A growing number of states have adopted so-called “matching” regulations, requiring the replacement the undamaged items when the damaged items cannot be replaced in a way that achieves a reasonably uninform appearance, which may give rise to increased litigation in the coming years. In 1990, the National Association of Insurance Commissioners adopted a new section of the “Unfair Property/Casualty Claims Settlement Practices Model Regulation.” Section 9 of the Model Regulation provides,

A. When the Policy provides for the adjustment and settlement of first party losses based on replacement cost, the following shall apply:

* * *

(2) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all such items in the area so as to conform to a reasonably uniform appearance. This applies to interior and exterior losses. The insured shall not bear any cost over the applicable deductible, if any.

Since then, nine states- Iowa, Nebraska, Kentucky, California, Florida, Utah, Ohio, Rhode Island, and most recently Connecticut- have adopted some version of this regulation. This year, South Dakota also introduced legislation to become the tenth state enact this regulation. See S.D. House Bill No. 1054 (2014) (proposing the adoption of the Model Regulation language). This alert provides some preliminary analysis of the various matching regulations as well as some defenses which can be raised against breach of contract and/or bad faith claims based on failure to comply with these regulations.

Nebraska and Kentucky have adopted the Model Regulation language virtually verbatim. See Neb. Admin. Code Title 201 ch. 60 § 010; 806; Ky. Admin. Regs. 12:095. Rhode Island and Utah have adopted arguably somewhat broader versions of the Model Regulation. Rhode Island’s regulation is identical to the Model Regulation except that it omits the limiting phrase “in the area.” See R.I. Admin. Code 11-5-73:9. Utah’s regulation also omits the phrase “in the area” in the Model Regulation but also deletes the phrase “all such.” See Utah Admin. Code r. R590-190 (“when a loss requires replacement or repair of items and the repaired or replaced items do not match in color, texture, or size, the insurer shall repair or replace items so as to conform to a reasonably uniform appearance”).

California and Florida have both adopted regulations that clarify the Model Regulation’s reference to “the area.” California’s regulation requires replacement of “all items in the damaged area so as to conform to a reasonably uniform appearance.” Cal. Code Regs. tit. 10, § 2695.9 (emphasis added). Notably, an earlier version of this regulation included a reference to the “area which encompasses clear line of vision” which was abandoned because it had “generated considerable controversy” as a highly subjective test which had resulted in different recoveries for identically situated members of the general public. See William W. Palmer, Proposed Unfair Claims Regulations, 36 Santa Clara L. Rev. 687, 695 (1996).

Florida requires the insurer to “make reasonable repairs or replacement of items in adjoining areas” when there is a loss requiring replacement of items and the replaced items do not match in quality, color, or size. See Fla. Stat. Ann. § 626.9744 (emphasis added). Florida, however, allows the insurer to “consider the cost of repairing or replacing the undamaged portions of the property, the degree of uniformity that can be achieved without such cost, the remaining useful life of the undamaged portion, and other relevant factors” in determining the extent of the repairs or replacement of items in adjoining areas. Id.; see also Strasser v. Nationwide Mutual Insurance Company, No. 09–60314–CIV, 2010 WL 667945, at * 1 (S.D. Fla. Feb. 22, 2010) (observing that Fla. Stat. § 626.9744 matching requirement only applies to homeowner's policies).

Similarly, Connecticut’s newly enacted statute requires that “[w]hen a covered loss for real property requires the replacement of an item or items and the replacement item or items do not match adjacent items in quality, color or size, the insurer shall replace all such items with material of like kind and quality so as to conform to a reasonably uniform appearance.” Conn. Gen. Stat. § 38a-316e (2014) (emphasis added).

Ohio has adopted a slightly different standard for the required appearance. Its regulation requires that “[w]hen an interior or exterior loss requires replacement of an item and the replaced item does not match the quality, color or size of the item suffering the loss, the insurer shall replace as much of the item as to result in a reasonably comparable appearance.” Ohio Admin. Code 3901-1-54 (emphasis added). Finally, Iowa’s regulation requires the replacement of “as much of the item as is necessary to result in a reasonably uniform appearance within the same line of sight” but permits exceptions “on a case-by-case basis.” Iowa Admin. Code 191-15.44(1) (emphasis added).

Reviewing the various iterations of the Model Regulation, it is not clear to what extent these regulations will support a breach of contract claim, particularly where the policy does not include a law or ordinance provision. Courts have split on whether matching regulations are enforceable by policy holders under a contract theory. In Woods Apartments, LLC v. U.S. Fire Ins. Co., 3:11-CV-00041-H, 2013 WL 3929706 (W.D. Ky. July 29, 2013), the district court found that the Kentucky matching regulation did not support the plaintiffs' argument that the defendant insurers were legally obligated to repair or replace portions of the property's roofing and siding that were not damaged by Hurricane Ike, because the regulation was not enforceable by private action. Id. at *1. The court relied on the fact that the regulation expressly provided that “[a] violation of this administrative regulation shall be found only by the executive director. This administrative regulation shall not create or imply a private cause of action for violation of this administrative regulation.” Id.

In contrast, California and Ohio courts have found that matching regulations can provide at least support for a breach of contract claim. In Rattan v. United Servs. Auto. Ass'n, 84 Cal. App. 4th 715, 724, 101 Cal. Rptr. 2d 6, 12 (Cal. Ct. App. 2000), the court found that trial court was justified in rejecting a jury instruction suggesting that any violation of the “reasonably uninform appearance” regulation was per se a breach of contract or an act bad faith, rather than merely evidence of a breach or bad faith. Notably, California’s regulation does not contain the language indicating that the regulation does not create a private right of action.

Most recently, the Sixth Circuit Court of Appeals sidestepped the issue of the enforceability of Ohio’s matching regulation by noting that it was “evidence of industry practice relevant to construing an insurer's contractual obligations.” See Wright v. State Farm Fire & Cas. Co., 13-3727, 2014 WL 627171, at *3 (6th Cir. Feb. 18, 2014). The court acknowledged that Ohio’s matching regulation contains the proviso, “[n]othing in this rule shall be construed to create or imply a private cause of action for violation of this rule,” but found that “the Code nonetheless is intended ‘to set forth minimum standards for the investigation and disposition’ of insurance claims.” Id. (quoting Ohio Admin. Code 3901-1-54). The remaining states which have not yet addressed this issue will undoubtedly take differing approaches to whether their state’s matching regulation creates a private right of action.

To the extent that matching regulations are found to be enforceable by private action, the points of ambiguity in these types of regulations are apparent. First, “reasonably uniform/comparable appearance” could mean anything from a fair match to a nearly identical match. Second, “appearance” could mean an up-close observation, aerial observation, or a line-of-sight observation. Third, as the differing language employed the various states demonstrates “such items” and “the area” could mean all of the replacement items, all of the items in the specific area, all of the items in the line of sight, or all of the items in the whole structure. Finally, “conform” could imply that the regulation only applies to structures that have a reasonably uniform appearance prior to the damage. For instance, Merriam Webster’s defines “conform” as “to bring into harmony or accord.” See Collins v. Allstate Ins. Co., CIV.A.2:09CV01824WY, 2010 WL 2510376 (E.D. Pa. June 17, 2010) (finding that that no reasonable juror could conclude that the insurer lacked a reasonable basis for denying the claim where it had submitted evidence, which it considered in evaluating the claim, that before the storm damage the roof contained mismatched slates and did not have a uniform appearance).

So far, only one court has interpreted the meaning of “reasonably uniform appearance” and only indirectly. In Lyons v. Wawanesa Gen. Ins. Co., E044086, 2009 WL 1077294, at *5 (Cal. Ct. App. Apr. 22, 2009), the court held that a bad faith claim could not lie where there was a genuine dispute as to whether certain items could be matched or whether a larger area needed to be replaced. In so holding, the court noted that “[a] perfect match was not required” under the reasonably uniform appearance regulation. Id.

The Ohio “reasonably comparable appearance” regulation was recently interpreted by the Sixth Circuit Court of Appeals, which found that it did not require replacement of the entire roof where there was weather related damage to only a portion of the roof. See Wright v. State Farm Fire & Cas. Co., 13-3727, 2014 WL 627171, at *3 (6th Cir. Feb. 18, 2014). The court found that the testimony of the plaintiffs’ roofer that “[b]ecause the roof was made from wood shakes and had changed significantly over the years, ... the roof could not be repaired to match,” was of limited value because the roofer was not an expert on state law or the application of the Ohio Administrative Code. Id. The court further noted that it was uncontested that unweathered replacement shakes, after a reasonable amount of time, would weather to match the old shakes even though initially the unweathered shakes would not exactly match the color of weathered shakes. Id. Accordingly, the court held that the district court reasonably concluded that a partial repair would “result in a reasonably comparable appearance” and thereby satisfy the requirements of Ohio Admin. Code 3901-1-54. Id. In so holding, the court particularly emphasized its agreement with the district court’s flat rejection of “an extreme blanket rule requiring the entire replacement of any damaged shake roof” . . . “in the absence of evidence of special circumstances regarding their particular roof.” Id.

In Dolecki v. Nationwide Mut. Ins. Co., 2005-Ohio-1061 (Ohio Ct. App. Mar. 7, 2005), the court held that the trial court did not abuse its discretion in concluding that it would be unreasonable to replace damaged siding with unmatched siding, and thus finding that the policy required replacement in toto should the insurer be “unable to replace the siding with a product that is the same height, color and thickness that results in a reasonably comparable appearance * * *.” Notably, this ruling cited Ohio Admin. Code 3901-1-54. In Dolecki, however, the parties did not dispute that the replacement siding was substantially different from the existing siding, which was unavailable, as the replacement siding was 3/4 of an inch wider than the original siding. Id. Thus, the meaning of “reasonably comparable appearance” was not directly at issue. None of the remaining states’ regulations has been interpreted by a court, so we do not yet have a good sense of how broadly or narrowly this general language will be construed by the courts.

While the case law on “reasonably uniform appearance” is not well developed, several cases have addressed the meaning of standard insurance replacement cost policy provisions such as “like kind and quality” in the context of an insurer’s matching obligation. The precise policy language cited in these cases often varies so the strength of any analogy to the “reasonably uniform appearance” standard depends on how similar the policy language is to the regulation. In Trout Brook S. Condo. Ass'n v. Harleysville Worcester Ins. Co., CIV.12-2888 RHK/JSM, 2014 WL 460851, at *7 (D. Minn. Feb. 5, 2014), the district court held that, under ordinary meaning, the terms “similar materials” and “material of like kind and quality” did not as a matter of law preclude consideration of color. Thus, the court held that it is a question for the jury whether these policy terms obligated the insurer to pay for matching shingles on the plaintiff’s property. Id. at *8. Several other courts have addressed the meaning of “like kind and quality” and found it to require something less than an exact match. See Seamon v. Acuity, A11-429, 2011 WL 6015355 (Minn. Ct. App. Dec. 5, 2011) (“the phrase ‘like property’ indicates that the policy requires repair with comparable or similar materials, but does not require the use of identical materials”); Farmers Auto. Ins. Ass'n v. Union Pac. Ry. Co., 756 N.W.2d 461, 471 (Wis. Ct. App. 2008) (holding that replacement of “like kind and quality” does not require identical replacement); Collins v. Allstate Ins. Co., CIV.A.2:09CV01824WY, 2010 WL 2510376 (E.D. Pa. June 17, 2010) (noting that policy terms such as “like kind and quality” and “equivalent construction” were similar to the “like construction” term of the policy in Greene, which was interpreted to require “repair of the damaged slope ... with shingles similar to the damaged shingles” rather than “replacement with the identical item damaged”).

Several other cases have addressed the scope of the duty to replace undamaged portions of property. Recently, the Minnesota Court of Appeals held that an insurer was required to replace all of the siding on twenty townhome buildings, even though only a small portion was actually damaged in a hail storm, because the original siding was no longer manufactured in the same color. See Cedar Bluff Townhome Condo. Ass'n, Inc. v. Am. Family Mut. Ins. Co., No. A13–0124, 2013 WL 6223454, at *3–4 (Minn.Ct.App. Dec. 2, 2013). The insurer argued that it was unreasonable to interpret the “of like kind and quality” and property “of comparable material and quality” provisions as requiring the replacement of both damaged and undamaged siding in order to achieve an exact color match. Id. at * 4. The insured interpreted this language to mean that a repair of its damaged buildings requires that the buildings have uniformly colored siding. Id. Finding that there was more than one reasonable interpretation of the policy language, and that policy ambiguities are resolved in favor of the insured, the court found that the insured was entitled to summary judgment. Id.; see also Woods Apartments, LLC v. U.S. Fire Ins. Co., 3:11-CV-00041-H, 2013 WL 3929706, at *3. (W.D. Ky. July 29, 2013) (finding that because the plaintiffs had not offered any evidence of the unavailability of comparable or similar material such that repairing only the damaged portions of the Property would negatively affect the aesthetic integrity of the Property plaintiffs were not entitled to recover for repair or replacement of portions of the property that Hurricane Ike did not directly damage).

In Greene v. United Services Auto. Ass'n, 936 A.2d 1178, 1186 (Pa. Super. Ct. 2007), the insurance policy “clearly and unambiguously require[d] USAA to pay the replacement cost of thepart of the building damaged.” The insured contended that because the original shingles were no longer available on the market, the insurer was required to replace the entire roof. Id. The court held that:

As noted above, [the insureds] contend that this policy language requires [the insurer] to pay for the cost of replacing their entire roof because the roof was the “part of the building damaged.” We find this interpretation of the policy language to be unreasonable and absurd. At most, the “part of the building damaged” in this case was one slope of [the insureds'] multi-sloped roof. The trial court succinctly highlighted the absurdity of [the insured's] argument when the court stated, “To utilize [the insureds'] logic would necessitate the replacing all siding when one piece of siding is damaged, or an entire door when a door knob is damaged. It defies common sense.”

[The insureds'] argument regarding the policy's “like construction” language equally is unavailing. Although the exact shingles that were damaged as a result of two incidents are no longer available, testimony at trial revealed that shingles of similar color and texture were available and that these shingles could have been used to repair the damaged slope of [the insureds'] roof. The policy clearly and unambiguously provides for “like construction,” not replacement with the identical item damaged. We are satisfied that the repair of the damaged slope of [the insureds'] roof with shingles similar to the damaged shingles in function, color, and shape meets the parameters of “like construction” as called for by the policy language. For these reasons, we conclude the trial court properly determined that [the insureds'] homeowners insurance policy did not require [the insurer] to pay for replacement of [the insureds'] entire roof.

Similarly, in Eledge v. Farmers Mut. Home Ins. Co. of Hooper, Nebraska, 6 Neb. App. 140, 148, 571 N.W.2d 105, 111-12 (1997), the court held the “plain and ordinary meaning” of the “like construction and use” policy provision did not require the replacing the entire roof which had been damaged by hail in only a part of the roof, where matching replacements could be found, and where the repair can be made without damage to the remainder of the roof.

Unfortunately, to the extent that these cases have favorable language they might actually strengthen a plaintiff’s argument that “reasonably uniform appearance” must be more strictly interpreted. A plaintiff might well argue that states have enacted specific statutes or regulations imposing certain appearance or cosmetic requirements on replacement cost policies for the purpose of going beyond ordinary policy provisions. Moreover, a court might be loath to interpret its state regulation as redundant to standard insurance language. Accordingly, the cases interpreting standard insurance language pertaining to replacement cost policies may be distinguishable. A counterargument might be the regulation merely intended to standardize and mandate the “like kind and quality” provision of many insurance contracts. Thus, by adopting the Model Regulation the state merely intended to require all insurers offering policies to include the “like kind and quality” provision when offering replacement cost policies.

Surveying this legal landscape, it appears that the most promising defenses in this type of case are as follows:

  1. Because the property lacked uniformity prior to the covered loss, it would be impossible to “conform” any replacement items to an existing “reasonably uniform appearance” and therefore the obligation to match the replacement items under the regulation was not triggered;  
  2. Because the lack of a reasonably uniform appearance prior to the covered loss was the result of causes that were excluded under the policy there was no obligation to replace all the existing items because it would represent an unjust windfall to the insured;  
  3. Assuming that the regulation applies to the insured’s loss, the evidence establishes that the repair can be performed such that a reasonably uniform appearance can be maintained;  
  4. The replacement items can be matched to conform to a reasonably uniform appearance because “reasonably uniform appearance” is analogous to “like kind and quality”;  
  5. The area that must be replaced to conform to a reasonably uniform appearance is less than the entire property (immediate area, slope section, line of sight); and  
  6. The regulation is not enforceable because it does not create a private right of action.