Will Wind/Hail Cosmetic Damage Exclusion Endorsements Become the Norm?

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by Amy O'Connor

Cosmetic damage from wind and hail to homeowner and commercial properties may no longer be covered if insurers opt to use new endorsements, one for homeowners and another for commercial roofs, that are becoming available.

The two organizations that standardize forms and policies for property/casualty insurers, the American Association of Insurance Services (AAIS) and ISO, have both filed cosmetic damage endorsements.

ISO, a member of the Verisk Insurance Solutions group at Verisk Analytics, is also working on another cosmetic damage endorsement, this one for homeowners.

Some believe use of these endorsements could become the norm.

The two organizations said they created the forms at the request of their member carriers that were experiencing an Increase in insured losses from what they considered “cosmetic” wind and hail damage to a property.  Cosmetic damage is damage that just affects the appearance but not the function of a specific property component.

AAIS’s “cosmetic damage exclusion” was filed in most states at the beginning of February and works as an optional policy endorsement for homeowner insurers. The endorsement excludes coverage for exterior surfacing of walls, roofs, and/or doors and windows if wind and hail damage just affects the appearance of these surfaces but not their ability to keep weather-related or other elements from entering.

Because the endorsement is optional, insureds who receive it could get a premium credit, which would be a small percentage of the premium as it relates to wind and hail.

“Insurers have reported to us that they are seeing more of these types of claims, and their only response would be to raise premiums on all homeowners,” says Joseph Harrington, director of corporate communications for AAIS. “Insurers would prefer to have the choice to allow some homeowner insureds to get a break on their premium for damage that is purely cosmetic in nature.”

Harrington says even if a policy has the endorsement, the insured is still covered for any functional physical damage to these exterior components because the endorsement only applies if the damage is cosmetic.

The endorsement is optional to the 330 companies that use AAIS’ homeowners programs, and not all insurers will use it on all policies. Harrington said it’s possible some companies will apply the endorsement on a policy-by-policy basis with input from applicants and insureds, but AAIS expects companies will either use it or not use it on a general basis.

Some insurers may also decide to sell coverage with this endorsement automatically included in certain geographic territories, but that would be “clearly communicated to the consumer,” Harrington said.

The endorsement also enables the insurer to exclude one component – such as the roof – separately.

Some carriers have already introduced their own proprietary endorsements to deal with these losses, but Harrington said he believes AAIS’s is the first that attempts to systematically address the exterior components.

“For homeowners insurers writing coverage, particularly in Midwestern states, their exposure can grow quite substantially based on a new way of seeing hail damage,” he says.

ISO

As part of its complete 100 page commercial property form revision, which was filed last year and will take effect April 1, ISO added a cosmetic roof limitation for commercial properties.  Most U.S. property/casualty insurers, including all of the top 100 and all of the 10 largest global reinsurers, are customers of ISO and the Verisk Insurance Solutions Group at Verisk Analytics.

The ISO endorsement actually contains two options: the first allows insurance carriers to cover a building on a full replacement cost basis, but limit the valuation on “roof surfacing” to actual cash value (ACV). Option two applies to the cosmetic limitation, which is defined as any kind of marring or pitting or other superficial damage specifically from wind and hail that alters the appearance of the roof but does not prohibit it from functioning as intended as a barrier.

“As long as the roof still has the primary function of protecting the inside of the building, it would not be covered,” says Stephen Clarke, assistant vice president of ISO’s Commercial Multi-Line Division.

Clarke says ISO, too, received requests from its carrier customers for a tool to underwrite that specific part of the exposure because of concern over roof losses in the industry. The endorsement can be attached to an underlying form – whether it is builders’ risk, building property, standard property or various condo forms.

The endorsement can include both the ACV option and the cosmetic damage option, or an insurer can use one or the other. Clarke says the two were placed together because both concepts deal with roof surfacing.

Clarke says ISO is currently in the research and development phase for extending this endorsement to the homeowners insurance segment, and he expects that could come out this year.

What Agents Need to Know

Bill Wilson, education director for the Independent Insurance Association of America (Big “I”), says these endorsements do address a major issue for insurers trying to keep their costs down without raising premiums on insureds.  Wilson said state regulators have made it tough for carriers to raise rates so eliminating coverage is the best – or only – option they have.

But, he said, agents need to make sure they are paying close attention to what coverage their insureds are getting as a result.

“These are presented as an optional endorsement but it’s only an option from an insurance company standpoint,” says Wilson. “Agents have to be vigilant and make sure the policy doesn’t come back with an endorsement put on without their knowledge.”

Wilson says the insurer definition of what is cosmetic could also be troublesome for those insureds who get this endorsement.

“Market value is something that should be considered,” he says. “This could dramatically affect the market value of a property when selling.”

Another factor is how state regulators may react, says Wilson. Some state insurance departments don’t approve filings right away, or they wait and see what way other states choose to go.

AAIS just began its filing and ISO’s is so new that Wilson says it’s hard to gauge a reaction yet.

ISO’s Clarke did say that some states did not approve the cosmetic damage option of its roof surfacing endorsement, but would not comment on why or which ones because the filings are still taking place.

Wilson says that it is understandable why insurers are requesting endorsements such as these and until regulators make it easier for companies to get rate approvals where they are needed, insurers do not have many other choices.

Wilson says with climate change and homeowner carriers loss ratios catching up to them, these endorsements could become the norm and not just an option.

“Some of these areas – particularly in the Midwest where they have a lot of tornadoes and storms – accepting less coverage may be the only way you can get insurance,” he says. “I hope it doesn’t come to that but it may be the only tool that companies have to reduce their loss experience without premium increases.”


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Comments

  • February 28, 2013 at 7:57 pm
    Kathy says:

    I am an agent in the Midwest, right in the heart of tornado and hail country and I am not accepting these endorsements. I hope they do not become the norm. If I have a metal roof on my house and the insurance will not pay for hail damage unless the structure is damaged or unstructurally sound, what happens when I go to sell my house and it looks like I have a checker board on my roof. What happened to insurance bringing you back to like, kind and quality. You pay for insurance and hope not to use it but when you have a covered claim I would expect my roof to look like it did before the storm. I feel these types of claims will need to work through the court system and then the endorsements will not be enforced. I don’t want insurance to become an appearance settlement.

  • February 28, 2013 at 8:46 pm
    Rusty says:

    I agree with Kathy. It appears that the industry is looking to get further and further away from its intended mission of making policyholders whole again following a loss. I am also leery of having something as subjective as “cosmetic damage” inserted into the policy contract. That opens the door for endless litigation and complaints. And, to her concern about policies simply being renewed with the new form, at least here in New York State, policyholders are entitled by law to a conditional renewal notice at least 60 days in advance of esxpiration advising them of any change that reduces coverage from that of the expiring policy. The trouble is when an entirely new form is adopted with new exclusions or conditions that reduces coverage, the notice sent is often as lengthy as the policy itself and requires huge amounts of time to read in an attempt to understand the effect on policyholders, who wouldn’t be able to decipher the notice themselves. That imposes a big burden on agents and brokers who might be held responsible if a loss that was expected to be covered, as it may have been in the past, wasn’t covered because of the new form. That is of real concern because people don’t typically read their polcies or ask questions about them. Even if they did, they wouldn’t likely understand it, but they often expect just about any loss they experience to be covered unless, perhaps, they heard on TV – like in the flood insurance commercials – that it isn’t covered.

  • February 28, 2013 at 10:47 pm
    Ed says:

    As an adjuster I must agree with the agents, this is going to be a messy situation. And typically the ones who first have to deal with the insured’s wrath are those of us standing there talking with them in person looking at that “cosmetic damage”. Let’s just hope that many states simply do not approve it and that the courts don’t find it appealing either. Just one more avenue by which we get to listen to the insured scream!

  • March 1, 2013 at 3:38 pm
    Paul R. Kujawa, CIC says:

    I have to agree that this will open a whole new can or worms for claim settlements. I can just see adjusters excluding damage and calling it “cosmetic” and the insured contesting it affects the functionality of the premises. We are already dealing with the flood and wind adjusters pointing fingers at each other saying it is not their loss. This will just add more problems to the process. I do understand that carriers have to watch their bottom line but there is only so much coverage you can carve out of the contracts. Our agency is on the east-end of Long Island so we are already dealing with major wind restrictions on our property policies. I am still waiting for the cat. storm to strike us and the percentage deductibles coming into play. That is going to be a nightmare. No matter how much we educate our clients about the existance of those deductibles, the clients are going to freak when their being told to pay tens of thousands of dollars to satisfy their deductible. We lucked out with SuperStorm Sandy as it was not a cat. storm in our area. The big one will come and that is going to be an interesting ride.

  • March 1, 2013 at 7:42 pm
    Hector Chaparro says:

    Agree with the market value being affected; however, HOAs have to be taken in consideration since their power places homeowners against the wall from the property being “aesthetically” presentable within the subdivision, especially the affluent gated/pre-Madonnas subdivisions; the cost of repairs. Can you repair hail damage on Spanish S-tyle roof, or even less costly — asphalt shingles. I believe homeowners may be facing steep fines and or liens imposed by HOAs.

  • March 1, 2013 at 9:51 pm
    Ray says:

    The problem is when insureds demand the replacement of the roof and then do not replace it and pocket the money. On occasion the dents pop out with the heat of the sun over time. It is a tough call. If there is a solution to be fair to both parties I am all ears.

  • March 1, 2013 at 10:36 pm
    Watcher says:

    Unless the carriers can get an increase to cover things like that, then it makes sense to limit cover. If this doesn’t work, then it almost sounds like an increase in deductible is needed to make up the difference. The idea of $2500 or even $5000 roof deductibles could be a feasible alternative.

  • March 2, 2013 at 3:27 am
    Olin says:

    A problem I have already experienced is when you have some cosmetic damage and the client wants to switch carriers this type of endorsement will make rewriting a policy much more difficult if not impossible. If this type of endorsement is allowed then all companies will pretty much have to follow suit or a client will be forced to remain with the one carrier until the roof is completely replaced. I can see some major problems between carrier acceptance of risks. This is just another side of the decline in market value for the property owner.

  • March 4, 2013 at 5:07 pm
    KentU says:

    I see good and bad in the cosmetic exclusion endorsement – it depends upon the situation. My agency is in the Dallas-FW metroplex and I can’t count the number of hail losses which I’ve had in the last 30+ years. My sister is buying a house (90 miles south of Dallas)two days from now which has a UL grade 4 metal panel roof. She is age 70 and doesn’t plan on ever moving again. She won’t care if her metal roof sustains only cosmetic damage because she never plans to resale the house. However, I’ve had other customers that changed their mind about going to a metal roof because of the cosmetic exclusion. I would like to see carriers offer two rate structures – one with the cosmetic exclusion and one without. I am also looking at replacing my compostion shingle roof with metal but, I’m looking at going with corrogated steel which rolls rather than the steel panel because it will take a lot more punishment. We are taking about metal roofs but, many of these cosmetic exclusions are also applying to all kinds of roofs.

  • March 4, 2013 at 10:48 pm
    R P Floyd says:

    I am a comm property underwriter and we are using this endorsement more and more. We see it as a solution for the frequent hail claims to industrial and warehouse bldgs that have metal roofs. Fact is many of the insureds pocket the claims and/or recycle the same damage from a prior year into a new claim with the new carrier. We offer this form at a discount and also offer the coverage with out the endorsement for higher premium. Seems fair to me and gives the insured an option…..otherwise premiums will rise substantially…in the E&S market at least.

  • March 7, 2013 at 4:42 am
    Mark says:

    This endorsement has been around in Texas for nearly 20 years. Where has the rest of the country been?? It’s pretty common to have the cosmetic exclusion on homes with metal roofs. Out in west Texas, the hail dents add character and I doubt it really hurts the value of the house.

  • June 5, 2013 at 6:29 am
    Gary Deitering says:

    Question about home owners insurance on a metal home. Finished a Very nice home-2400 Sqr.ft. living-attached 3 car garage, factory bulding, custom interior. Now the problem, no buddy will insure “metal homes” Farmers-Farm Bureau- State Farm- and different underwriters. Totally sick and need help. I am retired and this is my last home. Build one in Texas 20 years ago with no problem in dealing with Farmers, don’t understand the problem, nor does the agents, they all say buetiful home and are surprised at rejection. Maybe describing it wrong or something, all code on wiring, plumbing.etc. Should have checked before I built but didn’t expect a problem, at my age to have all my savings in the home with no insurance is a daily worry, sure would like to here if others have problems like this, or where to look for ins. or am I describing it wrong for insurance ratings. Everybody is in pressed with the home but that doesn’t help with my problem. Thanks for any in site you folks can give. Gary P.S. Built on edge of small town, fire plug 1000′ foot away, Fire station 3 blocks away, as if fire is a problem. Thanks again

  • June 5, 2013 at 7:01 am
    Gary Deitering says:

    Home owners insurance for metal homes. I finished a 2400 sq. attached 3 car garage, very-very nice home. Factory built home, custom interior, all construction is to code of our town. Built one in Texas 20 years with no problem on ins. But here I’ve tried Farmers-Farm Bearu and different underwriters with no avail. insurance in Texas was with Farmers. All Agents are amazed also that they won’t write it. Should have checked before I built but never expected a problem. Am retired and used all my savings to build, so every day worry to have it done and not able to insure it. Home is 1000′ from fire plug and 3 blocks form fire Dept. so fire is not a problem. Maybe agents are listing it wrong I just need some imput. Thank you for any help Gary

  • July 27, 2013 at 3:17 pm
    Diana Higginbotham says:

    We suffered soft ball size hail damage on our home a few months ago. Didn’t realize the deduction we got in our insurance rates was because of the “cosmetic damage” clause until we filed an insurance claim for our roof. The roof is metal with some kind of stone coatings on it. It has been dented in MANY places and the coatings knocked off. The manufacturer says the warranty is voided. The insurer won’t pay. The roof isn’t leaking…right now. But the bare metal is showing and the appearance has been degraded. So we got a 15% discount because we had a metal roof. Does that mean we have to pay $67,000 for a new roof out of our own pocket to protect against something our insurer should pay for to bring our property back to the point it was BEFORE THE HAIL STORM? This does not seem right. We were not told this was a cosmetic exclusion. We were told it was a discount because we were buying a home that had a metal roof. Yes, we should have read the fine print. Unfortunately we were still in shock because our home of 18 years had just burned down in the Texas wildfires of 2011 and we thought we could trust this agent to guide us. Do we change agents now? Get a new policy? Would that do us any good with a pre-existing damaged roof???

    • September 12, 2013 at 1:13 am
      Keith Bynum says:

      @Diana. I am a public insurance adjuster who deals with these types of “exclusions” daily, they are based on “cosmetic” damage only and are not intended to be a platform for blanket denial by the insurance company. If the damage is “cosmetic” in nature then so be it, if the seams have been compromised and the roof will leak in the future, it is functional and needs to be address properly. I have helped people like yourself and could possibly help you as well. keith_bynum@hotmail.com if you would like to talk about your situation

  • October 3, 2014 at 5:15 pm
    Don Johnston says:

    The hail storm that dents a car will also dent your metal roof. Dents in a car will not affect the function of the car. Would anyone carry replacement cost insurance on their car knowing that hail dents “cosmetic” damages is not covered. I think not. J

  • October 6, 2014 at 12:58 am
    Tom Koster says:

    We had a hail storm come through our area & damaged over 95% of the homes in the area all needing roofs replaced. We own a retail store with 3 buildings all metal & each one consist of over 10,000 sq ft per building. Insurance adjuster looked at our roofs & said we had over $200,000 dollars damaged. I get a call from my insurance agent & said because we have a exclusion in our policy that it will not cover our buildings because of cosmetic exclusion. My concern is we are close to 65 years old & are wanting to sell the business, due to the damages to our buildings I know we will take a hit on the selling price. If I was a buyer I know I would make the seller take less for the business because of the looks of the facility. Any suggestions on what we should do? Thanks Tom

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