Since Merlin Law Group is a nationwide firm, we blog about topics and cases that happen all over the United States. Since I head the Denver office, I usually post about events in the midwest. As Jason Aldean calls them, the 'fly over states.' We don't get hurricanes, but we do get a lot of hail, wind, and tornado claims. If you follow our blog daily, you probably read Chip Merlin's post, A Hail Dented Roof Is Covered Direct Physical Damage And Loss. He discussed a recent 7th Circuit case out of Wisconsin relating to 'cosmetic' damage, Advance Cable v. Cincinnati Insurance Company.1

As is common to most insurance policies, in the "Coverage" section it stated, "We will pay for direct physical loss to Covered Property at the premises caused by or resulting from a Covered Cause of Loss." Neither 'direct' nor 'physical' were defined in the policy.

After a large hail storm, the President of Advance filed a claim for property damage. He then inspected the roof with an adjuster from Cincinnati Insurance. The adjuster noted there were dents to soft metal roof vents and A/C fins but observed no damage to the roof (how many times have you heard this exact sentence?). He estimated the damages at less than $2,000.

Six months later, Advance considered selling the property and a potential buyer inspected the roof. The inspector found hail damage, so Advance asked Cincinnati to reopen the claim and a new inspection was made. Hail impact was found on the metal roof, up to one inch in diameter. However, the inspector found that the dents would not affect the performance of the panels or the roof's life expectancy. (You've heard this one too.) Advance sued Cincinnati and the court found on summary judgment that the hail damage was covered but there was no bad faith by Cincinnati. The parties stipulated that the damage was $175,500.

The grant of summary judgment was appealed. The main dispute between the parties was the meaning of 'direct physical loss.' The court found that 'direct' meant that there was no intervening force that played a role in causing damage. Cincinnati argued that 'physical' meant 'material.' The court disagreed and found that since the hail caused dents that changed the physical characteristics of the roof, that constituted 'physical' damage.

'Loss' was defined in the policy as "accidental loss or damage." The court found there was no exception for any particular type of damage, including cosmetic. If Cincinnati wished to exclude cosmetic damage, it could have written the policy that way.

In Wisconsin, to prove bad faith you must have two things:

  1. The absence of a reasonable basis for denying benefits, and
  2. defendant's knowledge or reckless disregard of the lack of a reasonable basis.2

Advance alleged that Cincinnati adjusted the claim in bad faith. It made several arguments, one of which was that Cincinnati's position conflicted with the AAIS (American Association of Insurance Services). In the Winter 2013 issue of Viewpoint magazine, AAIS noted that its standard policy forms do not distinguish between cosmetic and functional damages. The court found it was not proven that Cincinnati knew of these forms or this article.

I'm writing this post while on a plane high above the 'fly over states' so please enjoy the following: https://vimeo.com/72062024

Click here to view the video.