Matching Problem in Property Insurance Claims

Look to the Policy Wording

When faced with a coverage question, the first stop is always the policy. The Insurance Services Office, Inc., Building and Personal Property Coverage Form (CP 00 10 10 12) references direct loss or damage and lost or damaged property in several parts of the policy.

A. Coverage

We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss….

E.4. Loss Payment Condition

a. In the event of loss or damage covered by this Coverage Form, at our option, we will either:

• (1) Pay the value of lost or damaged property;
• (2) Pay the cost of repairing or replacing the lost or damaged property….

G.3. Replacement Cost Optional Coverage

e. We will not pay more for loss or damage on a replacement cost basis than the least of (1), (2) or (3) …:

• (1) The Limit of Insurance applicable to the lost or damaged property;
• (2) The cost to replace the lost or damaged property with other property:
  • (a) Of comparable material and quality; and
  • (b) Used for the same purpose; or
• (3) The amount actually spent that is necessary to repair or replace the lost or damaged property.…

[Emphasis added.]

Source: Insurance Services Office, Inc., Building and Personal Property Coverage Form (CP 00 10 10 12), © 2011

Identify the Lost or Damaged Property

The question then becomes what is the lost or damaged property? Is it just the section of siding that has blown off or is it the building itself that, while functional after replacement of the lost siding, may have an unacceptable appearance?

The principle of indemnity underlies property insurance and aims to restore insureds to the condition they were in prior to the loss. If the policy simply pays to replace the section of siding that was damaged, has it truly restored the insured to the same pre-loss condition, which is that of an insured whose building had matching siding?

Look to Model Laws

The National Association of Insurance Commissioners (NAIC) addresses the matching issue in its Unfair Property/Casualty Claims Settlement Practices Model Regulation, stating in part:

Section 9.

Standards for Prompt, Fair and Equitable Settlements Applicable to Fire and Extended Coverage Type Policies with Replacement Cost Coverage

A. When the policy provides for the adjustment and settlement of first party losses based on replacement cost, the following shall apply: …

• (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 area so as to conform to a reasonably uniform appearance. This applies to interior and exterior losses. The insured shall not bear any cost over the applicable deductible, if any.

While this model law has served as a basis for regulations in many states, it is not always controlling.

Look to State Statutes

Some states have enacted statutes, rules, or regulations to address the matching issue. One section of the Effective Rules and Regulations of the State of Tennessee, for example, applies to any policy that provides fire and extended coverage, and it incorporates the language of the NAIC model regulation.

Tenn. Comp. R. & Regs. 0780-01-05-.10

(1) When the policy provides for the adjustment and settlement of first party losses based on replacement cost, the following shall apply: …

• (b) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace items so as to conform to a reasonably uniform appearance according to the applicable policy provisions. This applies to interior and exterior losses.…

Iowa takes a different approach, referring to line of sight in its law. In the case of the wind-damaged building, the siding that is visible when looking at the damaged face of the building should be replaced. Siding on the other face of the building, though, does not need to be replaced.

Iowa Admin. Code § 191-15.44 (507B)—Standards for determining replacement cost and actual cost values

When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace as much of the item as is necessary to result in a reasonably uniform appearance within the same line of sight. This subrule applies to interior and exterior losses. Exceptions may be made on a case-by-case basis…

Look to Case Precedent

In states where there is no statute, rule, or regulation addressing the issue, case law may provide an answer. For example, Alabama does not have a statute addressing matching, but courts have limited an insurer's obligation. In a case involving wind damage to shingles on a rental dwelling, policy language provided for "the replacement cost of that part of the building damaged for equivalent construction and use on the same premises." The court ruled that:

A replacement cost policy only requires the insurer to pay for the pieces of property that were actually damaged.

Source: Graffeo v. St. Farm Fire Cas., Inc., 628 So. 2d 790 (Ala. Civ. App. 1993).

In a Minnesota case, a court reached a different conclusion when asked to rule on the matching issue after hail damaged the siding on 20 condominium buildings. The siding was 11 years' old, and although replacement panels were available, the panels were not available in the same color. The policy in question, a businessowners policy, provided for the replacement of damaged property with other property of comparable material and quality. In this case, the court ruled that the insurer must pay to replace all siding on each of the 20 buildings, stating:

The policy term "comparable material and quality" means "a reasonable color match between new and existing siding" and… requires something less than an identical color match, but a reasonable color match nonetheless." "Color mismatch" constitutes "direct physical loss of or damage to Covered Property."

Source: Cedar Bluff Townhome Condo. Ass'n, Inc. v. American Fam. Mut. Ins. Co., 857 N.W.2d 290 (Minn. 2014)

Sometimes matching is not possible, and not because materials are no longer available, but because the existing materials have weathered. Even in jurisdictions where an insurer is required to pay to replace undamaged property to create a uniform appearance, what is covered may change if matching is not possible due to weathering.

Ohio's Administrative Code is similar to the Tennessee regulation above in that it requires insurers to replace undamaged property to effect matching. In a case involving matching of weathered wooden roof shakes, an Ohio court pointed out that, although new shakes would not exactly match the color of weathered shakes, over time the new shakes would weather to match the old ones.

The district court could reasonably conclude that this would "result in a reasonably comparable appearance" and thereby satisfy the requirements of the Administrative Code.

Source: Wright v. State Farm Fire & Cas. Co., 555 Fed. App'x 575 (6th Cir. 2014)

Usually, when a court rules on the matching issue, the case involves policy language that does not specifically address matching.

Modified Insurance Language To Clarify Intent

Some insurers have added language to their policies to either clearly exclude or clearly cover matching. In the sample language that follows, the insurer is making clear its position that it will not pay to repair or replace property solely because of mismatch.

Contrast that language with language from an insurer that does plan to replace undamaged exterior surfaces so that the building exterior has a uniform appearance. Even with this language, though, there is an exception for mismatch due to weathering and other wear and tear.

A middle ground of sorts is included in the last sample. This language is from a homeowners policy and limits coverage for matching to a percentage of the dwelling limit.

Conclusion

Whether a policy will pay to repair property that is not directly damaged by a covered cause of loss depends on policy language, state statutes and regulations, and common law in the jurisdiction. It is important that insurance professionals understand how coverage applies so that the insured knows what to expect in the claims process.