Replacement Cost Loss Settlement; To What Extent Is Matching Required? – Claims Magazine

Issue:

A hail storm dented the insured's aluminum siding in 14 locations on two sides of the house. The siding is old and no longer available. Does the ISO HO 00 03 04 91 policy require the insurer to pay for replacement of all of the siding for the entire house if the damaged siding cannot be matched?

Analysis:

Perhaps. Case law addressing this issue is not clear on the insurer's obligation in this situation. The policy refers to settling property losses to buildings at replacement cost of "that part of the building damaged for like construction and use on the same premises, or at actual cash value if not repaired." Those favoring total replacement or coverage for "all four sides" support their position by considering the "building's siding" as the "part of the building" damaged; thus the policy covers replacement cost for all four sides of the building. On the other hand it could be argued that "part of the building" refers to the particular area or side of a building damaged. If a court concludes that this policy language is susceptible to two or more reasonable interpretations, it would construe the ambiguity in favor of the insured.

Only a few cases discuss the problem of matching. In Holloway v. Liberty Mut. Fire Ins. Co., 290 So.2d 791 (La. App. 1974), before the home suffered water damage in one bedroom, the carpet color was uniform throughout the entire bedroom wing and the adjacent hallway. The carpet was no longer available from the manufacturer and the insured wanted to have the carpet in the entire bedroom wing and hallway replaced. The insurer wanted to replace only the damaged carpet. The court awarded the insured the entire cost of replacing all of the carpet, holding that the insured was entitled to replacement of undamaged property where it was necessary to obtain an aesthetically pleasing repair and to prevent devaluation of the insured's property after the repair. The court's decision was based on the testimony of an interior decorator who testified that the contrast between the old and the new carpet would have an adverse effect on the overall market value of the home.

Two sections of a roof were damaged by a windstorm in Hutcherson v. Tennessee Farmers Mut. Ins. Co. of Columbia, 1987 Fire & Casualty Cas. 288 (Tenn. App. 1986). Although the court found that the damaged area was limited to the front of the house, the court concluded that only repairing the damaged spots would not be satisfactory because of aesthetic reasons. The court held that it was necessary to replace the entire front portion of the roof instead of repairing only the defective two sections.

Similarly, in Mastin v. Sandy & Beaver Ins. Co., 461 N.E.2d 332 (1983), the insured brought an action to recover the cost of replacement of the kitchen floor, which had to be cut through to repair storm damage. There, the court found that the insurer had to replace the entire "roll type" vinyl floor because it concluded that the floor could not be said to be repaired if it had an obvious patch after the repair process. In these cases the courts concluded that replacement was required to prevent the insureds from suffering either (a) an aesthetic loss, or (2) devaluation of the property after the repair.

Matching was also discussed in Thomas v. American Family Ins. Co., 666 P.2d 676 (Kan. 1983). In Thomas damage occurred on the south side of a garage roof and the insured asked for additional monies to replace a portion of the northern slope of the roof claiming that by replacing only the south side of the roof, making it thicker than the north side, both sides would not meet properly at the peak. The court held that it would be proper for the jury to determine that part of the roof's north slope had to be replaced.

An argument that the appearance loss is not covered because it is only of an economic indirect or consequential nature will be met with the counter-argument that, under either the market value or broad evidence test of actual cash value, the appearance loss resulting from hail damage would reduce the actual cash value of the building. The law of a particular state is very relevant to the adjustment of this type of loss. In states using a broad evidence or market value approach to determining actual cash value, any evidence of decrease of market value resulting from a siding mismatch would appear relevant in determining the effect on the actual cash value of a loss.

The California Insurance Code, Section 2695.9, Standards for Prompt, Fair and Equitable Settlements Applicable to Fire and Extended Coverage Type policies with Replacement Cost Coverage provides:

a) When a fire and extended coverage insurance policy provides for the adjustment and settlement of first party losses based on replacement cost, the following standards apply:

(1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for depreciation nor any other cost except for the applicable deductible.

(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.

Insureds have made the argument that the value of a house will be diminished in the event that all of the siding does not match. In this example, it may be necessary to replace all of the siding if a partial replacement with mismatched siding would not be aesthetically acceptable or would diminish the market value. However it may be unreasonable for an insured to refuse certain restorative measures. For example, depending on the location of the siding, it may be possible to substitute the dented panels with panels removed from an area of the dwelling that is not as visible as the area of the loss. However, the insured is entitled to the same uniform aesthetic appearance of the quality which existed before the loss.