4 ADJUSTINGTODAY.COM Potential Issues/Problems As noted earlier, the introduction of these limiting endorsements is at least a partial response by insurers to confront mounting claim frequency involving volatile weather-caused losses that adversely affect their bottom line. Frankly, mounting claim frequency (and severity) affect the entire country: from conflagrations in California; wind, hail and tornadoes in the Midwest and South; to wind, hail and hurricanes on both coasts. Despite the insurers’ rationale for introducing these limitations, they are not necessarily being welcomed by agents and insureds. There are pitfalls and problems that will confront insureds, insurers and adjusters alike. The meaning of “cosmetic damage,” despite the fact that the term is defined in the policy, may still create debate and controversy. Here are some of the issues with these endorsements: Let’s say an insured has an extensive wind or hail loss to his roof, which is 15 years old. In the absence of the new endorsements, the roof will be replaced new for old, less the deductible (assuming he has a homeowner or commercial property policy with replacement cost coverage). If the ACV endorsement is attached to the policy, payment will be made for the actual cash value of the roof, which means replacement cost less 15 years of depreciation. This means the insured Cosmetic damage is damage that affects the appearance but not the function of the roof, … . will need to pay a significant portion of the cost for a new roof out of pocket. Some may reason that an insurance company should not have to pay for a new roof when the building was already well on its way to needing a new roof. Others may reason that the cost for having full replacement cost is already figured in the premium. How about the insured with a metal roof? Hail dents, pits, mars and discolors the roof — but does not cause any leakage. The roof is cosmetically a mess, but no coverage is available. What happens to the market price of the building when the insured goes to sell it with a roof in that condition? (The same, of course, would apply to asphalt and other types of roofs.) Homeowner associations (HOAs) often have strict rules about maintaining one’s property in first-rate condition. It will not necessarily matter to the HOA whether the homeowner has insurance to make necessary repairs — the bylaws may require it regardless. A dent or crack in a wall caused by wind or hail would not immediately lead to water intrusion from subsequent rainfall, nor would it activate insurance coverage with these new endorsements. But over time it could result in more serious and permanent damage that might have been prevented had repairs been completed at the time of loss.
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