Cosmetic Damage Exclusion Stirs Controversy

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Agents and insured need to be aware of and understand the limitations if these endorsements are attached to their policies.

Conclusion

Since these endorsements have only recently been filed with state insurance departments, it is not yet certain what their impact will be on the insurance environment. Although it is possible that the endorsements could become the norm rather than merely an option, it is also quite possible that not all state insurance departments will approve them or that all insurers will adopt them.

Depending on agent and consumer response, insurers may decide to modify their endorsement language or offer premium discounts in the interest of public relations.

Some insurance practitioners have suggested alternative ways to improve insurer loss ratios in lieu of these endorsements, e.g., increase deductibles on roof damage caused by wind or hail, or offer two rating plans — one with the cosmetic damage exclusion and one without.

Time will tell how far the industry will go with these endorsements, how they will be received by state regulators, how they ultimately will be accepted by insureds and agents, and how the cosmetic damage exclusion may be interpreted by the courts. The reality is that insurers have a responsibility to monitor their loss ratios and respond accordingly when they believe they need to be improved to preserve the bottom line. Raising premiums, reducing coverage, increasing deductibles and offering different rate structures are some of the options insurers have. As for the endorsements, consumer and agent response likely will influence how broadly they will be applied.

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