• Cosmetic Hail Damage to Insured’s Roof is Deemed a Covered Loss. Court Disagrees With The Concept of “No Harm No Foul.”
  • August 24, 2015 | Author: Rick Hammond
  • Law Firm: Johnson & Bell, Ltd. - Chicago Office
  • The number of reported claims involving hail damage to residential and commercial roofing has increased dramatically over the last few years. Some reports place the increase at almost double historical claim totals, i.e., there were 5,536 major hailstorms in the U.S. in 2014, according to the National Oceanic Atmospheric Administration (NOAA). Moreover, weather events involving wind, hail or flood accounted for $16.1 billion in insured catastrophe losses in 2013 dollars from 1994 to 2013 (not including payouts from the National Flood Insurance Program).

    Along with the increase in hail claims has come a proliferation of public adjusters, roofing “experts” and contractors, many of whom are unlicensed in the states in which they’re operating and, of course, policyholder attorneys that are eager to file suit and cash in on the slightest possible evidence of insurer bad faith.

    When an insurance carrier is faced with a coverage question concerning hail damage to a roof, the issue in dispute usually pertains to whether the damaged roof suffered physical loss or damage due to an actual weather event. Or, whether the so-called hail damage was fabricated or merely cosmetic. In order to answer these questions, it’s usually necessary for an expert to be retained to make that determination. The problem, however, is that many so-called “roofing experts” are too often willing to offer an opinion that is questionable at best, or totally false at worse.

    Meanwhile, insurers are facing an onslaught of bad faith lawsuits related to their coverage decisions and the manner in which they have handled a policyholder’s hail claim. Courts, on the other hand, have been slow to offer guidance on how most insurers’ policy language, as it relates to hail, should be construed. Under that backdrop, a recent appellate court decision out of Ohio offers insight on how a court might interpret an insurer’s policy as it relates to a disputed hail claim and an insured’s allegation of bad faith.

    Advance Cable Company, LLC and Pinehurst Commercial Investments, LLC v. Cincinnati Insurance Company - U.S. Court of Appeals for the Seventh Circuit (Nos. 14-2620 & 14-2748)

    In 2010, Advance Cable Company and Pinehurst Commercial Investments (collectively referred to as “Advance”) obtained an insurance policy from Cincinnati Insurance Company on two properties in Middleton, Wisconsin, one of them at 2113 Eagle Drive. On April 3, 2011, Middleton, Wisconsin was pelted with hail and some structures were damaged, including Advance’s metal roof that was located at 2113 Eagle Drive.

    Advance submitted a claim to Cincinnati Insurance and, Mike Larson, Advance’s president, subsequently inspected the roof with Curt Jorgenson, a senior claims representative for Cincinnati. Jorgenson allegedly spotted some dents, but he saw little other evidence of damage. In June 2011, Jorgenson sent Larson an estimate for hail damage in which he noted “some dents to soft metal roof vents and AC fins” but stated that he “did not observe any damage to roofing.” Thereafter, Larson issued a check for the estimated damage to both of Advance’s buildings, minus a $1,000 deductible, for a total of $1,512.70.

    Approximately six months later, Advance was in the process of selling the Eagle Drive building when the potential buyer, Walton Enterprises, decided to have the roof inspected. Walton’s inspector reported that there was “definitely hail damage” and this opinion prompted Advance to ask Cincinnati Insurance to reopen their claim. Cincinnati did so and arranged for a new inspection of the roof. The resulting report noted that there was denting that was characteristic of hail impact on the roofs of several of their buildings. The report further stated that the denting “will not affect the performance of the (roofs) or detract from the (roofs’) life expectancy, [i.e]., the denting that occurred as a result of hail impact was relatively minor and cannot be view[ed] from ground level.”

    A few months after receiving this report, Advance sold the 2113 Eagle Drive building to Walton and Advance subsequently filed suit against Cincinnati alleging that they had breached its contract by failing to cover damage to the Eagle Drive building, and alleging that Cincinnati’s denial of coverage was in bad faith. Both Advance and Cincinnati moved for summary judgment, i.e., Advance asked the trial court to rule that the insurance policy covered the hail damage, and Cincinnati asked the court to find that coverage was excluded; and also asked for a grant summary judgment against Advance on its bad faith claim. The trial court held that the policy covered the hail damage, but further held that Cincinnati’s refusal to acknowledge coverage was not done in bad faith. Following the court’s summary judgment decision, both parties filed an appeal.

    Court Disagrees with Insurer’s Concept of “No Harm No Foul”

    The appellate court noted that the primary issue in dispute concerned the meaning of “direct physical loss.” In that regard, neither “physical” nor “direct” was defined in Cincinnati’s policy. That said, Cincinnati contends that the term “physical” means “material.” On the other hand, Advance claims that the hail caused visible indentations to the surface of its roof, and that this denting changed the physical characteristics of the roof and satisfied the language of the policy.

    The next question was what the term “loss” means, i.e., the policy covers loss or damage. In other words, “the policy expressly contemplates the possibility that there may still be “damage” while at the same time giving it a different meaning than the word “loss.” Cincinnati argues that “loss or damage” means “harm,” and it makes the assumption that the dents caused by the hail did not harm the roof enough to diminish its function or value. The court noted, however that:

    No harm, no foul, [Cincinnati] says: if this is the case, then it believes that the policy does not require it to pay to replace the roof. The problem with this analysis is that it bears no relation to the language of the policy. There is no exception to the definition of “loss” for cosmetic damage, or any other kind of particular damage. Had Cincinnati wished to exclude cosmetic damage from coverage, it should have written the policy that way.

    The appellate court then addressed Advance’s claim for bad faith and noted that an insured is required to show two things in order to support a bad faith claim: “the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge must evidence a reckless disregard for the lack of a reasonable basis for denying the claim.”

    Cincinnati’s Reading of the Policy was Not “Beyond the Pale”

    A second element questions “whether the [Cincinnati] properly investigated the claim and whether the results of their investigation was subject to a reasonable evaluation and review.” This second question asks whether the insurer was aware that there was a reasonable basis for denial, or whether it displayed “reckless disregard of a lack of a reasonable basis for denial or a reckless indifference to facts or to proofs submitted by the insured.

    We take it as a given that the policy at issue required coverage of hail damage to Advance’s roof. But that does not mean Cincinnati’s investigation and subsequent evaluation that coverage was lacking were unreasonable. Cincinnati’s reading of the policy, while wrong, was not beyond the pale; we already have noted that there are several plausible readings of, for example, the term “physical,” and that Cincinnati was able to find federal cases that provided some support for its position. Advance’s argument amounts to a proposed rule that would require a finding of bad faith any time an insurer does not prevail in its reading of a policy. This strikes us as draconian. It is also worth noting that Cincinnati worked with Advance on the claim for a time, making multiple visits to the Eagle Drive property to inspect the roof and extending an offer of compensation, albeit one that was far lower than Advance believed was proper.

    Thus, Cincinnati twice investigated the rooftop, calculated an estimate for coverage, reopened the claim when Advance asked it to, and has relied on cases in support of its arguments. Accordingly, the appellate court affirmed the trial court’s ruling, finding that there was no bad faith conduct by Cincinnati.


    Below are a few recommended strategies that insurers can employ to minimize their exposure for a breach of contract and/or bad faith claim related to a hail loss:
    • Engage qualified experts with verifiable experience to help in identifying hail damage;
    • Promptly reserve rights when there is a potential for a viable coverage defense;
    • Promptly examine the claimed damage and assess, document and estimate the damages;
    • Issue payment for undisputed damage when coverage is not an issue;
    • Assess the laws of the relevant state to determine how cosmetic and matching issues are viewed by the courts in that jurisdiction;
    • Consider a demand for appraisal when damages are the only matter at issue; and
    • Be mindful of the exposure for bad faith when there is a questionable coverage defense or a delay in the resolution of a claim.