The Emerging Hail Risk: What the Hail is Going On?

The number of reported claims involving hail damage to residential and commercial roofing products has increased dramatically in the past few years. Some reports place the increase at almost double historical claim totals.

What is the cause of this significant increase? There is no disputing that in recent years, there have been significant hail events in large metropolitan areas. But does this alone account for the near-double increase in claim filings? Plus, in addition to the increase in the number of claims, an abnormally high percentage of these claims are ending up disputed and ultimately in appraisal or litigation.

In Texas, hundreds, literally hundreds, of lawsuits are being filed each week in Dallas, Tarrant, Potter, Hidalgo, and other counties involving alleged underpayment of hail related roof damage claims – far, far more than has ever previously been the case.

Has the property insurance industry suddenly stopped paying these claims? Or are more sinister forces involved, causing both the increase in number of claims being submitted and number of claims resulting in litigation.

There is no question it is the latter.

What the Hail Is Going On?

In the past decade, a cottage industry has emerged of individuals who believe they can make a living by involving themselves in the insurance claims process. These individuals have previously focused primarily in hurricane claims, fighting over what constitutes wind damage and the never-ending debate over wind versus water damage.

Most significantly, in 2008, Hurricane Ike struck the Texas coast. The feeding frenzy was on. Almost overnight, an entirely new industry of roofing contractors, general contractors, claims consultants, and professional appraisers appeared ready to help building owners take-on the “greedy insurance companies.”

A new generation of public adjusters also appeared. In the past two years alone, membership in the Texas Association of Public Insurance Adjusters has more than doubled. Further, to assist these individuals in pursuing their claims, a new generation of “roofing experts” emerged, many with absolutely no previous experience with roofing systems but prepared to issue reports.

Finally, when the insurers refused to pay claims that lacked merit, attorneys were everywhere. With Texas tort reform making it difficult for plaintiffs’ attorneys to earn a living handling their usual docket of fender bender and slip-and-fall cases, fighting evil insurance companies became the go-to practice area. All of a sudden, every personal injury plaintiffs’ attorney was also a policyholder attorney. Armed with favorable Texas laws governing the underpayment of insurance claims (automatic 18 percent statutory penalty, attorneys’ fees, treble damages and potential bad faith damages), the race to the courthouse was on.

Today, almost six years later, most of the Hurricane Ike lawsuits are gone. But lawsuit coffers need to be filled. Hail claims have become the obvious next target. Unlike major hurricanes, which only arrive every few years, hail falls many times a year all across Texas. Plus, like wind damage, determining what constitutes hail damage to a roofing product is often subject to debate. With favorable Texas law, hail claims present the perfect full employment opportunity until the next hurricane comes along.

For all of these reasons, it is obvious – the increase in hail damage claims and resulting lawsuits have nothing to do with abnormally large or frequent storms. It also has nothing to do with insurance companies refusing to pay meritorious claims. Instead, it has everything to do with strangers to the insurance policies in question injecting themselves into the claims process with the intent to bleed-off whatever money they can into their own pocketbooks. That is what the hail is going on.

Managing the Current Crisis

These claims are predictable. They all have the same warning signs:

Late notice. Most of these claims originate with a contractor knocking on the building owner’s door, promising “a free roof from your insurance company” in exchange for execution of a “roofer contingency contract” allowing the contractor to negotiate the claim and perform the roof replacement work. The contractor then orders a “hail report” to find a recent storm somewhere in the general area to use as the date of loss. The claim is then reported. Often this is months or even years after the reported hail event.

Absence of the insured. The building owner itself is noticeably absent from the claims process. Only the contractor or public adjuster is involved in the actual handling of the claim. The insured, with no out-of-pocket risk, figures “What the hail? If he’s gonna get me a free roof, I might as well let him try.”

Microscopic damage. Roofs seldom actually leak from hail damage. When they do, building owners call their insurance companies right after the hail event and the claims get paid. The claims at issue today almost always involve roofs that are not leaking and the alleged damage is not visible to the naked eye. Instead, the alleged roof damage “requires microscopic technology to see,” “might leak in the future,” “will cause the roof to prematurely fail,” or “will void the warranty.”

Modified bitumen, built-up or metal roofs. Again, when damage is obvious, insurance companies pay claims. With a single-ply membrane, the holes or fractures in the membrane are usually quite apparent. With composition shingles, holes and soft spots are readily apparent. But creativity abounds when identifying alleged damage to other types of roofing systems – “the modified membrane lost granules, which are needed to protect the interplys from long-term deterioration,” “the hail struck and displaced the gravel, which exposed the asphalt flood coat of the built-up membrane, which will now deteriorate,” and of course, “the minor dings in the metal roof will collect water and particulates, which will cause rusting and leaks over time.”

Predictable Patterns

With these similarities in issues, these claims all follow a predictable pattern. Once a dispute arises as to the existence or scope of damage, the contractor or public adjuster has all he needs to demand appraisal. With courts now holding that such disputes are subject to appraisal, all that is needed for a guaranteed payday is an aggressive, manipulative appraiser and a favorable umpire appointment.

Finally, for those claims that are not dumped into appraisal, litigation is also an attractive option. What constitutes physical loss or damage to a roofing product will often be a factual issue driven by expert testimony. With new “roofing experts” having broad views as to what constitutes hail damage, policyholder attorneys have no problem getting cases to trial. Faced with this reality, the significant cost of litigation, and draconian penalties if they happen to be wrong in their position, insurers typically have no choice but to settle claims.

In response, insurers can do no more to protect themselves than carefully proceed through the claims process and hope to mitigate the predictable outcome.

Below are a few recommended strategies that can help:

• Engage qualified engineers with real experience in identifying hail damage;
• Refuse to negotiate claims with contractors and other individuals acting as unlicensed public adjusters;
• Hold the insured to its policy burdens (establishing physical loss or damage and establishing a date of loss within the insurer’s policy period);
• Refuse to accept inflated Xactimate estimates but instead require real bids from real contractors;
• Refuse to pay “10+10” overhead and profit when general contractors are not reasonably necessary and their costs not incurred (there is no “Texas Department of Insurance Bulletin” or “three trade rule” dictating otherwise);
• Closely monitor appraisals to avoid the inevitable manipulation of the process and race to the courthouse for a favorable umpire appointment; and
• Steer clear of the predictable traps.

Finally, insurers can also decide to start fighting the worst abusers, not only in the claims process itself, but also in the shady underworld of referral fees, inflated invoices, kickbacks and outright fraud.