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.
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.”