Plaintiffs’ Bar Hits A Wall When It Comes to “Access” Damages

Jorge Cruz-Bustillo | Chartwell Law

In Florida, for years, the plaintiffs’ bar has been filing first-party property law suits for ensuing water damages caused by the failure of cast-iron pipes. In those cases, in which there is no evidence of interior water damages, the plaintiffs’ bar has been claiming repair costs associated with “access” (i.e., tear out and replacement) through the flooring to repair a plumbing drain line. Of course, with this “access,” the plaintiffs’ bar seeks recovery for damages based on matching which could include continuous flooring, baseboards, drywall, painting, etc.

A typical homeowner’s insurance policy in Florida will have a “perils insured” provision similar to the following:

“We insure against risk of direct loss to property described in Coverages A and B only if that loss is a physical loss to property; however, we do not insure loss:***

2. caused by:***

h. (1) wear and tear . . . deterioration; ***

If any of these cause water damage not otherwise excluded, from a plumbing . . . system . .., we cover loss caused by the water including the cost of tearing out and replacing any part of a building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which this water escaped.”

The last paragraph of the “perils insured” provision is referred to as the “ensuing loss” exception. This “ensuing loss” exception provides coverage for any resulting water damage caused by the discharge of water from a plumbing system or household appliance, that is not otherwise excluded under the policy. This “ensuing loss” exception also includes “the cost of tearing out and replacing any part of the building necessary to repair the system.”  The latter provision is known, in first-party property litigation, as “access.”  

In Homeowners Choice Property & Casualty v. Maspons, 211 So. 3d 1067,1069 (Fla. 3d DCA 2017) the Third District Court of Appeal clarified that a homeowner’s insurance policy does not cover “access” through the flooring unless the plaintiff can prove that there are ensuing water damages caused by a back-up covered under the Policy.

In Maspons, supra, the plaintiff furnished a video showing a “break” in the drain line. The insurance carrier retained a plumbing company that inspected and found a “large hole” in the drain line. The trial court entered summary judgment in favor of the insureds. Id. at 1068 (“Based upon this state of there cord, the trial court found there was no coverage under the insurance policy for the repair and replacement of the pipe, but that Homeowners Choice was responsible for the greater cost of tearing out and replacing the slab to make the repair.”)

The Third District reversed and remanded directing the trial court to enter summary judgment in favor of Homeowners Choice. Id. at 1070. The Third District held: “At the time of the summary judgment proceeding . . . There was no evidence that the water exiting the pipe had caused any damage to its surrounding.”  Id. Based on the plain language of the “perils insured” provision, the Third District concluded that ensuing water damages was a necessary condition precedent to coverage for “access” through the flooring (even though the camera inspection did in-fact show that the drain line was broken).

The Third District’s analysis is important for the defense bar to understand. Specifically, the Third District wrote: “Any analysis must begin with the language of the insurance contract.” Id. at 1069. “We give the undefined words of an insurance contract their ordinary meaning, just as we would with any other type of contract.” Id. “‘Direct’ and ‘physical’ modify loss and impose the requirement that the damage be actual.” Id. “Examining the plain language of the insurance policy in this case, it is clear that the failure[i.e. break and/or large hole identified in Maspons] of the drainpipe to perform its function constituted a ‘direct’ and ‘physical’ loss to the property within the meaning of the policy.” Id. The Third District continued:

“However, the last paragraph of the “perils insured” provision, often referred to the “ensuing loss” provision of the policy, cautions that we not prematurely abort our inquiry. That clause provides the homeowner with coverage for an‘ ensuing’ loss that is not specifically excluded. Thus, while the exclusion for“[w]ear and tear” or “deterioration” might mean, and this case does mean by virtue of the Maspons’ concession that Homeowners Choice is not obligated to compensate the Maspons for their corroded drain pipe, if the Maspons suffered consequential loss as a result of the corroded pipe and that consequential or “ensuing” loss is not excluded under another provision of the policy, the loss is covered.” (emphasis added) [citations omitted]. Id. at 1070.

“Happily, for us, we can quickly conclude the interpretative gymnastics in which we are engaged at this point.” Id. “There was no evidence that the water exiting the pipe had caused any damages to its surroundings.” Id. “Thus, the trial court erred by entering judgment against Homeowners Choice for the cost of the repair and replacement of the slab necessary to reach the broken pipe at this time.” Id. “For this reason, we reverse and remand this case for entry of judgment in favor of Homeowners Choice Insurance Company, but without prejudice to the Maspons filing another claim of loss at a later date, if appropriate.” Id.

In Maspons, ensuing water damages were covered. The Third District, however, found that there was no evidence of ensuing water damage. Since the necessary predicate condition precedent did not exist, the Third District directed the trial court to enter summary judgment in favor of Homeowners Choice. For those Florida policies which contain a “water back-up” exclusion, under Maspons “access ”damages would never be covered.

Policy Language Expressly Prohibits Replacement of Undamaged Material to Match Damaged Material

Tred R. Eyerly | Insurance Law Hawaii

    Construing an all-risk Businessowners Policy, the court found that the policy language did not required replacement of undamaged material match materials that were damaged. Pleasure Creek Townhomes Homeowners’ Ass’n v. Am. Family Ins. Co., 2019 Minn. App. Unpub. LEXIS 1095 (Minn. Ct. App. Nov. 25, 2019).

    The policy covered the Association’s 14 townhome buildings. In June 2017, a hail storm damaged siding on all 14 buildings. An appraisal panel included the cost to replace the undamaged, faded siding in its appraisal award so that it would match the new siding. American Family refused to pay this component – which was appraised at about $211,382 – of the award. 

    An exclusion in the policy provided,

We will not pay to repair or replace undamaged material due to mismatch between undamaged material and new material used to repair or replace damaged material. 

We do not cover the loss in value to an property due to mismatch between undamaged material and new material used to repair or replace damaged material. 

After declining to pay for the undamaged mismatched siding, American Family moved for summary judgment, which the district court granted, finding that the policy excluded coverage.

    The appellate court affirmed. The Minnesota Supreme Court in Cedar Bluff Townhome Cond. Ass’n v. Am. Family Mut. Ins. Co., 857 N.W. 2d 290 (Minn. 2014), found that the mismatch between the old siding and new siding available constituted a covered loss, and obligated American Family to pay to replace all of the siding. But the policy in Cedar Bluff had no matching exclusion. Therefore, this case was distinguishable and the district court’s granting of summary judgment to American Family was affirmed. 

Matching Issues and New Endorsements Creating an Insurance Coverage Gap

Chip Merlin | Property Insurance Coverage Law Blog

Insurance company law firm Matthiessen, Wickert & Lehrer have updated a thorough discussion of the adjustment issue of matching in an article, ”Matching Regulations” And Laws Affecting Homeowners’ Property Claims In All 50 States. From their view, they noted the current state of affairs regarding matching:

It remains one of the most difficult issues to deal with in the world of property insurance. Homeowners’ insurance policies usually contain a provision obligating the carrier to repair or replace an insured’s damaged property with ‘material of like kind and quality’ or with ‘similar material.’ They cover property damage resulting from ‘sudden and accidental’ losses. When damage caused by fire, smoke, water, hail, or other causes results in a small portion of a home or building being damaged (e.g., shingles, siding, carpet, cabinets, etc.), whether and when a carrier must replace non-damaged portions of a building in order for there to be a perfect match remains a point of contention. It is a matter of great importance to insurance companies because ‘matching’ problems with a slightly damaged section of roof or flooring can lead to a domino effect of tear out and replacement costs of many items which are not damaged. The problem of partial replacement is especially troubling where the damaged siding or shingles have been discontinued, making it virtually impossible to properly match. To replace only the damaged portion would result in an obvious aesthetic deficit due to a clear difference in the appearance of the replaced portion of the building from the portion that remains undamaged.

Would the entire structure need to be re-sided or the entire roof re-shingled? Or is it sufficient to replace just one wall of siding or just a few shingles? Whether or not the insurance company must pay to replace entire sections of the structure in order to bring the property back to its previous uniformity and aesthetics can bring various state insurance laws and regulations into play. On the one hand, many pundits claim that the terms of the insurance policy require the carrier to pay the cost to ‘repair or replace with similar construction for the same use on the premises.’ They argue that ‘similar’ doesn’t mean matching exactly. Others argue that coverage for ‘matching’ and ‘uniformity’ under a homeowner’s policy doesn’t exist without a specific endorsement. The truth lies somewhere in between and can vary greatly from state to state.

In the Merlin Law Group Condominium Law Blog, I noted a recent case denying the costs of matching in, Associations Which Require Uniform Appearance Should Not Be Sold Policies With Anti-Matching Language. There, a policy was sold to a townhome owners association with an endorsement that excluded matching:

9. Undamaged material. We will not pay to repair or replace undamaged material due to mismatch between undamaged material and new material used to repair or replace damaged material. We do not cover the loss in value to any property due to mismatch between undamaged material and new material used to repair or replace damaged material.

Why an insurance agent would ever sell an insurance policy to an association with anti-matching language is beyond me. I find it ironic that Wikipedia lists both “insurance” and “appearance standards” as benefits for owners in associations. The uniform appearance standards often found in association regulations simply make it negligent for agents to sell anti-matching policies to associations who are supposed to purchase insurance that meets the requirements of the association. Agents should read the by-laws for all associations as a matter of necessary action before selling any association policy to ensure that the people relying upon the agent are purchasing what is required.

The National Association of Insurance Commissioners lists the flowing as an unfair claims practice in its model act:

When a covered loss for real property requires the replacement of or items and the replacement items do not match in quality, color or size, the insurer shall replace 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.

Insurance regulators have noted that not matching is a coverage gap problem to such a degree they have deemed it an unfair claims practice when it happens. Having recognized this as an unfair claim practice, they should not then allow insurers to include language excluding matching. Alternatively, they should severely prevent the selling of such insurance products without mortgagee approval and significant warnings given to the policyholder of the potential negative impact of such language.

Insurer Must Pay for Matching Siding of Insured’s Buildings

Tred R. Eyerly | Insurance Law Hawaii | September 11, 2019

    The Seventh Circuit found that the insurer was obligated to pay for siding of a building that was not damaged by hail so that it matched the replaced damaged portions of the siding. Windridge of Naperville Condominium Association v. Philadelphia Indem. Ins. Co., 2019 U.S. App. 23607 (7th Cir. Aug. 7, 2019). 

    A hail and wind storm damaged buildings owned by Windridge. The storm physically damaged the aluminum siding on the buildings’ sought and west sides. Philadelphia Indemnity, Windridge’s insurer, contended that it was only required to replace the siding on those sides. Windridge argued that replacement siding that matched the undamaged north and east elevations was no longer available, so Philadelphia had to replace the siding on all four sides of the buildings to that all of the siding matched. 

    Windridge sued and moved for summary judgment. The district court ruled that matching was required. The only sensible result was to treat the damage as having occurred to the building’s siding as a whole. 

    The policy was a replacement-cost policy. Philadelphia promised to “pay for direct physical ‘loss’ to ‘Covered Property’ caused by or resulting from” the storm, with the amount of loss being “the cost to replace the lost or damaged property with other property . . . of comparable material and quality . . . and . . . used for the same purpose.” The loss payment provision offered four different measures for loss, leaving Philadelphia free to choose the least expensive: (1) pay the value of the lost or damaged property; (2) pay the cost of repairing or replacing the lost or damaged property; (3) take all or any part of the property at an agreed or appraised value; or (4) repair, rebuild or replace the property with other property of like kind and quality. 

    The Seventh Circuit noted that the district court’s conclusion that the buildings as a whole were damaged – and that all of the siding must be replaced to ensure matching – was a sensible construction of the policy language as applied to the facts. Philadelphia’s interpretation – pay to replace only the specific panels of siding that were directly hit by hail, leading to two-tone buildings – was less reasonable. Regardless, the unit of covered property consider under the policy (each panel of siding vs. each side vs. the buildings as a whole) was ambiguous as applied to the facts, so the interpretation that led to coverage was favored. 

    Here, each building as a whole suffered direct physical loss as a result of the storm. The storm altered the appearance of the buildings such that they were damaged. Due to the extent of the damage and the lack of matching siding available on the market, the better construction of the ambiguous policy was to require Philadelphia to replace the siding on all four elevations of the buildings. The district court’s judgment in favor of Windridge was affirmed. 

Matching Considerations in Utah

Jonathan Bukowski | Property Insurance Coverage Law Blog | November 26, 2019

The National Association of Insurance Commissioners (NAIC) drafted a model law named the “Unfair Claims Settlement Practices Act.” These standards include fair and rapid settlement of claims as well as the procedures and practices constituting unfair claim adjustment practices. Section 9 of the Model Act outlines language pertaining to the replacement of undamaged items when the damaged items cannot be replaced in a way that achieves a reasonably uninform appearance.

In 1999, Utah adopted portions of the NAIC Model Unfair Claims Practices Act to set forth the minimum standards for the investigation and disposition of property insurance claims under Rule 590-190. Among those portions adopted by Utah was Section 9 regarding matching. Rule 590-190-13 of Utah’s Administrative Code provides:

(1) Replacement Cost Value: 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 or repair of items and the repaired or replaced items do not match in color, texture, or size, the insurer shall repair or replace items so as to conform to a reasonably uniform appearance. This applies to interior and exterior losses. The insured is only responsible for the applicable deductible.

While there is a strong likelihood of argument with an insurer as to whether a repair provides a “reasonably uniform appearance,” Utah’s adoption of the matching portion of the NAIC Model Act under Rule 590-190-13 demonstrates its recognition of the inherent effect on value to property caused by mismatching repairs and suggests insurer’s have an obligation beyond repairing the direct physical damage of the property.

It should be noted that a violation of Utah’s Administrative Code does not create any private right of action in Utah.1 Instead, Rule 590-190-13 establishes a guideline for the insurance company to follow with regard to the payment of claims involving matching or uniformity which commonly arise where damaged materials have been discontinued. Violations of Utah’s Administrative Code may evidence the insurance company’s breach of duty under the implied covenant of good faith and fair dealing.
_____________________________
1 UT ADC R590–190–1; Cannon v. Travelers Indem. Co., 994 P.2d 824, 828 (Utah Ct. App. 2000).