Insurance companies have turned the property insurance world upside down by denying claims based on engineers who claim that no "functional damage" occurred and only "cosmetic damage" was sustained at the insured property. Most of us in the property insurance claims business have been taught that any "physical damage" is covered by a property insurance policy. This concept of "physical damage" as the bell weather proof of the type of damage covered under property insurance policies is changing and challenged by some insurers and their forensic vendors who claim that "cosmetic damage" is not really the type of "physical damage" covered under insurance policies.

I have previously written about this issue:

Some insurers have added new language into policies attempting to only pay for "functional" damage to a building structure and exclude cosmetic damage. Will Wind/Hail Cosmetic Damage Exclusion Endorsements Become the Norm? discussed this:

AAIS’s “cosmetic damage exclusion” was filed in most states…and works as an optional policy endorsement for homeowner insurers. The endorsement excludes coverage for exterior surfacing of walls, roofs, and/or doors and windows if wind and hail damage just affects the appearance of these surfaces but not their ability to keep weather-related or other elements from entering.

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[The insurance spokesman] says even if a policy has the endorsement, the insured is still covered for any functional physical damage to these exterior components because the endorsement only applies if the damage is cosmetic.

Neil Hall presented an academic paper at the First Party Claims Conference this week. Interestingly, Hall notes that one of the first papers on this issue was published by one the insurance industry’s leading vendors, HAAG Engineering. He then notes how HAAG’s research was flawed and even indicated that as a result of not conducting enough in depth research, HAAG’s researchers are like the last person getting verbal information about a story in a long string of descriptions.

While there will be a Part Two to this paper, Neil Hall succinctly states the issue for forensic engineers asked to comment about "structural damage" from an insurance adjuster:

It is curious to hear FEs pontificate about “cosmetic” and “functional” damage when rarely do the same speakers acknowledge the broader term “direct physical loss” which (it can be assumed) is the etymological root of the neologisms they so warmly embrace. Most FEs assert “functional” damage (and by association “cosmetic” damage) as engineering terms yet hold “direct physical loss” taboo because it is an insurance term-of-art used to establish coverage. The mere utterance of “direct physical loss” by a FE can raise eyebrows among peers, let alone accusations of collusion based on the preposterous notion that FEs best serve their clients when they are ignorant of their client’s workaday vocabulary.

The lack of communication is a two-way street. Consider an Insurance Adjuster who retains a FE to identify “structural damage” to a given property. The Adjuster means direct physical loss to the building’s structure as opposed to the building’s contents, but the FE presumes this to mean “structural damage” as opposed to “non- structural” or “cosmetic” damage. With her head buried in SEI/ASCE-7, the FE tediously investigates the Main Wind Force Resisting System (MWFRS) while ignoring the cracked Venetian plaster. The FE reports “no structural damage”, the Adjuster hears “no damage”, the claim is denied, and all Hell breaks loose.

I encourage all of my nerdy insurance friends to read Neil Hall’s paper. I did not find it a "snoozer" and it adds a lot to this hot debate in the property insurance claims world.

Positive Thought For The Day

The best engineer a few decades ago was someone who could create the most beautiful beam or structure; today it’s to do a structure you cannot see or understand how it’s done. It disappears and you can talk only about color, symbols, and light. It’s an aesthetic of miracle.
         —Jean Nouvel

  • Gary
  • Leland Coontz

    I was in an appraisal hearing when the carrier’s engineer was asked point blank if an item had “physical damage”. He was obviously trained not to let that term pass his lips, and refused to answer. He was willing to say the item “suffered distress” or “was impacted” or some other such euphemism, but would not concede that severely cracked concrete was “damaged”. It was amusing at first, but after 5 minutes of refusing to answer a yes or no question whether “physical damage” occurred it got a little exasperating. I would like to think he lost credibility with the appraisal panel.

    We’re really talking about Orwellian “doublespeak”. A person can say, with a straight face, “the sky is not blue” if they have first redefined the meaning of blue.

    It is important for the plaintiff attorney, public adjuster or homeowner to not get sidetracked. Many times the forensic engineer’s opinion has limited value – because they did a limited investigation and performed a limited analysis, resulting in an opinion that also has limited value.

    I once worked on a claim where the engineer opined that the cracks in bedroom walls were over 20 years old. Problem is, the walls had been painted only a couple of years earlier, and the insured could prove it. The engineer wore reading glasses, but left them in his car. He didn’t see that there wasn’t any paint inside the cracks, if he had he would have recognized the cracks occurred after the walls were painted. If he had interviewed the homeowner, he would have done a more complete investigation. In this case an incomplete investigation resulted in an opinion that was obviously wrong.

    This article does a great job of pointing out that if you don’t succeed in getting paid on the basis of structural damage, you might try a second approach using a cosmetic argument. But don’t forget there could be a third or fourth reason to repair something. Like the need to remove something to eliminate an odor, or remove something with no physical damage to get access for bacterial or smoke cleanup. California regulations require the carrier to pay to remove undamaged materials to access bad ones, at least for homeowner replacement cost policies. An engineer’s opinion that metal roofing has no damage does not override an industrial hygienist’s opinion that it has to come off to get to the smoke residue underneath it.

  • Chip Merlin

    Leland,

    This is one of the best comments that I have read . Thank you because you add a lot to the discussion where the rubber meets the road.