Author: Bill Wilson
“A home on the east side of our insured landlord's rental home had a ruptured water line. Water travelled on the ground and entered the home causing damage to the flooring. Our insured's rental home is covered by a Dwelling policy. The neighbor's homeowner insurer is paying this as a liability claim but says they will not pay replacement cost coverage on carpeting, nor will they replace all of the carpeting in the house. Our insured had the same color carpet throughout the home before and she just wants the same thing she had and the new carpet wouldn't match the old carpet. Are you aware of any verbiage in the HO5 that would only allow ACV on third party damage? What is her best course of action? How can I help solve this problem? I feel terrible for this lady and want to help her find a solution.”
Since we do not have a copy of the policy(ies), we can only speak generally about liability coverage. The bad news is that there is a substantial body of case law that attaches ACV, rather than replacement cost, valuation to liability claims. Here is a VU article on this:
However, since this is a legal liability question, a legal opinion from an attorney would be more appropriate…perhaps your state’s law differs from the norm around the country.
Similarly, whether the negligent party is responsible for replacing all of the carpet due to a “matching” problem is another legal liability question that an attorney would have to answer. For first-party property claims, most policies only cover DIRECT damage to tangible property, not consequential economic losses due to market value…but I can’t tell you if that’s true with liability insurance. In addition, some states have statutes (and perhaps case law) at variance with policy terms, as outlined in this VU article:
I suspect the other party might be responsible for ANY non-excluded loss of value, though probably on an ACV, not RC, basis. So, they might be legally obligated to pay the ACV for replacement of all of the carpet whose value would be reduced by mixing it with new carpet. Again, only an attorney can opine about the scope of legal liability.
It may be too late now, but one alternative course of action would have been to turn the claim in to her own carrier which might pay more on a first-party basis, then subrogate against the neighbor to offset such payment. If your insured’s policy has a Pair or Set clause, some insureds have had success in getting consequential “matching” losses paid under that provision. Last year, my wife and I lost 6 of 26 shutters due to tornado damage to our home and I invoked the Pair or Set clause to get all of them replaced since they were custom shutters originally made in 1984. In addition, my HO carrier not only had a Pair or Set clause, but recovery under a “broadening” endorsement was on a replacement cost basis rather than the ACV basis in the unendorsed policy…we got 26 brand new custom shutters.
Follow-Up
The agent advised that the claim had initially been submitted to the landlord’s DP insurer but denied due to the “surface water” exclusion. The VU “Ask an Expert” (AAE) service was still not provided with copies of any of the policy forms in question.
Some HO and DP policies specifically cover water damage claims that originate off the premises if they involve the rupture of a water or sewer system, as opposed to water damage that occurs through natural precipitation like rain or snow melt though, in some cases, these exceptions to the Water Damage exclusion only apply to a public or municipal water system. Also, if you’re looking at the “surface water” exclusion, there is case law from around the country that says that “surface water” refers only to naturally occurring water, again, like rain or snow melt. As a result of these cases, ISO changed their policy language to extend the exclusion to “unnatural” causes. But perhaps the carrier in question has not done this if this isn’t a pure ISO form?
So, to summarize:
The neighbor is likely only responsible for the ACV of your insured’s damaged property. An attorney would need to confirm.
The neighbor may be responsible to pay for replacing carpet that was not directly damaged but whose value is reduced by the matching problem. An attorney would need to confirm.
Your insured’s policy might cover this loss (and they can then subrogate against the other party) if the surface water exclusion is being used to deny the claim. This could be based on a possible exception for off-premises water damage originating from a water or sewer system and/or case law that holds that “surface water” means naturally occurring water from, for example, rain or snow melt.
Among other points, this AAE question illustrates why specific policy form language must be considered in order to provide a definitive interpretation. If you have an AAE question for the VU faculty, we MUST know if it’s an ISO form. If it is, we need the full form number including edition date. If it is not, then you can attach a copy of the insurer form and any supporting documentation like a claim denial at the time the AAE question is submitted.
Last Updated: July 30, 2014