the state. Just like shingles on a roof or carpet in on the floor, if the replacement causes disparity between the existing, undamaged property and the replacement of the damaged property, then the insured is no made "whole" unless the entire property is replaced; again, depending on the state.

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In order to have an opinion on the coverage provided we'd need a copy of the policy in question. The coverage most often called on to meet HOA requirements would be the Loss Assessment coverage. The HOA's decree doesn't appear to be an assessment at this point, but could become one. 

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Good try but the work of a homeowner's association is not a governmental authority issuing an ordinance.

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The adjuster is correct that law and ordinance coverage was not intended to cover decrees made by HOA boards that might, in some instances, send out whimsical orders that they believe are authoritative. That being said, a court of law might determine that HOA directives are valid and require an insurer to adjust the loss to comply.

Here is a link to a Rutgers University 2016 white paper on HO policies and "matching" and line of sight rules. It comments on states with regulations and some case law. Perhaps you could find something to help support your client's claim.

http://www.uphelp.org/sites/default/files/publications/matching_memo_4-2016_to_post.pdf

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This is one of the most difficult areas to decide right or wrong. Companies differ on what is "damaged property." The "line of sight" argument doesn't clarify matters. "Is the roof damaged" or "are the shingles damaged" is not clearly defined in any policy that I have read. I have discussed this in many classes with students and adjusters and have found no solid agreement. A Minnesota case seemed to lean in favor of broader coverage, but even that case doesn't give a definitive rule. My feelings are that replacing only the damaged shingles or siding after a loss reduces the value of the dwelling, but not the functionality. The Homeowners policy doesn't cover market value, actual cash value or sales price; it covers "replacement cost" without a true definition of "replacement cost".

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ISO has no 10-06 edition date of the homeowners' policy so read yours to see the wording.

See this VU article: http://www.independentagent.com/Education/VU/Insurance/Personal-Lines/Homeowners/Property-Coverages/FacultyConsequential.aspx

This is not an O&L claim, plus the association letter means nothing.

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Since the Homeowners' Association has the authority to regulate such repairs, I'd view their ruling as being an ordinance. An undefined word in the policy is construed as the word is normally used. This is not legal advice. I'm not aware of any court decisions on this matter.

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While a HOA is not a traditional "regulatory" authority, it does or may have the statutory authority to regulate construction, reconstruction or repair of structures within the association. Most state statutes and/or local ordinances confer upon HOAs the ability to manage the appearance of the houses in the neighborhood.

Further, the HOA has the ability to levy liens against any property owner failing to comply with the associational guidelines. And if the liens are not paid, the HOA can institute foreclosure procedures upon the home. This fact places them in a highly authoritative place.

The grant of statutory authority to regulate construction (including repair) combined with the ability to take a person's home for failure to abide by the bylaws of the HOA make the association a very power authority in the homeowner's world. While the extension of Ordinance or Law coverage may sound like a stretch, it seems reasonable to expect it to respond to such great authority.

A sticking point in all this, did the HOA have this level of authority before the loss, have they decided differently in the past, and other key questions that may disallow this level of assertion due to the concept of estoppel. The HOA cannot take a new position in contrary to a previous position without undertaking the necessary legal steps. A lawyer would need to respond.

Combo of Meanings of Ordinance or Law in HO Policies

Question...I have a client insured under a standard ISO personal automobile policy (PAP). Comp and collision coverage is in place. Last week a heavy rain storm resulted in damage to the inside of the vehicle due to intrusion through the closed sun roof. The technician stated that the water entered the car because the drains around the sun roof were clogged. The insurance carrier denied the claim based on wear, tear and regular maintenance. I disagree with the company.

Answer

Faculty Response

Look at the "wear and tear" exclusion. It should state the exclusion applies only to the wear and tear part of the loss and not to the consequential damage. If the brakes failed from lack of maintenance, the resulting damage when the insured hits the tree would still be covered.

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The things that are excluded are losses resulting from those things. If the seal around the glass wears out and needs to be replaced, the cost of replacement is excluded, but this loss is entirely different--it the result of an unusually heavy rainstorm, and that's not excluded.

This is the kind of stuff that makes us all look bad--the loss is covered and should be paid. If the adjuster can't see that, escalate it to a supervisor. If that doesn't work, mention the term "bad faith" in your next conversation. 

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This loss is covered. Water damage is a listed comprehensive peril. The water was the cause of the loss, not the failure of the seals. The exclusion for wear, tear and maintenance normally is limited to excluding loss that is both "due" AND "confined to" wear and tear. Even if one could successfully argue the loss was caused by wear and tear, it was not limited to wear and tear. Otherwise the insurer could deny a claim where a poorly maintained bald tire blew and caused an accident totaling the car. A copy of the policy would be helpful as exclusionary language can vary.

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An ISO policy limits the "wear and tear" exclusion to damage "due and confined to" wear and tear. Because the drains were clogged, the water entered the vehicle, the damage is due to the water. It doesn't sound like there was wear and tear on the drains, it sounds like they needed to be cleaned out. That might be maintenance, but the damage was confined to cleaning the drains.

Let's say the insured found out that the rubber seal around the sun roof was worn out, the policy would not replace the worn-out item. However, if water seeped into the vehicle because of the worn-out seals, the damage is not "due and confined to" the worn-out rubber seals. A non-ISO policy might not have the "due and confined to" wording, check the exclusion.

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The company is wrong. See policy, emphasis added:

2. Damage due and confined to:

a. Wear and tear;

b. Freezing;

c. Mechanical or electrical breakdown or failure; or

d. Road damage to tires.

This Exclusion (2.) does not apply if the damage results from the total theft of "your covered auto" or any "non-owned auto".

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I agree with you. Ask for reconsideration.

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Water damage is a covered peril. The loss itself was not due to wear and tear of the item damaged. It was due to water. The claim is not being filed for the item suffering the wear and tear. Pay the claim.

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The ISO form has no "regular maintenance" requirement for coverage. Wear and tear would apply to, for example, a seal that wore out allowing water to enter the vehicle…but, even so, it would apply only to the seal, not the resulting water damage. The water damage itself is the insurable loss and that's no "wear and tear."

This is the ISO PAP exclusion:

2. Damage due and confined to:

 a. Wear and tear;

 b. Freezing;

 c. Mechanical or electrical breakdown or failure; or

 d. Road damage to tires.

This Exclusion (2.) does not apply if the damage results from the total theft of "your covered auto" or any "non-owned auto".

Notice the "and confined to" language. Any damage that arises from wear and tear is covered…only the wear and tear itself ("confined to") is excluded. There are several VU articles about this…search the VU for "due and confined to".

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Excerpt from ISO PAP exclusion:

2. Damage due and confined to:

a. Wear and tear;

The exclusion only applies to the part that was worn out, not consequential damage (water entering).

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The carrier is misapplying the exclusionary wording. Resulting damage is covered; the only cost possibly excluded is to the weather stripping. Not sure where the idea of regular maintenance came from; but I'm sure from inexperience.

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This is another example of how a carrier doesn't know how to interpret coverage in their own policy. This is not a wear and tear claim, it is a claim for damage from a leaking seal. Even though water damage may have been contributed by lack of maintenance or wear and tear, the exclusion does not apply to the resulting damage. The insured is not seeking damages for the seal, but the resulting damage.

The exclusion is there to assure that the customer pays for their own vehicle maintenance (not the carrier). If an auto accident resulted from the fact that the insured vehicle had faulty brakes, the damage from the accident would still be paid, just not the brakes. In other words, the policy does not pay for a routine brake job or window seal that should be replaced, just the resulting damage.

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