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Cosmetic Damage Exclusions

AAIS files new Homeowners options to address a growing exposure

"Storm chasers" are having an impact, and homeowners insurers are looking to respond with more than increases in rates and deductibles.

For those unfamiliar with wind and hail underwriting, storm chasers are construction contractors that flock to areas recently hit by wind and hail storms.

These firms canvass residents to notify them of potential physical damage to their structures, and their right to recover for such damage under their homeowners policies. They commonly advertise that they will agree to restore a homeowner’s roofing, siding, and/or doors and windows in return for whatever the homeowner receives from his or her insurer.

In some cases, the "damage" affects only the appearance of the property, with no loss to the functionality of a building’s exterior components. The damage is often undetectable to the untrained human eye.

Insurers, however, can clearly detect growing losses from the increasingly systematic and sophisticated search for "cosmetic damage."

No distinction

For insurers, standard property forms do not distinguish between physical damage that affects the function of insured property, and physical damage that affects only the property’s appearance.

Any evidence of damage from an insured peril, no matter how slight, raises the possibility of a claim that usually can’t be denied.

To cite one example of a type of cosmetic damage claim, a carrier reported to AAIS in 2012 that "claims to cosmetically damaged windows can reach $50,000 to $100,000.

"The damage [can] consist of some small, shallow dents that are barely perceptible to the human eye and do not alter the functionality of the window. From just a few feet away, the window will appear undamaged and, in most cases, the windows would be described to be in excellent or ‘like new’ condition.

"Many times the damage has gone unnoticed for years until a storm contractor goes hunting for it."

Over the past 10-15 years, insurers have responded to cosmetic damage, or "appearance loss," claims by developing proprietary coverage limitations and exclusions for damage to roof surfaces and aluminum structures that did not impair the functionality of the respective roof or structure.

An asphalt shingle roof can lose many of its grains and continue to protect the underlying structure, but companies have faced claims over the loss of grains. Similarly, aluminum roofs and siding can become discolored and sustain small dents in a hail storm without impairing their function.

AAIS action

Faced with growing hail losses, member companies of the Missouri Association of Mutual Insurance Companies (MAMIC) asked AAIS in 2011 to develop optional endorsements for reducing exposure to cosmetic damage claims under the homeowners program AAIS maintains for MAMIC.

(MAMIC has a group affiliation with AAIS, one of several such affiliations AAIS has with state mutual insurance company associations.)

"The increased frequency and severity of hail losses brought about a need to reduce claims expenses," explains Connie Costigan, president of CFM Insurance, Concordia, MO, a MAMIC member company.

"There seems to be more use of metal buildings and metal roofing, and oftentimes the hail does not really damage the structure," she adds. "Many companies felt they were paying for the cosmetic damage, but the insured was not replacing the metal."

In response, AAIS filed in two endorsements for MAMIC in Missouri developed with input from its members:

  • One excludes coverage for damage that affects the appearance but not the functionality of siding and/or roof covering described on a schedule built into the endorsement; and
  • Another imposes a cosmetic damage limit (described on the schedule as a percentage of the applicable property limit) for damage that affects the appearance but not the functionality of siding and/or roof covering described on the schedule.

Both the exclusion and limitation apply to loss caused by any peril.

"Not all MAMIC companies are using the forms," says Costigan, "but I believe the companies using them have reduced claims and adjusting expenses."

Multistate

AAIS has taken a different approach in developing a "Cosmetic Damage Exclusion" now being filed in most states under the AAIS Homeowners program.

Although not unprecedented, the latest AAIS exclusion is the first standardized endorsement to address the problem of cosmetic wind/hail damage to all the major exterior components of property insured under a homeowners policy.

The exclusion, available as an optional policy endorsement, would exclude coverage for exterior surfacing of walls, roofs, and/or doors and windows, if wind and hail damage to such surfaces merely affects their appearance, but does not impair their ability to keep out weather elements.

The exclusion would apply only in situations where damage was only cosmetic in nature, and would not apply if there was any impairment to the functionality of the property from the wind/hail damage, even if some of the damage was only cosmetic.

The endorsement includes a schedule where an insurer would indicate whether the exclusion applies to any or all of the following: exterior wall surfacing, exterior roof surfacing, or exterior surfacing of doors and windows.

Manual rating information for the exclusion provides rating factors for adjusting the policy premium to reflect selection of the exclusion for one, two, or all three types of surface property (walls, roofs, and window and doors).