"Paid When Incurred? A Not Very Neighborly Tactic by State Farm Insurance!

[Toby]

I love my job!  I once heard that if you get a job you like, you will never have to work a day in your life.  For this reason, I don't "work" for a living, but every now and then something comes up that just takes the joy out of my day, and this was one those days.

     I got a call from a client (and friend) about a septic tank backup at his house.  Yuck!  Water damage in your home is bad enough, but smelly black water from your septic tank really ruins your day!  I recommended a local drying company to him to get the water and contaminants out and get the house dry.  They came out right away and provided good service.  My friend called his State Farm Insurance agent and submitted a claim, and an adjuster called and set up a meeting for Monday morning at 8:30.  He asked me to meet him and the adjuster there, so that Monday morning first thing I was shaking hands with a local State Farm adjuster that I have worked with in the past.  So far so good!

     Now, this is not an average house.  While it is not a high end mansion, it is a custom house that they designed, planned, and sweated over to build about seven years ago.  It has a lot of really nice features, and a couple of them are key to this discussion; nice quality solid bamboo flooring throughout the entire downstairs, and an open floor plan.

The kitchen, half bath, and laundry area suffered the most damage, and the drying company removed a lot of the bamboo flooring in this area so they could get everything clean and dry.  The bamboo also runs past the kitchen into a large living room, a dining room, foyer, and hall.  These areas are all part of the bamboo floor, and there is no separation at all between the rooms; the floor flows nicely from one room to the next with no place to break it.

When we met with the adjuster, only the kitchen floor was actually damaged.  The rest of the floors would have to be replaced so that there would once again be a smooth unbroken floor throughout the downstairs.  Then the adjuster said something I have never heard before, and completely ruined my day.  "The other floors will have to be replaced, but we will only pay for them if you actually incur that expense."

     You may not know this, but your insurance policy is a contract between you and your insurer, and that contract spells out a lot of things.  One of the things it spells out is how covered losses will be paid.  The policy clearly states that a covered loss will be paid on an actual cash value basis, with payment of the replacement cost difference "if incurred."  What that means is that your entire claim should be paid, minus depreciation, as settlement of the claim, whether or not you EVER do the work.  If you actually make replacement of the covered items, then you can go back to the insurer for payment of the depreciation that was held back.  State Farm has taken the position that some items in the loss will be paid for up front, while others will not, because you might not actually replace those items.  This is in direct conflict with the wording in the policy!

     Let's think this through.  In my friends kitchen are a lot of really nice cabinets, all covered with really nice solid surface countertops.  They are still in place, and the bamboo runs underneath them.  We have two options in dealing with those cabinets, one good, the other not so good.  We can take the cabinets out, put the floor back underneath, and then reset the cabinets, countertops and all.  This will cost a bunch of money, but that is what it will take to restore the kitchen to the quality it was.  Or we can leave the cabinets in place, cut the bamboo out as close to the cabinets as possible, and run new flooring around the cabinets, using trim to close any gaps at the base of the cabinets.  State Farm is paying up front to remove the cabinets, even though the cost of handling them has not yet been "incurred."  Why the cabinets and not the living room floor?  To take the example to an extreme, it is theoretically possible to buy some new bamboo, piece it in where the old has been removed, and leave the kitchen looking like a patchwork quilt.  Why not hold back the cost of any new bamboo until costs are "incurred?"  Finally, what if my friend elects to not repair the kitchen at all?  What if he likes the way it looks now, with plywood showing through patches of torn out bamboo and the baseboards removed and the walls scratched up?  Why not hold back all payment until costs are "incurred?"

The truth is that, under the insurance contract, the loss has value whether or not any repairs are ever made.  "Incurred expense" coverage has been tried before, and is always rejected by the courts.  What you do with your ACV insurance money is your business (and your mortgage holder's), and it is NONE of State Farms' business.

     There are a bunch of people in Pennsylvania so upset with State Farm over this issue that they have gotten together and filed a class action lawsuit.  Here is a link to information about that suit:  http://classactionlawsuitsinthenews.com/class-action-lawsuit-complaints/state-farm-insurance-paid-when-incurred-or-pwi-class-action-lawsuit-complaint/

     A suit filed regarding this issue has been dismissed with prejudice in Federal court in Philadelphia.  The court sided with State farm in finding that using a "PWI" settlement for undamaged portions of a structure does not constitute bad faith or breach of contract.  You can read about the case here: http://www.martindale.com/litigation-law/article_Fineman-Krekstein-Harris-PC_2013004.htm

     In this case the plaintiff suffered damage to portions of his siding on three sides of his home, and on 30% of the roof.  State Farm wrote an estimate to replace the damaged areas of siding and roofing, and paid that portion of the claim on an ACV basis.  They then added to replace the rest of the siding on the damaged walls and the rest of the roof on a "PWI" basis.  Plaintiff filed suit alleging bad faith and breach of contract, and the court sided with State Farm saying "that to require the insurer to provide the costs upfront for undamaged property would result in a windfall to the insured. Rather, the insurer’s method of designating funds as PWI and providing the funds if and when plaintiffs chose to repair the entire home was fair, and not a breach of contract because plaintiffs had already been provided with the depreciated value of the damaged property."

     It is our opinion that the court erred in this finding.  The court made the invalid assumption that the damaged siding and roofing pieces are separate parts that do not constitute a larger system, and can be changed individually without affecting the value of the system as a whole.  The truth, however, is that a roof is an item composed of individual parts that, when properly installed, create a new system that is more valuable than the total of the individual parts.  The same is true of siding.  You only have to think about the cosmetic aspects of these two systems to know that changing out individual pieces should they become damaged does not return the system to its former value.  Think about it: When you signed up for your insurance did your roof or siding look like a patchwork quilt?  If not, then it shouldn't look that way after your insurance claim!
     In the past year the Georgia Supreme Court ruled that homes can suffer diminished value just like autos, and that diminished value was covered by a standard homeowners policy.  It is common sense that a home with a patched appearing roof and siding is worth less than one with a uniform appearance.  Perhaps then a claim for diminished value would be appropriate if a PWI settlement is offered!

     I think you would agree with me that arbitrarily changing the terms of a deal would be downright un-neighborly.  Apparently, State Farm would disagree.