“Right to Repair” is a trend, that while becoming an increasingly popular option given that property insurance policies include wording giving insurers this power. Unfortunately, while becoming more common, and while the provision sounds like a good idea in theory, is not being utilized by insurers in the way that was intended.
Digging deeper into right to repair provisions and the effect they can have on other coverages in property insurance policies, Carter Bess of the Merlin Law Group, gives us a taste of what policyholders can expect if they use this provision. In a blog post, Right to Repair: How People’s Trust Insurance Company’s Preferred Contractor Endorsement Leaves Policyholders Over a Barrel, calls this a get-out-of-jail-free-card for the insurance companies.
For quite some time now, the standard HO 3 language in a residential homeowners insurance policy has had “Our Option” language in the conditions section towards the end of the coverage for section I:
Our Option. We may repair or replace any part of the property damaged or stolen with similar property within 30 days after receipt of your signed, sworn proof of loss. Any property we pay for or replace becomes our property.
In the past, insurers have rarely used this condition. Now, however, evolving language has created a nightmare for policyholders. Citizens, Avatar, and People’s Trust are some of the major players taking advantage of this program, as their policies will have a slightly different “Our Option” condition language:
At our option:
1. For losses settled on an actual cash value basis, we may repair or replace any part of the damaged property with material or property of like kind and quality.
2. For losses covered under Coverage A – Dwelling, insured for Replacement
Cost Loss Settlement as outlined in SECTION I – CONDITIONS, Loss Settlement, we may repair the damaged property with material of like kind and quality without deduction for depreciation.
3. We will provide written notice to you no later than thirty (30) days after our inspection of the reported loss.
4. You must comply with the duties described in SECTION I – CONDITIONS, C. 7 and 8.
5. You must provide access to the property and execute any necessary municipal,
county or other governmental documentation or permits for repairs to be undertaken.
6. You must execute all work authorizations to allow contractors and related parties entry to the property.
7. You must otherwise cooperate with repairs to the property.
8. You are responsible for payment of the deductible stated in your Declarations page.
9. Our right to repair or replace, and our decision to do so, is a material part of this contract and under no circumstances relieves you or us of our mutual duties and obligations under this contract.
This option has become carefully crafted by insurance company underwriters, where the option was rarely used is now being invoked at each available opportunity to disclaim liability now or in the future.
A scenario posed by Carter in his previous post was the following:
An insured property suffers a loss as a result of a fire. People’s Trust sends out an adjuster to estimate the loss, but ultimately prepares an estimate for damages to the dwelling that is insufficient to restore the insured property back to its pre-loss condition. People’s Trust then notifies the policyholder that it is extending coverage in the amount of the estimate and that it is invoking its right to repair under the Preferred Contractor Endorsement.
The policyholder advises People’s Trust that he or she does not agree with the amount of the loss. People’s Trust then requests a Sworn Proof of Loss and invokes the policy’s appraisal provision shortly after. The policyholder submits an executed Sworn Proof of Loss and supporting estimate, but People’s Trust rejects the Sworn Proof of Loss and informs the policyholder that any valuation dispute will be addressed through the appraisal process.
The party’s appraisers ultimately enter an appraisal award for more than twice the amount People’s Trust initially paid on the claim. People’s Trust then sends the policyholder a “work authorization” form that authorizes the “preferred contractor,” Rapid Response Team, to perform repairs according to the amount of the appraisal award. The policyholder then signs the work authorization and complies with all other conditions stated in the policy in order for the loss to be paid and repairs to begin.
Whereas Carter’s post then dealt with this provision’s conflict with other language dealing with a policyholder’s non-salvageable contents, this blog will address another scenario: the faulty workmanship exclusion.
One of the most common exclusions, which will be found in almost every homeowner’s insurance policy, is the faulty workmanship exclusion.
SECTION I – EXCLUSIONS
A. We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.
12. Existing Damage
a. Damages which occurred prior to policy inception regardless of whether such damages were apparent at the time of the inception of this policy or discovered at a later date; or
b. Claims for damages arising out of workmanship, repairs or lack of repairs arising from damage which occurred prior to policy inception. However, any ensuing loss arising out of workmanship, repairs or lack of repairs, caused by a Peril Insured Against, to property described under Section I – Property Coverages, is covered unless the loss is otherwise excluded in the policy.
But that is not the only place you will find it. The example policy provision quoted above puts another workmanship-related provision in the section directly after section A:
B. We do not insure for loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not precluded by any other provision in this policy is covered.
1. Weather conditions. However, this exclusion only applies if weather conditions contribute in any way with a cause or event excluded in A. above to produce the loss.
2. Acts or decisions, including the failure to act or decide, of any person, group, organization or governmental body.
3. Faulty, inadequate or defective:
a. Planning, zoning, development, surveying, siting;
b. Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
c. Materials used in repair, construction, renovation or remodeling; or
d. Maintenance; of part or all of any property whether on or off the “residence premises.”
Both of these provisions are similar – any damage performed prior to the policy inception is not covered and any faulty workmanship after the covered loss occurs, then the damage will not be denied as excluded – this is “ensuing loss” arising out of workmanship. Just because it is not excluded does not mean the insurance company will not increase the estimated value of your covered loss by a substantial sum.
“Policy inception” can and will often be, interpreted to be the date in which the policy begins, even upon renewal. Here is an example:
Picture significant roof and interior property damage due to a hurricane suffered by a policyholder. This policyholder has a Right to Repair provision in their policy, allowing the insurer to assign its preferred contractor to fix the damages instead of paying out benefits. Their preferred contractor, however, is bogged down with hundreds of other claims, delaying repairs. This contractor finally arrives at the property but isn’t given their full attention or time due to their busy schedule and their need to get to other homes.
Once the contractor leaves, the insurance company notifies the policyholder that the claim is now closed. The policyholder trusts that the insurance company and the contractor assigned to their claim has provided satisfactory efforts in repairing the damages that has enabled the insurance company to close the claim.
After about a year and a half, this same policyholder’s home has a burst pipe in the kitchen – which overlaps with some of the previous damage from the hurricane. The insurer sends out an adjuster whose inspection concludes that the overlapping damaged areas points directly back to the shoddy work done by the contractor and denies a portion of the claim.
You are not alone if you find this to be a more than a little messed up. The preferred contractor – hired by the insurance company – was someone who contributed to the damage of the property and because the damage happened in a policy period AFTER the damage from the hurricane, affects the policyholder’s claim. So, of course, they are “preferred” if they can be used like this.
The more that these Right to Repair provisions are included in homeowner’s policies, the more the insurance companies will take advantage of them. This is why these policies need to evolve, so that these claims don’t continue to be manipulated, mishandled, and used for the advantage of the insurer.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email email@example.com.