By Michael Lowder, Esq. and Heidi Storz, Esq., Benson Kerrane Storz & Nelson
As we head into the summer season, it is inevitable that Mother Nature will bring some wild Colorado weather to the Front Range. These storms could result in damages that require Associations to make insurance claims. Whether it is hail, wind, or some other weather-related Act of God, it is important to know some of the games that insurance carriers might play when you make a claim under your Association’s property insurance policy.
1. Multiple Causes of Loss
Most Association insurance policies contain what is known as an “anti-concurrent causation clause.” This is “insurance lingo” that means that if your loss is caused by multiple different causes, and one of those causes is not covered, the insurance company can deny your claim. For example, if you have a sewer line back up in your basement (covered under the policy), and you also have water get into the basement from exterior flooding (not covered under the policy), your entire claim could be denied because of an anti-concurrent causation clause in your policy, even though some of the damage was caused by a covered loss. Lesson: be careful about how you describe your claim when you submit it.
2. Policy Sub-Limits
Some policies will contain “sub-limits” for certain types of insurance coverage. While your overall coverage under the policy may have a $1,000,000 limit, certain components of that coverage may be limited to a smaller “sub-limit.” An example of this is coverage for debris removal. Your Association’s policy may have a sub-limit for debris removal, which limits coverage for costs to remove debris to $10,000 or some percentage of the overall limit. Practically, this means that even though you have $1,000,000 in coverage, if your debris removal sub-limit is $10,000, but the actual debris removal costs $15,000, your Association could only get $10,000 for that work (the sub-limit for debris removal). Lesson: make sure you know the sub-limits when you buy your policy.
3. Cosmetic v. Functional Losses
Some insurance policies contain limitations on the types of damage they will cover relating to whether or not the damage or loss is “cosmetic” or “functional.” Some policies do not cover “cosmetic” losses. Figuring out what is “cosmetic” versus “functional” is something that Associations and their insurers often fight about, but it’s important to realize that if your Association’s policy has a cosmetic loss exclusion, this could be an issue that the insurance company raises. For example, if hails dents your Association’s metal roof but does not cause leaks through the roof, that may be a “cosmetic” loss. If you have a cosmetic loss exclusion, that damage may not be covered and you’ll be stuck with the unattractive dented roof, even though there’s no dispute that the hail caused the dents. Lesson: if you want to ensure that cosmetic damages are fixed, make sure you don’t have a cosmetic loss exclusion in your policy when you buy it.
4. Code Upgrades
When an older building suffers a loss, the repairs made are required to comply with the building code that is in effect when the repairs are made. In this example, let’s assume the building was up to code when it was originally built. However, due to changes in the building code since then, if the building suffers an insurance loss, it may not be code-compliant. Although the building is grandfathered in as it stands, any repairs made after the loss have to bring the building into compliance with the new building code requirements. Some insurance policies contain coverage for these additional repairs and required upgrades. This coverage is called “code upgrade” coverage. However, if the building was never built up to code at the time of its original construction, you are not entitled to code upgrade coverage if you suffer a loss that’s otherwise covered under the policy. Lesson: if your building is older, make sure you have coverage for code upgrades.
5. Actual Cash Value v. Replacement Cost Value Policies
Another thing that is crucial to determine is whether your Association has an “Actual Cash Value” policy or a “Replacement Cost Value” policy. With a Replacement Cost Value policy, the insurer must pay the full cost to replace the damaged components, i.e., it must pay the full cost to replace a roof damaged by hail. However, with an Actual Cash Value policy, the insurer can deduct depreciation, which is essentially the “value” that the insured has received of the damaged component over time. In the example of the roof above, let’s assume that, at the time of the hail storm, the roof had an expected life of 20 years, and had already been on the building for 10 years. Then, the hail storm happens and the roof has to be replaced. The insurer calculates the amount it owes to the Association by taking the “replacement cost value” (the full replacement cost for the roof), and then deducts the depreciation (the value the Association has gotten out of the roof for the last 10 years), and then pays whatever is left. Lesson: if the insured component (i.e., roof) is older, an actual cash value policy may not provide much coverage, if any, for a loss.
Dealing with storm damage and the resulting insurance claims can be confusing and frustrating, but hopefully these tips can help you with some of the insurance lingo that you might hear when dealing with insurance claims. If you ever feel like something doesn’t seem fair, or doesn’t make sense, it’s best to bring in a professional to assist you in negotiating a claim with the insurance company.
Michael Lowder is a senior associate attorney with Benson, Kerrane, Storz & Nelson, P.C., where Heidi Storz is a partner. Mr. Lowder and Ms. Storz practice insurance and construction defect law, serving homeowners and homeowners’ associations throughout Colorado.