Imagine an adjuster gets called out to a property after a loss, assesses the damage, and discusses the scope of loss with the insured. Everything is going smoothly, until the insured (or his contractor or public adjuster) points out small marks on most of the roof tiles on several of the slopes. The adjuster did not document the marks because they were not noticeable and did not affect the water shedding capability of the roof. But now, the insured and their representatives are demanding replacement of the entire roof.
This common scenario can be substituted with any number of building components (siding, fencing or stucco). How do we navigate coverage issues for conditions that do not affect the performance of the building component?
The Merriam-Webster Dictionary defines cosmetic, in pertinent part, as “done or made for the sake of appearance as: decorative, ornamental, not substantive: superficial” or “visually appealing.” It defines functional,
in pertinent part, as “performing or able to perform a regular function.” In this context, we address conditions of building components that affect its appearance as opposed to conditions that affect the building component’s function.
When assessing how to address coverage issues in relation to conditions of building components, it is important to consider the expectations placed upon those materials. Manufacturers build their materials to perform a specific function for an expected amount of time (i.e. roof shingles for 30 years). While property owners typically have the same expectations as manufacturers, they also often expect the components to be aesthetically pleasant and uniform.
Warranties for building components can provide some guidance as to what the manufacturer considers to be damage sufficient for repair or replacement by the manufacturer through warranty or by the building owner out-of-pocket. Warranties for roofing components often state the warranty does not cover conditions and handling beyond manufacturer control that could adversely affect performance or cause leaks. This language recognizes damage could be claimed by a property owner, that is not covered by warranty.
Similarly, roofing tile or siding warranties often specify variation in color due to weathering or changes in product line are not covered, while excessive fading is covered. Replacement products are often of comparable quality and price to the original products, but there is no guarantee of color match. This language addresses cosmetic concerns relating to the appearance of the building components owners’ potential including normal weathering, color discontinuation, or variation from excessive fade.
Insurance policies carry the most weight for an adjuster determining how to address these claims. The language of the operative policy will typically dictate how to assess the loss. However, few policies and endorsements directly address the difference between cosmetic or aesthetic conditions and functional damage. Conflict arises where the property owner expects the property to be restored to a condition as if the loss never happened, but this is often impossible when dealing with certain irreplaceable items (i.e. discontinued building materials) and expensive when dealing with widespread minor, yet visible, conditions caused by the loss.
For example insureds are making an increasing number of claims of physical damage following wind and hail storms. The claimed conditions are often difficult to detect with an untrained or unaided eye. While the claimed condition does not impair the ability of the component to withstand the elements, the property owner, contractor, and/or public adjuster often demand replacement.
In 2013, the American Association of Insurance Services announced the filing of a “Cosmetic Damage Exclusion” under its Homeowners Program in response to minor cosmetic conditions being claimed and paid, but property owners subsequently not making those repairs of the minor damage. The optional exclusion addresses building components separately. The endorsement can exclude coverage if wind and hail damage to exterior wall surfacing, exterior roof surfacing, and/or exterior surfacing of doors and windows merely affects their appearance, but does not impair their ability to keep out weather elements. In some geographic territories, this endorsement has been included automatically. When this is done, the inclusion of the endorsement must be clearly communicated to the consumer.
When there is no cosmetic damage exclusion, the assessment is less straightforward. In this scenario, policies cover direct physical loss caused by a covered risk (such as storm damage) to the property. For instance, a small hail impact mark on a roof tile may be caused by a covered risk (hail from a storm), and although minor, is a direct physical loss caused by the covered risk. Therefore, if the policy does not expressly exclude cosmetic damage, the hail mark may be construed as a covered loss. The building component now has conditions (dents, marks, etc.) that were not there before the loss. Compare hail impact marks on tiles or siding to graffiti on the side of a house: neither affects the function of the building components, but they are covered as changes in the condition of the property caused by a covered risk.
The word “damage” is rarely defined by policies, and “direct physical loss” is rarely defined in terms of threshold damage (either in visibility or in relation to the function of the component). Courts have consistently held when a word is not defined by the policy, the plain and ordinary meaning which the average person would understand controls. If the policy is ambiguous, courts construe the ambiguities against the insurer and through the eyes of an objectively reasonable insured. Courts have recently held cosmetic conditions such as dents in metal, marks on roof tiles or siding, caused by hail impact marks, although minor, are still a tangible alteration to the property and are therefore covered.
So what is the difference between cosmetic conditions and functional damage from a coverage perspective? Unless the policy expressly excludes cosmetic conditions caused by particular risks of loss, coverage likely applies. Clarity in policy language is essential if the insurer wishes to limit the scope of coverage. The policy needs to define what is excluded, set thresholds for covered damage, identify covered portions of the property and address those causes of loss that trigger the exclusion (i.e. hail, wind, graffiti, vandalism). If no exclusion applies, work within the parameters of the applicable policy’s language and determine if the condition was caused by the covered risk (i.e. hail or windstorm) and provide payment to the insured accordingly.
ABOUT THE AUTHOR
J.P. Harrington Bisceglia is senior counsel at Tyson & Mendes LLP. She specializes in general liability defense, insurance coverage and bad faith litigation . Contact J.P. at 602.386.5644 or email@example.com.