A Kansas District Court in Great Plains Ventures, Inc. v. Liberty Mutual Fire Insurance Company, 161 F.Supp.3d 970 (D.C. Kan. 2016), granted summary judgment to an insured who made only a cosmetic hail indentation damage claim, in the absence of any evidence that the hail indentation reduced the roof’s usefulness, expected service life, or even resulted in aesthetic damage. Interestingly, the District Court did not cite Kansas law to supports its decision but rather relied upon a Seventh Circuit decision. Relying exclusively upon the literal language of the policy, the District Court further ruled that the insurer, Liberty Mutual, was obligated to pay for replacement costs for new roofs and not merely reduction in value, even in the absence of a “quantifiable” loss.
The insured relied upon a Wisconsin District Court decision holding that, when a policy provides that the insurer will pay for “direct physical loss,” that such language did not require an insured to demonstrate a financial loss to establish coverage for that damage because the phrase “physical loss or damage” was widely considered to encompass any physical alteration to a structure.
Liberty Mutual made two primary arguments. First, it argued and cited case authority for the proposition that the phrase “physical loss or damage” requires a showing of a measurable reduction in the property’s usefulness. The District Court rejected that argument, with little discussion and even less case authority, focusing on a literal reading of the phrase “physical loss or damage.” Second, Liberty Mutual argued that the scope of coverage was not defined by the “Insuring Agreement” section of the policy as argued by the insured and accepted by the District Court, but rather by the “Coverages” section and specifically the language requiring “a loss to covered property.” Liberty cited case authority for the proposition that the term “loss” meant there must be a showing of functional damage. The District Court, citing contrary authority, rejected Liberty’s arguments and found replacement cost coverage for what was undisputed to be purely cosmetic damage.
The learning from this decisions is fivefold: (1) Some jurisdictions do and some jurisdictions do not preclude coverage for purely cosmetic damage and an insurer’s adjusters and coverage lawyers need to be aware of those jurisdictional differences; (2) Those jurisdictions that enforce literal interpretations of policy language are more likely to require coverage for cosmetic damage, unless otherwise excluded; (3) If insurers provide replacement cost coverage for purely cosmetic damage, they may wish to consider adding a cosmetic exclusion; (4) If, for competitive or other business reasons, insurers do not desire to add a total cosmetic exclusion, they may wish to consider providing only actual cash value coverage and/or limiting such coverage when the damaged property is less than a given age, for example 10 years; and (5) Those insurers that do not wish to add a cosmetic exclusion, might want to consider merely adding a more comprehensive definition of damage such as “function or structural damage.”