A Cautionary Tale for Insureds and Insurers

Last year while I was out of town, a roofing company showed up at my home and told my wife there had been a hailstorm recently, so they were visiting impacted neighborhoods and providing free inspection services. She let them on the roof and, of course, they found extensive hail damage even though the storm they referred to did not deposit any hail in our immediate area that we were aware of.

So, to confirm their diagnosis, we contacted two roofing companies that we had used in the past at homes we’ve owned. Both of these companies had been in business locally for decades. Neither company found any hail damage to our roof. Neither of these companies follow storms looking for work, as both are usually backlogged with jobs.

The company that did claim we had damage I’d never heard of and they had apparently come here from about 150 miles away. Despite that, they had allegedly found hail damage at nearby homes and the homeowners insurers for those homes paid to have new roofs installed. Perhaps they actually did have damage … or maybe the insurers weren’t as vigilant as they could be?

The Issues

Regardless, this practice is just one of several issues that often accompany hail damage claims, but let’s focus on real problems regarding inarguable hail damage rather than conjecture. The first issue involves discovery and reporting of damage, which I’ll address in this month’s column.

Next month, we’ll examine other hail damage issues such as actual cash value vs. replacement cost policy provisions, percentage deductibles, special cosmetic damage exclusions, existing “marring” exclusions, and Pair or Set clauses, the latter of which I’ve used to get roof, siding and shutter claims covered under homeowners policies. But, first, let’s examine discovery and reporting issues.

Discovery and Reporting of Hail Damage

A few homeowners policies require “notice” without regard to timeliness. Most homeowners policies require “prompt” notice of damage or notice “as soon as practicable.” Some require the arguably more stringent “immediate” notice of damage.

More restrictive policies, such as those that are the subject of this article, indicate specific time limits such as one year or 365 days from the date of loss or damage-causing event. Case law is all over the place on hail claims where the damage may only be discovered months after it occurred when revealed by a major rain storm that results in interior water intrusion.

Court Case – Majority Opinion

Most recently, the Colorado Supreme Court decided two cases – Gregory v. Safeco Insurance Co. and Rumkel v. Owners Insurance Co. – by a very narrow 4-3 majority decision. In both cases, hail damage claims were denied based on the late reporting of damage under policies that included very specific time limits on reporting.

Previously, the Court had established that, in order to deny coverage for untimely notice, the insurer must show prejudice due to the late notice. However, this position had previously been limited largely to uninsured/underinsured motorist coverage and third-party liability claims, not to first-party homeowners property claims.

In their decision in these cases, the Court concluded that the notice-prejudice rule does apply to occurrence-based, first-party homeowners policies. Their decision was based on two principal reasons.

First, the purpose of such reporting restrictions in insurance policies is to allow the insurer to properly investigate and, if warranted, establish a defense while evidence and testimony is still reasonably fresh and reliable. In the Court’s opinion, this apparently is not enough of an issue in first-party property claims where damages and cause(s) of loss are evident over time.

Second, referring to a 2001 decision of the Court in Nationwide Mutual Fire Insurance Company, 16P.3d 223, 229-30, when determining whether the notice-prejudice rule applies, one must consider the “adhesive” nature of insurance contracts, the public policy objective of compensating victims, and the inequity of granting the insurer a windfall due to a technicality. In other words, as I stress in my book “When Words Collide: Resolving Insurance Coverage and Claims Disputes,” the purpose of insurance is to insure.

When it is clear that a loss is covered, courts should not be unreasonably swayed by contract language that essentially provides a loophole or an inequitable means of avoiding coverage.

In the present cases, the Court effectively established that, unless late reporting is prejudicial to the insurer, the limitation in the insurance policy is, as a matter of equity, unenforceable. In addition, the burden of proof as to prejudice falls on the insurer, not the insured.

Court Case – Minority Opinion

On the other hand, in the 4-3 decision, the minority included a dissenting opinion based largely on the freedom to contract, despite the assertion of the majority regarding the adhesive nature of insurance contracts. The reality is that pretty much no homeowners read the policies they buy and certainly do not compare multiple policies when making an insurance purchasing decision, so adhesion is, to that extent, quite real.

The minority opinion’s primary focus appeared to be the potential impact the majority decision could have on the marketplace given the premise that the date-certain notice requirement in a property policy assists insurers in underwriting and pricing the coverage. They have a point, but it did not sway the majority in reaching a decision they based in large part on public policy issues. State insurance regulators, as a matter of public policy, have often suspended restrictive policy language regarding reporting and documentation following disasters.

Another point expressed in the minority opinion was that property policies impose an obligation on insureds to be aware of the condition of their property. This presumably means that, if the insured suspects they may have insurable damage, they should report it to the insurer promptly. This raises the issue of how reporting potential claims following every significant storm might adversely impact underwriting and pricing for insureds. Do insurers really want to encourage and deal with an influx of such reporting?

Possible Solution?

An interesting point in this discussion is when a very specific 365-day reporting requirement only applies to wind or hail damage. Such a restriction might seem reasonable, even generous, for a fire claim, or if a pipe bursts and floods a home. But for a claim that is not readily apparent to a consumer, is it? It would make more sense if a specific limitation applied to most claims except for “hidden” losses like hail damage or plumbing leaks. Often, hail damage is only discoverable when it manifests itself months later in the form of a roof leak during a significant rainstorm.

ISO homeowners policies used to exclude water damage from repeated seepage or leakage of water from plumbing systems that occurred over weeks, months or years. However, often such leaks are hidden in walls or other nonvisible spaces and it can take weeks, months, or even years for the damage to reveal itself. As a result, in their 1991 countrywide homeowners filing, ISO removed this exclusion and, since that time, relied on the Neglect exclusion to deny such claims. That being said, many, if not most, insurers continue to exclude repeated seepage or leaking plumbing claims, which makes one wonder how such policy provisions may be considered in the future in Colorado given the decision discussed here.

The reality is that there is very little in the way of encouraging loss control in personal lines, and homeowners should do a much better job of periodically inspecting their property to catch and/or prevent damage. However, is it reasonable to expect insureds to have their roofs inspected after every storm? And, again, is it in the best interest of insurers to have to devote claims services to such inspections?

What do you think? Feel free to voice your opinion. Be sure to tune in next month when we discuss a half dozen or so additional issues dealing with hail and windstorm claims.

Wilson, CPCU, ARM, AIM, AAM is the founder and CEO of InsuranceCommentary.com and the author of six books, including “When Words Collide…Resolving Insurance Coverage and Claims Disputes.” Email: Bill@InsuranceCommentary.com.

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