“MATCHING REGULATIONS” AND LAWS AFFECTING …

1 WORK PRODUCT OF MATTHIESEN, WICKERT & LEHRER, Page 1 Last Updated 1/13/22 MATTHIESEN, WICKERT & LEHRER, Hartford, WI New Orleans, LA Orange County, CA Austin, TX Jacksonville, FL Boston, MA Phone: (800) 637-9176 matching REGULATIONS AND LAWS AFFECTING HOMEOWNERS PROPERTY CLAIMS IN ALL 50 STATES 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 ( , 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.

2 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.

3 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. Replacement Cost Value (RCV) vs. Actual Cash Value (ACV) Policy There are two primary valuation methods for establishing the value of insured property for purposes of determining the amount the insurer will pay in the event of loss under a homeowner s policy: 1. Replacement Cost Value (RCV): This method is usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation. It pays an insured for the value of replacing the damaged property without deduction for deterioration, obsolescence, or similar depreciation of the property s value.

4 The carrier assumes the cost of paying the full cost of repairing or replacing the damaged property. 2. Actual Cash Value (ACV): This method pays an insured for a similar item less depreciation. ACV is ordinarily determined in one of three ways: (1) the cost to repair or replace the damaged property, minus depreciation; (2) the damaged property s fair market value ( FMV ); or (3) using the broad evidence rule, which calls for considering all relevant evidence of the value of the damaged property. The insured bears the difference between the depreciated value of the damaged property prior to loss and the higher cost of repairing or replacing it. WORK PRODUCT OF MATTHIESEN, WICKERT & LEHRER, Page 2 Last Updated 1/13/22 The issue of matching or uniformity in first-party homeowners insurance claims is one that lends itself to RCV policies. If property is only partially damaged, the carrier takes the position that it is only required to pay for repair or replacement of the limited portion of the property that is damaged.

5 The insured argues that replacing only the damaged property restores the functionality of the roof but does not fully replace the damaged property because the replaced property does not match the existing property. For example, a roof had a uniform appearance, and uniformity has a significant effect on value. Therefore, the proper measure of RCV is the cost to replace the entire roof to restore the uniform appearance. This is known as the issue of matching or uniformity. The issue is whether the carrier has to match the damaged property to the undamaged property in order to return it to its previous uniform appearance and restore the entire home to its condition prior to loss. Whether the policy is an RCV or ACV policy can make a big difference. ACV coverage pays an insured for a similar item less depreciation. RCV coverage compensates an insured for the value of replacing the damaged property without deduction for deterioration, obsolescence, or similar depreciation of the property s value.

6 An insurer with an ACV policy may be able to exercise the option to repair, restore, or replace the damaged property itself rather than having to pay for the cost to repair the property with property of like kind and quality. Moreover, some matching regulations only apply to RCV policies. A good illustration of the matching /uniformity problem is found in a 2014 Minnesota federal district court case in which a manufacturer discontinued the shingles used on the insured s roof, thus leading to a mismatch problem. The issue was whether the carrier was obligated to replace the damaged shingles with substantially similar shingles or to pay for new shingles for the entire roof. Trout Brook S. Condo. Ass n v. Harleysville Worcester Ins. Co., 995 F. 1035 (D. Minn. 2014). The Harleysville RCV policy provided coverage which obligated it to pay for the property s replacement cost, defined as: (1) the cost of repair or replacement with similar materials for the same use and purpose, on the same site or (2) the cost to repair, replace, or rebuild the property with material of like kind and quality to the extent practicable.

7 Harleysville claimed only partial damage to the roof and allocated $21,000 for roof repairs, but the insured s construction expert believed the roof had to be entirely replaced at a cost of more than $800,000. In addition, the shingles were no longer being manufactured. The insured sued, arguing that the unavailability of matching shingles entitled it to full roof replacement. The court noted that the covered property under the policy was defined as the buildings (rather than the individual items on the property) and held there was a jury question as to whether the building suffered a loss on account of the unavailability of matching roof shingles. Whether Harleysville was able to replace shingles with shingles of a like kind and quality hinged on whether the unmatched shingles would provide an acceptable aesthetic result, and that had to be determined by a jury. The idea is that property that has not been physically damaged may become damaged where replacement of physically damaged property does not lead to an aesthetic result acceptable to the insured.

8 It suggests that the carrier has an obligation beyond repairing the functionality of the damaged property, by paying to repair the aesthetics of the building. Similarly, in a 2015 federal court decision that dealt with damaged limestone panels, the policy gave the carrier the option to either pay the value of damaged property, pay the cost of repairing or replacing the damaged property, take all or part of the property at an agreed or appraised value, or repair, rebuild, or replace the property with other property of like kind and quality subject to the condition that the carrier pay to replace damaged property with other property of comparable material and quality and used for the same purpose. Nat l Presbyterian Church, Inc. v. GuideOne Mut. Ins. Co., 82 F. 55, 57 (D. 2015). The court found a distinction between the repair options relating to the property and those relating to lost or damaged property, specifically noting that the property was broadly defined by the policy to include the building, inclusive of fixtures, floor coverings, and appliances.

9 It also held that the phrases comparable material and other property of like quality and kind can be read to mean property that looks the same. Notwithstanding any insurance regulations that control the issue, a carrier s obligation to pay for matching depends on the policy language and hinges on whether the loss payment and valuation terms of the policy can be read to obligate the carrier to match the replacement materials. The industry s response is that allowing coverage for matching provides a windfall to the insured. To allow for full replacement of matching roofing and siding can be unduly burdensome on a carrier whose policy agrees only to repair damaged portions of the building. WORK PRODUCT OF MATTHIESEN, WICKERT & LEHRER, Page 3 Last Updated 1/13/22 Terms of Insurance Policy The terms of insurance policies vary greatly and are very important to determining the carrier s obligations in a claim which involves a matching concern. The current ISO HO-3 and HO-5 and company-specific policies contain Loss Settlement provisions such as: Covered property losses are settled as follows.

10 2. Buildings covered under Coverage A or B at replacement cost without deduction for depreciation, subject to the following: a. If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, after application of any deductible and without deduction for depreciation, but not more than the least of the following amounts: .. (2) The replacement cost of that part of the building damaged with material of like kind and quality and for like use; or (3) The necessary amount actually spent to repair or replace the damaged building. b. If, at the time of loss, the amount of insurance in this policy on the damaged building is less than 80% of the full replacement cost of the building immediately before the loss, we will pay the greater of the following amounts, but not more than the limit of liability under this policy that applies to the building.