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Direct vs. Consequential Damage in the Homeowners Policy

Author: VU Faculty

Here's the scenario: Windstorm and/or hail has damaged shingles on the roof of your insured's home. Since the roof is over 15 years old, replacing selected shingles with new ones will make the roof unsightly. So, of course, the insured wants the entire roof replaced. The carrier refuses, saying their only contractual obligation is to replace the damaged shingles. How do the ISO Homeowners forms respond?


Here's an email received by our "Ask an Expert" service:

Question..."My customer does not believe the insurance adjusters. They tell her she only has 6 shingles damaged by hail. She maintains she wants a whole new roof because no way can hail hit one shingle and not the other. Also she said if she only has a few shingles damaged she wants a new roof because the new shingles will not match the rest of the house. I am told this is an older house and the roof is older. How can I help this customer? The insurance company sent an independent, she had her own roofer and the company is sending another roofer for a 3rd opinion. She is very upset with the insurance company, adjusters and even me. I cannot find a way to help her understand what they are telling her. I even suggested arbitration but she does not want to bother with that."

Answer?We're sure, is one you've heard many times before. According to the ISO Homeowners forms, the Coverage A - Dwelling insuring agreement (Section I - Perils Insured Against) says, "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. [emphasis added]" Below is what our HO faculty members had to say about this issue. In addition, we've included subscriber feedback.


Faculty Response
The HO 00 03 05 11 policy says it only covers DIRECT damage. It is understandable that the insured doesn't want new shingles on an old would look bad. However, the policy doesn't cover the consequential loss/expense of replacing the entire roof since the remaining shingles have not been damaged by other than normal wear and tear which is excluded.

However, it does seem that there is a movement to cover some of these losses. One argument I've seen is the Pair & Set clause in the policy...looking at the entire "set" of shingles as a whole, this valuation provision says you have to pay the difference between the value of the set before and after the loss. I think this is a pretty weak argument.

Recently, there was a court case on this where the court found coverage...see the following:

American Family Insurance Statement

MINNEAPOLIS, Oct. 13 /PRNewswire/ -- The following statement was issued by American Family Insurance:

Hennepin County District Court Judge Patricia Kerr Karasov has ruled that Minnesota state law and American Family Insurance homeowners policy language require American Family to pay for cosmetic damage as well as physical damage for some homes with damaged materials from the 1998 storms. When materials used to replace physically damaged materials on a house do not reasonably match the existing materials, the company must also pay to replace the existing materials so there is a reasonable match. The judge, however, specifically states that when there is a mismatch between new and old materials on a house because of "the natural weathering of existing materials," the company is not obligated to provide complete replacement of existing materials on the house.

We will apply the criteria outlined in the court's order to re-examine the relatively few claims that have not yet been resolved. (American Family handled about 60,000 claims and has paid out about $334 million to help Minnesota homeowners recover from the 1998 storms.) We will also re-examine claims that were previously settled if a policyholder informs us he/she believes there is a mismatch of materials that is due to causes other than "the natural weathering of existing materials." Policyholders with questions about a 1998 storm loss claim may call 1-866-774-6568 to talk with a Claim Call Center representative.

We are pleased the judge rejected the request for appointment of a special master to review these claims. The judge points out in her order that our "policies provide an adequate and agreed-upon method of dispute resolution when only the amount of loss is at issue."

It is important to note that because the court based its order, in part, on the basis of Minnesota statutes, the ruling will apply to all property casualty insurers in Minnesota.

Key points:

* American Family will use court's criteria to review cases.

* Replacement of existing materials to correct a mismatch is not required if the mismatch results from "natural weathering of existing materials."

10/13/2000 09:01 EDT

Note that the court says the company doesn't have to pay for damage resulting from "the natural weathering of existing materials." What's strange is that this is the source of the "loss" in all of these claims! However, this is a local court, not a precedent setting Appeals or Supreme Court decision, so I'd take it with a grain of salt until upheld by a higher court.

For now, the bottom line is that the contract says it only covers DIRECT damage, not consequential losses because property has to be replaced due to aesthetics.

Faculty Response
See if your state has any laws that govern this. Here is a statute from Florida:

626.9744  Claim settlement practices relating to property insurance. Unless otherwise provided by the policy, when a homeowner's insurance policy provides for the adjustment and settlement of first-party losses based on repair or replacement cost, the following requirements apply:

(1)  When a loss requires repair or replacement of an item or part, any physical damage incurred in making such repair or replacement which is covered and not otherwise excluded by the policy shall be included in the loss to the extent of any applicable limits. The insured may not be required to pay for betterment required by ordinance or code except for the applicable deductible, unless specifically excluded or limited by the policy.

(2)  When a loss requires replacement of items and the replaced items do not match in quality, color, or size, the insurer shall make reasonable repairs or replacement of items in adjoining areas. In determining the extent of the repairs or replacement of items in adjoining areas, the insurer may consider the cost of repairing or replacing the undamaged portions of the property, the degree of uniformity that can be achieved without such cost, the remaining useful life of the undamaged portion, and other relevant factors.

(3)  This section shall not be construed to make the insurer a warrantor of the repairs made pursuant to this section.

(4)  Nothing in this section shall be construed to authorize or preclude enforcement of policy provisions relating to settlement disputes.

History.--s. 10, ch. 2004-370; s. 155, ch. 2004-390.

Faculty Response
The article on Homeowners (the partial roof damage) I believe omits a few considerations. First the roof is covered as part of the building, not the shingles. Second  the combination of the Pair & Set clause plus Replacement cost coverage and Reasonable Expectation premise would get the full roof panel paid for in Missouri. The company writes the policy and if they did not put a limitation in the policy it is their own fault.  All of the shingles on the visible portion of a roof constitute a "set" and in your disputed case it would change the value of the house to have mismatched shingles easily discernable.

Faculty Response
The Pair or Set clause is an interesting approach and quite possibly a valid one. One problem, though, is the valuation used in this clause. Valuation under the HO policy for building "damage" is usually replacement cost. However, the Pair or Set clause says:

4. Loss to a Pair or Set. In case of loss to a
   pair or set we may elect to:
   a. Repair or replace any part to restore the
      pair or set to its value before the loss;
   b. Pay the difference between actual cash value
      of the property before and after the loss.

Where only a few shingles are involved, some adjusters argue that shingles from a less visible area of the roof can be moved to replace damaged shingles in a more visible area.

In addition, note that valuation is based on ACV, not replacement cost when you're dealing with a pair or set. A significantly worn roof's ACV would be quite low, resulting in a recovery that wouldn't be sufficient to pay for complete replacement. Also, if the HO 04 93 05 11 is attached, valuation is on an ACV basis for any roof surfacing damage caused by windstorm or hail.

Finally, since most policies are HO-3's, there is a specific exclusion for "wear and tear," which is the actual "damage" to the shingles not harmed by hail.


July 2014 Update:

Q:  "Our insured has covered damage to the siding on one side of his house. The insurance company will only replace the damaged siding. The existing siding is no longer made so there is no way to match the new siding to the rest of the house. The adjuster says they will not pay because they do not have to, that Iowa state law says they only have to pay for the damaged portion and it doesn't matter if the siding matches rest of the house. What is the rule of law in Iowa?"
A:  Assuming an ISO HO policy, the policy only covers DIRECT damage to property, not indirect or consequential damage such as a loss in market value due to the appearance of a mix of new and old siding after the repair. This may vary under non-ISO forms and some states have laws that govern "mismatched" repaired property.
Specifically, with regard to the state of Iowa, our state Big I association just recently re-ran an article:
We are bringing this question back as it seems it is storm season and we have been getting calls about what the requirements are for replacing siding and shingles (paint, etc...) when damaged.
Question - My client's house was damaged by hail, the siding is no longer made and can't be matched. The client has replacement coverage on the home and the carrier does not believe they have to replace all the siding to match. Is this correct?
IIAI Answer - If the siding does not match and that can clearly be seen from a visual point, then the carrier must match the siding. Iowa has a line of sight regulation, which can be found below. The key provision is the "reasonably uniform appearance within the same line of sight" term. So, if you stand at the corner of the house and can clearly see the siding does not match, the carrier must replace it (this would be the same for roofs, paint, flooring etc...). The following is the legal requirement…
IAC 191-15.44 states:
15.44(1) Replacement cost. When the policy provides for the adjustment and settlement of first party losses based on replacement cost, the following shall apply: a. When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making such repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for betterment or any other cost except for the applicable deductible. b. When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace as much of the item as is necessary to result in a reasonably uniform appearance within the same line of sight. This sub-rule applies to interior and exterior losses. Exceptions may be made on a case-by-case basis. The insured shall not bear any cost over the applicable deductible, if any.


Click here for a recent Missouri court case.

Click here for info on a Rhode Island law.

California Code of regulations, Title 10, Chapter 5, Subchapter 7.5, Section 2695.9.(a)(2)
When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance.


Last Updated:  March 23, 2016
August 27, 2015

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