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An equitable solution to the 'matching problem'

ON MAY 15, 1998, the Minneapolis-St. Paul metropolitan area experienced the worst hailstorm in its history. It caused nearly $1 billion in damage to cars, home siding and roofs. That was more damage than was caused by the cumulative effect of all tornadoes in the area in the past 50 years!

There was a lot of "weeping and gnashing of teeth" among homeowners because of claim disputes. One of the biggest sources of complaints consisted of roof and siding "matching" problems. Typically, the storm damaged about half of a house's roof or two sides of its siding. Under the homeowners policy's replacement-cost provisions, insurers paid to repair or replace the damage, usually with no deduction for depreciation. In most cases, however, the insured suffered an additional loss when the new shingles or siding didn't match the old undamaged areas. That usually was because replacements for the original shingles or siding-in regard to color or materials or both-were no longer available.

Clearly, an insured is not made whole when damaged areas are repaired in such a way that they don't match undamaged areas. Yet, the homeowners policy explicitly states it will repair or replace only the damaged areas. Under a strict interpretation of the policy's replacement-cost provisions, insurers are not obligated to pay anything additional just because a manufacturer discontinues a shingle, or a siding pattern or color.

As hard-nosed as that interpretation sounds, I agree with it. Replacement-cost provisions clearly apply to direct damage only. But there is a clause in the homeowners policy that does address the indirect financial loss caused from a mismatch: the "pair and set" clause.

"Hold on," you're saying. "That clause applies only to personal property, such as when you lose one diamond earring from a set of two, or when an expensive dish that is part of a set of 10 is damaged."

I disagree. The clause, which is found under "Section I-Conditions" of the HO 2000 homeowners policy, reads as follows:

"In case of loss to a pair or set we may elect to:

"1. Repair or replace any part to restore the pair or set to its value before the loss; or

"2. Pay the difference between actutal cash value of the property before and after the loss." That's it. Nowhere does the clause say, "This applies only to personal property." True, its use historically has related to personal property, but in my opinion it also can apply to structures.

How the pair and set clause works

The pair and set clause attempts to compensate an insured for the damage to, or loss of, an irreplaceable item that is part of a pair or set. In addition to covering this direct financial loss, the clause covers the indirect loss resulting from the fact that the value of the remaining item(s) in the now incomplete pair or set has diminished.

Assume that a set of 10 antique plates is valued at $2,000. The value of one broken plate is $200, but if it can't be replaced, the value of the remaining plates is not $1,800. They now may be worth only $900 because there no longer is a full set. The pair and set clause requires the insurance company to pay, in addition to the $200 for the one damaged plate, $900 for the loss in value of the set of remaining plates.

Applying the clause to structures

I only recently realized that the pair and set clause could apply to structural matching claims. Bob Leitschuh, a fellow agent in my office, had a client with a structural matching dispute and asked me if the pair and set clause could apply. When I researched it, I concluded that it could.

Bob's client had storm damage to two sides of the house. The siding was 15 years old, with an original life of 30 years. The original siding was white 10-inch aluminum, which was no longer available. The closest match was white 4-inch vinyl. That was not a good match, so the insured demanded that the insurer spend $7,800 to replace siding on all four sides of the house. The insurer refused to pay for more than the $3,900 needed to replace the two damaged sides.

The dispute went to court, where the insured produced appraisals showing his home was valued for $94,000 before the storm, when the siding all matched. With the mismatched siding, the appraised value fell to $90,000. (In other words, the set value of the undamaged siding had decreased by $4,000.)

The court awarded the insured $2,000 for the diminished house value, based on the fact that the undamaged siding had only half of its initial 30-year life left. (In essence, the court awarded the insured the ACV/depreciated value loss for the undamaged siding.)

"Before" and "after" home appraisals are probably the most accurate way to determine the loss in set value of the remaining set of undamaged, mismatched siding or shingles. Such appraisals are expensive and cumbersome and sometimes may delay the claim, but they can help clients obtain compensation for their economic loss from the mismatch under a homeowners policy's pair and set clause. The cost of the appraisals should be paid for by the insurance company as an adjustment expense.

But rather than go to the expense and trouble of real-estate appraisals, I think an equally equitable and less cumbersome solution would be to pay insureds the "actual cash value" of the undamaged mismatched areas. Thus, in any storm involving a structural matching problem, the insured would be paid the full replacement cost of the damaged areas under a homeowners policy's replacement cost provisions and the depreciated ACV value of the mismatched areas under the policy's pair and set provision.

An example

Suppose half of your roof is damaged in a storm, and the new shingles won't match the old. The replacement cost is $5,000 for the damaged part of the roof and $10,000 for the whole roof. The table above shows how a homeowners policy would pay, based on the age of the roof. Assume a 20-year expected life.

Considering that at the end of each 20-year period the insured would have to pay for an entire roof himself if it were undamaged, getting paid for the depreciated value of the undamaged shingles is equitable. As the table indicates, an insured would receive an additional $2,500 from the pair and set clause if his or her roof was 10 years old and nothing if it was 20 years old. Why? Because the roof was due for a full replacement anyway, so the 20-year-old undamaged roof had no remaining value.

When a storm partially damages a home's roof or siding, and the insured suffers additional loss because new materials can't be found to match the old, applying the pair and set clause to compensate the insured for his or her financial loss for the undamaged areas that don't match is an equitable way for both parties to resolve structural matching problems. And it is fully justified under current policy provisions.

Follow-up letter from Jack Hungelmann:

Minnesota court required insurer to pay 'matching' claims


As a follow-up to my article in the July issue ("An Equitable Solution to the 'Matching' Problem"), I'd like to point out that legal action sometimes is a consequence of our industry's failure to address the financial loss suffered by homeowners when insureds' damaged roofing or siding is replaced with materials that do not match the undamaged sections.

Following a lot of complaints about this issue arising from a May 15, 1998, hailstorm, Minnesota's attorney general filed suit against American Family in an effort to require the insurer to pay not only for the replacement of damaged structural materials, but also to replace undamaged materials if they didn't reasonably match. American Family lost the case. Here's an excerpt of District Court Judge Patricia Kerr Karasov's Oct. 12, 2000 ruling:

"1. The State is awarded partial summary judgment against American Family Mutual Insurance Company for declaratory relief that American Family's obligation to pay claims under replacement value provisions of its homeowners' insurance policies, based upon American Family's policies and Minn. Stat. {72A.201, Subd. 5(8) (1998)}:

"a. requires American Family to pay for full replacement with materials of like kind and quality;

"b. is not satisfied by the replacement of only those materials that are physically damaged by a storm, if the replacement materials do not or would not reasonably match in terms of color, quality, texture or type of material the existing materials on the policyholders' home; and

"c. when the materials replacing the physically damaged materials do not or would not reasonably match the existing materials, American Family must also pay the sum necessary to replace the existing materials so there is a reasonable match, except where the mismatch is attributable to the natural weathering of the existing material."