When a gentleman’s home suffered storm damage, he fell into a significant dispute over his coverage. The policy was issued on an actual cash value basis, so there was agreement that the portion of payment for the materials used for repairs should be reduced. The problem arose over the other portion of the loss, labor costs.
The homeowner discovered that the insurer had a novel approach to depreciation that was being used with him and many other policyholders. The settlement also included a reduction for the amount paid for labor. The homeowner became the lead plaintiff in a class action lawsuit to challenge that practice. The dispute was appealed by the insurer when a lower court ruled that the homeowner’s interpretation was proper.
See how a higher court viewed the insurance company’s argument regarding the application of depreciation in ACV losses.
Charles Cranfield’s home was damaged by a storm. At the time of his loss, his home was covered by a State Farm Fire and Casualty Company (State Farm) dwelling policy. Cranfield and State Farm disagreed over the approach the latter used to determine damages. Cranfield, in the form of a class action of likewise situated policyholders, sued the insurer. State Farm moved the action from state court in accordance with law related to class action activity. After a district court ruled in favor of the insurer, Cranfield appealed.
The higher court spent its effort on the policy language with regard to actual cash value loss settlements (the process used by the dwelling policy) and a recent decision it made in another case involving the same provision.
In district court, the two parties argued over the applicability of depreciation, the key component in adjusting property losses under State Farm’s actual cash value loss settlement. Both Cranfield and State Farm agreed that depreciation was properly applied to the cost of materials used in making repairs to a home. However, State Farm then applied a depreciation factor to the labor costs of estimated repairs and Cranfield objected.
As did the lower court, the higher court reviewed the policy’s definitions of both actual cash value and depreciation. The higher court also considered the decision it made in Perry v. Allstate. After both the policy review and consideration of Perry, it reached a different conclusion. The court did not agree with the attempt to depreciate labor costs as, in neither this situation nor Perry, the applicable policies did not specify that labor costs were subject to depreciation. The lower court decision was reversed and remanded for rehearing.
Charles Cranfield, individually and on behalf of all other Ohio residents similarly situated, Plaintiff-Appellant, v. State Farm Fire & Casualty Company, Defendant-Appellee. USCTAPP, 6th Circuit. No. 19-3004. Filed: 03/23/2020. Reverse and Remanded.
https://www[dot]propertyinsurancecoveragelaw[dot]com/files/2020/03/Cranfield-v.-State-Farm[dot]pdf [downloaded 7/31/2020]
Keeping Their Function But Losing Their Value
Residential property coverage has always been a challenge when it ages. Dwellings continue to be valuable because of their ongoing function in providing shelter. However, as time passes, valuation becomes a larger concern due to a disparity that develops and widens should a significant loss occur to the insured property.
Residential property policies are designed to align an insurer’s obligation to protect property owners in accordance with the value of the property that is insured. When losses happen, settlement is made in a manner that walks a fine line between function and value.
Here is an excerpt of wording on settlement found in the ISO Dwelling Property 3 Coverage Analysis in the PF&M portion of Advantage Plus.
- Loss Settlement
The settlement provision of the DP 00 03 policy depends upon the class of property that suffers a loss.
- Settlement on damage to:
- Personal property
- Awnings, carpeting, appliances, outdoor antennas and outdoor equipment, and
- Structures that are not buildings
If items such as the above covered property are damaged, the loss is settled at actual cash value at the time of loss. However, the settlement will not be more than the amount necessary to repair or replace the property.
| Example: Your client has a ten-year-old sofa that is destroyed in a fire. The insurance company discovers that the same model costs $1,700 today. However, they consider the age and information from the insured about its condition, stains, etc., and determine that its actual cash values is only $319 and that is all that will be offered. |
Remember, the purpose of insurance is to restore an insured to approximately the same position they enjoyed before the loss. Without this provision, an insured whose loss was based on new or replacement value would be financially enriched by a loss.
- Settlement on damage to dwelling and other structures:
Loss settlement for this type of property is more complicated. If such property is damaged, settlement may be based on replacement cost (where no deduction is made for depreciation). However, the use of replacement cost is conditional upon the following:
The limit of insurance written on the damaged property must equal at least 80 percent of the structure’s full replacement value.
Although the loss is settled according to replacement cost, the maximum to be paid under the policy is the least expensive among the following:
- The limit of liability shown on the declarations for the covered property
- The replacement cost of the portion of structure damaged (using similar materials)
- The amount necessary to replace or repair the damaged structure
Regardless the option, there will be a deduction for the policy deductible.
The settlement is different when the limit of insurance at the time of loss is less than 80% of the structure’s full replacement value. Under this circumstance, the policy will pay the greater of:
- The actual cash value of the damaged structure
- The proportional replacement cost value of the damaged structure. The proportion is based upon the relationship between the actual percentage represented by the limit of insurance to the 80% required to trigger full replacement cost coverage.
IMPORTANT: The loss payment will still subtract the deductible and it will be no more than the actual limit of insurance.
In order to determine the amount needed to meet the 80% of full replacement cost requirement, only include the value of the structure that is above the structure’s foundation walls or the lowest basement floor, whichever is applicable.
Only actual cash value of the loss will be paid unless one of the following applies:
- a. the damage is fixed
- b. the loss amount is less than $2,500 AND less than 5% of the limit of insurance.
Finally, the policy owner has the right to have the loss settled on an actual cash value basis and has up to 180 days (from the loss date) to make claim for any additional amount on a replacement cost basis.
We Preserve The Role of Insurance
So much of our current effort in both our personal and professional lives are tied-up with the pandemic. We all know just how thoroughly married the insurance sector is to this crisis which, unfortunately, has morphed into a long-range, substantial issue. In client and court spaces, questions are being raised, discussed and, too often, litigated with regard to the coverage provided by myriad forms of insurance.
The loss settlement process is a foundational piece of coverage intent. As insurance professionals in the 21st Century, one of our most important jobs is still to embed an understanding of insurance’s proper role to indemnify against eligible losses. Older residences are a prime example of having to manage insured expectations regarding reimbursement after eligible losses. The passage of time, even with the most careful maintenance, still creates conditions that reduce property value and makes insurance a source of compensation that is adjusted for the reality that replacement cost settlement is not an option.
Here is an article discussing various considerations for older homeowners, particularly with items that affect insurability and value under E-marketing for Agencies found in Advantage Plus.
Homes make up one of the largest types of coverage provided by insurance companies in the U.S. Per recent U.S. Census Bureau figures (as of 2013), the age composition of owner-occupied homes breaks down as follows:
2010 – 2013: 2%
2000 – 2009: 15%
1990 – 1999: 14%
1980 – 1989: 12%
1970 – 1979: 17%
1969 & earlier: 40%
The median age of such homes is 37 years. Average home age differs considerably across the U.S. with the lowest average age in the West and the highest in the Northeast. Older homes are, for the most part, readily insurable. However, significantly aged homes, say 70 years or older, can create issues for insurers.
Really old homes (antiques, built 1920 or earlier) have architectural features that are very difficult and costly to repair. This may make it necessary to get insurance coverage on a different claims settlement basis, such as functional or repair cost protection. The result is that owners of older homes must bear more of the risk and expense of losses that occur.
When dealing with older homes, there are a variety of problems, such as the following:
- May contain hazardous materials such as lead in paint or asbestos flooring or insulation.
- Possibility of insect damage such as termites; older, wooden structure in southern part of the country are more vulnerable as insect activity occurs year-round.
- Mold and Mildew Damage due to older homes being exposed longer to the effects of moisture, including from older plumbing fixtures.
- Plumbing Problems- significant damage can occur if a plumbing system is aged, making leaks and burst pipes possible due to clogs, deterioration and root damage.
- Foundation or Structural Problems – A variety of problems can occur due to deterioration, shifting and settling. Cracked foundations, floors, walls and damage to home openings become common and ineligible for coverage.
- Roof Problems – Older homes can often have old, deteriorating roofs. Such roofs may suffer from water damage, damage to insulation and drywall and even vermin infestation. All are ineligible for coverage as they are maintenance issues.
- Inefficient Windows – These are endemic to older homes, creating huge bills due to air leaks.
- Electrical Systems – Older homes face significantly higher exposure to loss caused by obsolete electrical systems, such as increased fire hazard from exposed wires or circuits that may blow or overheat.
- Failing or Inefficient Mechanicals and Appliances – these can present higher likelihood of interior flooding from burst appliance connections or winter pipe freezing because of furnace failure and other problems.
- Outdated Updates or Features – may exist in older homes due to actions of multiple, previous owners. Older homes may have physical features such as uneven flooring, unusual entries or stairs or partial walls and off-centered supports. These could lead to increased hazards to residents and visitors if uncorrected.
Please refer to our discussion, “Functionally Valuing Older Business Property” for more information.
Seek Information and Shine
Personal Lines clients don’t usually have the same level of insurance savvy as do Commercial clients. Often, additional effort is needed to assist them with making sure that their loss risks have been properly addressed. Spending time to educate clients is a marvelous opportunity to explore their personal risk environs.
Agents who wish every advantage to maintain and, better still, experience healthy growth understand that current clients can’t be ignored. In fact, it is critical that they are handled in a manner that demonstrates that their business and coverage needs are valued and monitored. It’s important to use tools that allow insurance professionals to competently build a client knowledge base. Actively seeking information is the proactive stance needed to properly serve insureds.
Below is a letter containing a homeowners checklist that can be invaluable in determining a client’s current exposures that should be addressed. It’s from Building Business Letters found in Advantage Plus.
Please take a moment to complete this form. Because aspects of your life change, you and your agent should use this form as an aid to assure that you are properly covered.
| Do you have collectibles: antiques, fine art, stamps, coins, etc.? | Yes No |
| Do you have costly sporting equipment or firearms? | Yes No |
| Do you have valuable jewelry or furs? | Yes No |
| Do you have valuable photography equipment? | Yes No |
| Do you have a business in your home? | Yes No |
| Do clients or customers come to your home? | Yes No |
| Do you keep a large amount of others’ business property in your home? | Yes No |
| Do you have a computer in your home? | Yes No |
| Do you own professional tools or equipment? | Yes No |
| Do you keep samples or items for sale in your home? | Yes No |
| Do you baby-sit or have child day care in your home? | Yes No |
| Do you own rental or income property? | Yes No |
| Are your contents covered for “replacement value”? | Yes No |
| Do you have a secondary residence? | Yes No |
| Do you own investment property? | Yes No |
| Have you installed home fire or security alarms? | Yes No |
| Do you keep more than $250 cash in your home? | Yes No |
| Do you own recreational vehicles: boat, jet-ski, camper, cycle, etc.? | Yes No |
| Have you remodeled your home? Have plans to do so? | Yes No |
| Do you have “umbrella” liability coverage? | Yes No |
| Do you have an above-ground or in-ground swimming pool? | Yes No |
| Do you have detached structures: gazebos, storage barn? | Yes No |
| Do you have a zipline installed on the premises? | Yes No |
| Do you have pets? | Yes No |
| Do you have roomers or boarders? | Yes No |
| Do you have domestic help such as babysitters, landscapers, or house cleaners? | Yes No |
| Do you travel frequently (domestic or foreign)? | Yes No |
| Do you have a wood burning stove? | Yes No |
| Do you have a fireplace? | Yes No |
| Have you had your chimney professionally cleaned and inspected within the last 12 months? | Yes No |
| Do you have flood insurance? | Yes No |
| Is there or has there ever been evidence of water leakage or seeping in the residence? | Yes No |
| Do you have earthquake insurance? | Yes No |
| When was the last time you refinanced your mortgage? (mm/dd/yy) | / / |
| Are you interested in protecting yourself from identity theft? | Yes No |
| Is your home insured correctly should you sustain a total loss? | Yes No |
| Would you complete a residence cost estimator? | Yes No |
| Full Name: | __________________________________ |
| Street Address | __________________________________ |
| City: | __________________________________ |
| State: | __________________________________ |
| Zip: | __________________________________ |
| Phone: | __________________________________ |
| E-mail: | __________________________________ |
