As an Insurance Attorney, I have represented many homeowners following large scale storm events like hurricanes, tornadoes, and hailstorms. I’ve seen the coverages that have saved the day and those that policyholders wished they had. Let’s talk about some of those.
The “Standard” Homeowners Policy
What passed for many years as the standard insurance policy was based on a policy form put out by an insurance industry group called the Insurance Services Organization or ISO. They called the form that became the prevalent form in the late 1970’s, the HO3 (earlier versions had been called the HO1 and HO2). Most domestic admitted insurance carriers, companies like State Farm, Allstate, Farmers, USAA, and Nationwide use a version of this form.
The form provides coverage for the dwelling and other structures on the property, for the personal property or “contents” of the dwelling and other structures, and for additional living expenses (called “ALE” by many insurance companies). In addition, there are other lesser coverages they come into play. However, the big three are Coverage A (dwelling), Coverage C (contents) and Coverage D (ALE or Loss of Use).
In the HO3, the policy provides coverage for accidental, direct physical damage to the dwelling. The policy then contains exclusions that exclude coverage from different things within this broad category. Some of the more common exclusions are for damages caused by 1) flooding 2) earth settlement or ground movement, 3) improper maintenance, 4) construction defects, and 5) plumbing that has been leaking for a long time.
The policy form covers damage to contents when that damage is caused by certain events such as 1) fire or lightning, 2) smoke, 3) windstorm or hail (this includes hurricanes and tornadoes), 4) theft, and 5) several other less common events.
If the loss event damages the home so that it cannot be lived in, the loss of use coverage in Coverage D covers additional living expenses or loss of use until the home can be repaired or replaced. This period may also be limited by a period of time, such as two years. Additional living expenses are amounts over and above what the insured would normally have to pay for living expenses and often includes increased food expenses (because the insured cannot use their kitchen), additional utilities, and additional rent for substitute housing.
Replacement Cost Coverage v. Actual Cash Value
The HO3 also provides for “replacement cost coverage” which is what most people are looking for to get back on their feet after a catastrophic event. If you want this coverage you need to make sure that your declarations page indicates RCV or replacement cost coverage. The way that replacement cost coverage works after a loss is that for both damages to the dwelling and personal property, the insurance company will initially pay their estimate of the actual cash value of the damaged dwelling or contents. They calculate this actual cash value (ACV) amount by estimating the replacement cost and then deducting depreciation. However, the form requires them to pay the unpaid depreciation when the dwelling has been repaired or replaced and when the homeowner has replaced damaged personal property. The homeowner usually documents the replacement of damaged personal property by giving the insurer receipts showing that the property has been replaced.
Similar Construction vs. Common Construction
Another consideration affecting the amount a policyholder is paid after a claim relates to the quality of materials used. Insurance companies offer the choice between paying for “similar construction,” also known as like kind and quality or “common construction.” Similar construction is more expensive but requires the insurance company to pay for the equivalent of what existed before the loss. Common construction is cheaper but only requires the insurer to pay for “common construction and materials commonly used by the building trades in standard new construction.” It specifically does not pay for “the cost to repair or replace obsolete, antique, or custom construction with like kind and quality.”
Other Important Coverages
These three coverages are the three most important coverages, but there are important coverages for homeowners after a major storm event.
Extended Replacement Cost Coverage
Extended Replacement Cost Coverage can save the day when the amount of your loss exceeds your dwelling coverage limits. Sometimes the dwelling coverage limits may not be enough due to rising material and labor costs, inflation, or a mistaken assessment of the cost to replace. Extended Replacement Cost coverage allows an extra amount, often up to an additional twenty-five percent, to replace the building. This coverage is purchased for an additional premium and is often called extended replacement cost coverage. Policies may also provide an annual inflation adjustment to be built into the limits.
Ordinance or Law
An insurance policy may not cover repairs that must be made due to ordinance or law. Usually, this means repairs or additional construction that must be done because it is required by building code changes that have occurred since the dwelling was originally built. Many homes are originally “up to code” or “grandfathered in” under previous building codes but do not meet the latest building codes. When there is a loss, the building inspector likely will require that they be repaired or rebuilt up to code. Ordinance or Law Coverage provides payment for additional repairs needed due to code changes. This coverage is very useful because these repairs can be expensive.
Some Problems to Watch Out For
Unfortunately, insurance policies seem to be getting skimpier and skimpier. Here are some of the areas to watch, especially if you live in a coastal area.
Exclusions for Wind and Hail Damage
Many insurers have started excluding coverage for damages from Wind or Hail in some areas, including large parts of Texas and on the Gulf Coast. If your homeowner’s insurer has excluded these perils, you need to look for another insurance company or buy a separate wind and hail policy unless you want to pay for repairs out of your own.
Flood Damage
Homeowner’s policies do not cover flooding. If you need protection from flooding, you will need to purchase a flood policy. In fact, in some areas, you will be required to purchase a separate flood policy.
Wind Driven Rain
Many insurers, especially insurers on the Gulf Coast and Texas have started including exclusions that do not pay for any rain damage to the inside of a home from “wind driven rain” unless the water enters through a “storm created opening.” Watch out for this exclusion because this type of damage is very common in serious storms and can create expensive disputes with the insurance company about how water entered a home and even require retaining an engineer to prove it.
Surplus Lines Insurers
Many traditional insurance companies have stopped writing homeowners coverage in coastal areas, parts of Texas, and states like California and Florida. When they leave, they leave a vacuum that has been filled by largely unregulated or underregulated “surplus lines” insurers. These insurers offer more limited coverage for more money and often do not have the administrative structure in place to properly pay claims. Because they are not regulated and because they don’t have good claims departments in place, policyholders are more likely to have claims denied or underpaid because of bad faith.
If you do have a serious storm claim, call Johnstone Trial Law, LLC. We are here to help.
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