Texas Law360
July 28, 2015

Texas is in the midst of a hail lawsuit crisis. Tens of thousands of lawsuits have been filed across the state, with dozens more being filed every day. Many of the lawsuits involve meritless claims solicited by case-runners acting on behalf of lawyers and brought for the sole purpose of extracting an early-litigation nuisance settlement payment. Abuse and outright fraud are common.

Despite a strong push by the insurance industry and others, the 2015 Texas Legislature failed to pass any significant reform measures to address the abuses giving rise to these lawsuits. With no legislative solution, the insurance industry undoubtedly will react with its own solution — policy form changes.

These changes will include increased hail damage deductibles, limitations on coverage in certain situations such as late notice or older roofs, exclusions for various types of damage and in some situations outright exclusions of coverage for any hail-related damage.

Examples of some of the potential forthcoming policy form changes are as follows:

Late Notice

It is not uncommon for case-runners to canvas a neighborhood long after a hail event has occurred. Building owners with no indication of hail damage are lured into filing belated claims with promises of a free roof. Often, these claims are filed many months or even years after the hail event. One reasonable manner in which to address this issue is a policy provision creating an absolute claim filing deadline, such as the following:

In addition to your obligation to provide us with prompt notice of loss, with respect to any claim wherein notice of the claim is reported by you and to us more than one year, but less than two years after the reported date of loss, our limit of liability and payment for covered losses shall not exceed the smallest of the following:

a. the actual cash value at the time of loss determined with proper deduction for depreciation;

b. the actual cost to repair or replace the damaged property with material of like kind and quality, with proper deduction for depreciation; or

c. the specified limit of liability in the policy for building.

With respect to any claim wherein notice of the claim is reported by you and to us more than two years after the reported date of loss, this policy shall provide no coverage for such claims.

This provision provides an insured with a two-year window to submit a claim, but limits coverage if the insured fails to promptly provide notice within an initial twelve month time frame. Obviously, such a provision would discourage case-runners from scouting and soliciting residential and commercial neighborhoods for claims long after a storm has passed.

Alternatively, an insurer could consider a simple and absolute one year claim filing deadline, such as:

In addition to your obligation to provide us with prompt notice of loss, with respect to any claim wherein notice of the claim is reported by you and to us more than one year after the reported date of loss, this policy shall provide no coverage for such claims.

Plain, simple and without ambiguity. Either file a claim within one year of the date of loss or it is barred.

Restrictions on Coverage For Older Roofs

Texas insurers are seeing large numbers of claims involving old, unmaintained and worn-out roofs which are still in place beyond their intended useful lives. Claims involving these roofs present a multitude of coverage questions — including determination of when the reported damage occurred (on the reported date of loss or perhaps long before) and concurrent causation issues (separating actual hail/wind damage from other excluded causes). One way to address these claims is to encourage replacement of these roofs prior to a storm event by restricting coverage in the event of a loss. This example significantly increases the deductible for roofs which are 15 years or older:

With respect to any claim involving physical loss or damage to a roof, roof covering or roofing system that is 15 years of age or older, we will pay only that part of the total of all physical loss or damage payable under any portion of this policy that exceeds 10 percent of the building limit of liability in the policy to which this endorsement is attached at the time of the claimed physical loss or damage.

The insured bears the burden of proving the age of the roof.

Another option is to limit coverage for older roofs to actual cash value:

With respect to any claim involving physical loss or damage to a roof, roof covering or roofing system that is 15 years of age or older, coverage is limited to actual cash value.

The insured bears the burden of proving the age of the roof.

Finally, a more restrictive option would be to include a complete exclusion for roofs over 15 years old:

There is no coverage under this policy with respect to any claim involving physical loss or damage to a roof, roof covering or roofing system that is 15 years of age or older.

The insured bears the burden of proving the age of the roof.

Limitations on Coverage For General Contractor Overhead and Profit

Claims are often inflated by arguing that “10 plus 10” general contractor overhead and profit should be added to the claim measure. This is despite the fact that a general contractor is neither involved in a project nor is the use of one reasonably necessary. Instead, such overhead and profit is in actuality used to increase profits to the roofing contractor, pay the public adjuster or put a few extra dollars in the insured’s pocket. This practice could be ended with the following language:

With respect to any hail or wind claim for a roof, roof covering or roofing system, we will not pay general contractor overhead and profit to repair or replace physical loss or damage to the roof, roof covering or roof system. We will consider making payment for general contractor overhead and profit on all other components of the hail or wind claim involving covered losses when such costs are reasonably necessary and such payment is consistent with all other terms of this policy.

“General contractor overhead and profit” means those costs incurred by you and paid to a general contractor to oversee, supervise, coordinate or monitor covered repairs to the insured location.

This provision does not apply to the reasonable and customary overhead and profit of independent, specialty or subcontractors performing covered repairs to the insured location.

Use of such a clear outright exclusion for general contractor overhead and profit would end this common dispute area.

Cosmetic Damage Exclusion

The battle continues over whether property insurance policies cover minor dents, dings and dimples to metal roofs. Insurers argue that the minor dents are not allowing leaks, will not reduce the service life of the roof and are not visible from the ground and therefore do not affect the aesthetic value of the roof. Building owners argue that a dent is damage, plain and simple. Unfortunately, commonly used industry “cosmetic damage endorsements” have not resolved the debate, with debates continuing as to what constitutes “marring and pitting” and whether any reduction in roof longevity, even far out in the future, is sufficient to defeat the exclusion. A clear exclusion such as the one below would resolve many of these debates:

We do not cover “cosmetic loss or damage” to any “metal roof covering” caused by the perils of wind or hail.

“Cosmetic loss or damage” means only that damage that alters the physical appearance of the “metal roof covering” but does not allow the penetration of water or moisture through the “metal roof covering” or does not result in the failure of the “metal roof covering” to perform its intended function to keep out water and moisture for the remainder of its anticipated useful service life.

“Cosmetic loss or damage” includes, without limitation, spatter/splatter marks on oxidized surfaces, blemishes, dents, dings, dimples, chips, marring, pitting, scratches, gouges, grooves or other superficial damage on the surface of the “metal roof covering.”

“Metal roof covering” means the metal roof, roof covering or roofing system material, flashing, vent caps, trim, drip edging and other similar materials covering the roof whose function is to keep out water or moisture for the anticipated useful service life of the roof.

We do cover hail and wind damage to a “metal roof covering” that allows the immediate penetration of water or moisture through the “metal roof covering” or that results in the failure of the “metal roof covering” to perform its intended function to keep out water and moisture for the remainder of its anticipated useful service life.

This exclusion does not apply to a “metal roof covering” that is intended to be primarily decorative, prominent, and visible from the ground.

The intent of this provision is clear. Dents to decorative roofs visible from the ground will be covered. Dents to low-sloped roofs will not (unless they are of such a magnitude that the roof will fail during its anticipated useful life).

Conclusion

Given the significant increase in storm litigation in Texas, absent a legislative or policy form solution the end result is predictable. An outright exclusion for hail damage:

Losses from hail and wind are not covered.

That would be unfortunate as the abuses common in these claims can be remedied through legislative action and policy form changes.