Leverage existing policy language to reduce wind claim indemnity
Shingle manufacturer warranties represent an unleveraged source of recovery for policyholders and insurers.
Florida homeowners results have been and will continue to be severely pressured, resulting in consistent financial losses since 2016. Key drivers of social inflation, soft fraud and assignment of benefits (AOB) have substantially increased attritional loss ratios while reinsurance expenses due to higher catastrophe losses have increased, as well. The concentration of these effects in Florida has resulted in significant rate increases just to break even, and other states are not immune.
While there is no single solution to this confluence of factors, leveraging existing policy language regarding ‘other insurance’, which designates the insurance policy as excess to any existing service plans or warranties, has the potential to partially mitigate these impacts.
Across all states, the following ISO policy language (in multiple forms) is regulatory approved:
Other Insurance and Service Agreement If a loss covered by this policy is also covered by: 1. Other insurance, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss; or 2. A service agreement, this insurance is excess over any amounts payable under any such agreement. Service agreement means a service plan, property restoration plan, home warranty or other similar service warranty agreement, even if it is characterized as insurance.
Given the predominance of the wind peril in Florida and other coastal states, shingle manufacturer warranties represent an unleveraged source of recovery for policyholders and insurers. Shingle manufacturers have been upgrading their warranties over the past 10+ years to extend well beyond the traditional manufacturer’s defect coverage that generally provides limited value.
Typical coverage includes 15 years of non-prorated wind coverage up to 130 mph. We estimate coverage eligibility for nearly one-half of all single-family detached homes with asphalt shingles, however, roof claims due to wind continue to be paid at the expense of property insurers and substantial policyholder deductibles.
By determining which homes are eligible for shingle warranty coverage and applying existing policy language, insurers may reduce roof claim indemnity and improve policyholder service outcomes through saved or reduced deductibles. Reduced claim indemnity may be particularly noticeable among claims based on social inflation or soft fraud, as not all policyholders will comply with warranty submission requirements. Policyholder non-compliance with duties after a loss, etc. may also become a factor.
Overall, we expect AOB lawsuits to be diminished as the shingle manufacturer’s warranty is primary and the insurance policy is excess.
Subrogation strategies may also exist for specific shingle manufacturers, but warranty contracts differ across manufacturers, so the insurer needs to determine those worth pursuit.
Once proven as a source of recovery for non-catastrophe events, insurers have an opportunity to leverage this same policy language for CAT events, which should ultimately reduce probably maximum loss and reinsurance expenses.
The deterioration of attritional loss ratios and soaring reinsurance expenses in homeowners markets leads insurers back to strength in fundamentals, including the application of existing policy language. The novel application of the other insurance provision to the wind peril provides the opportunity for improvement.
Joe DiMartino, Ph.D. is an insurance industry president/CEO, consultant, licensed insurance agent, licensed insurance adjuster and the founder of RoofCovr. He may be contacted at hello@roofcovr.com. Opinions expressed are the author’s.
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