Cosmetic Damage Exclusion Stirs Controversy


…coverage for solely cosmetic damage fromwind and hail in homeowner and commercial properties may be eliminated if insurers choose to use these endorsements.

Seemingly, this is a reaction by insurers to deal with the increasing volatility of weather events which are causing havoc with insurers’ loss ratios. Obtaining approval for rate increases is time-consuming and not always successful. In lieu of rate increases, insurers reason that the use of these endorsements can reduce their loss experience without raising rates on insureds. It seems fitting, though, that since there is a reduction in coverage, it may be appropriate to offer some reduction in premiums — but that is not entirely certain as yet.

The two rating organizations that draft standard policy forms and policies for property/casualty insurers, the American Association of Insurance Services (AAIS) and Insurance Services Office (ISO), have both filed cosmetic damage endorsements.

What is Cosmetic Damage?

Cosmetic damage is damage that affects the appearance but not the function of the roof, which is to serve as a barrier from weather-related damage. It is physical damage such as marring, denting or pitting that affects the appearance but not the intended function of roof surfacing, which is to prevent the penetration of water into the dwelling or building.

ISO and AAIS Endorsements

The ISO endorsement contains two options. The first gives insurers the option of covering a building on a full replacement cost basis, but limits the valuation on roof surfacing to actual cash value (ACV); that is, with deduction for depreciation. The second option is the cosmetic exclusion, which is defined as marring, pitting or other superficial damage from wind and hail that alters the appearance of the roof but does not prohibit it from functioning as a barrier. If the roof still functions...