The Policyholder’s Perspective from Brandon McWherter
The Insurance Company’s Perspective from Parks T. Chastain

The Occupational Safety and Health Act was signed into law in 1970 by President Nixon, and the Occupational Safety and Health Administration (OSHA) was simultaneously created to implement, administer, and enforce its requirements. OSHA’s mission is to “assure safe and healthy working conditions for working men and women by setting and enforcing standards and by providing training, outreach, education and assistance.” Every single contractor in the United States is required to provide a safe work environment for its construction workers. Compliance with OSHA standards is mandated by federal law and is not optional.  Over the years, it has become obvious that many insurance companies are not including the necessary cost of OHSA compliance within their Xactimate estimates. Contractors, public adjusters, and insurance appraisers have shown me countless estimates from insurance companies that omit any costs for OSHA compliance.

The cost of compliance varies depending on the type of job to be performed, but OSHA standards are applicable and enforceable on both residential and commercial projects. There are OSHA standards that must be followed for fire and water remediation, as well as roof replacements and siding repairs. Many insurance company adjusters do not believe that OSHA standards apply to residential roof replacements. This is a very common misconception, but here is a link from OSHA that explains the guidelines for residential roofing and fall protection – – OSHA Fact Sheet – Fall Protection in Residential Construction.

In my experience. I would estimate that 95% of the Xactimate estimates that I have seen written by insurance company adjusters do not include any of the necessary costs for OSHA compliance. Of the 5% that I do see that have these costs added, most of those incorrectly apply the costs of OSHA compliance under the “Ordinance or Law” section of the policy. I commend the adjusters and appraisers who strive to do the right thing and my hat is off to them for including these costs into their estimate; however, OSHA costs must be included within the ACV settlement and it is inappropriate to withhold these costs as “Paid When Incurred” items.   Costs of compliance with an “ordinance or law,” also commonly referred to as “code upgrades,” are excluded by almost every standard form insurance policy  unless the policyholder has paid an additional premium to purchase “ordinance and law” coverage.  Ordinance and Law coverage is available to provide additional coverage when a law or ordinance regulates the materials, demolition, or construction to a property after a covered loss. For example, drip edge is required to be installed on the eaves of roofs in every jurisdiction within the state of Tennessee. If a roof requires replacement and it does not currently have drip edge installed, the building code will require drip edge be installed during the new roof replacement. The cost associated with the drip edge will fall under the ordinance or law coverage provided by the policy and some of these policies only pay this cost on an incurred basis, meaning it is not paid with the initial ACV payment. For reference, a standard residential ordinance or law provision is below:

Ordinance or Law

      1. You may use up to 10% of the limit of liability that applies to COVERAGE A, you may use up to 10% of the limit of liability that applies to Building Additions and Alterations for the increased costs you incur due to the enforcement of any ordinance or law which requires or regulates:

(1) The construction, demolition, remodeling, renovation or repair of that part of a covered building or other structure damaged by a PERIL INSURED AGAINST;

(2) The demolition and reconstruction of the undamaged part of a covered building or other structure, when that building or other structure must be totally demolished because of damage by a PERIL INSURED AGAINST to another part of that covered building or other structure; or

(3) The remodeling, removal or replacement of the portion of the undamaged part of a covered building or other structure necessary to complete the remodeling, repair or replacement of that part of the covered building or other structure damaged by a PERIL INSURED AGAINST.

      1. You may use all or part of this ordinance or law coverage to pay for the increased costs you incur to remove debris resulting from the construction, demolition, remodeling, renovation, repair or replacement of property as stated in a. above.

This coverage is additional insurance.

With this provision, the homeowner can use up to 10% of his or her dwelling limit to cover any increased costs or demolition that is required to comply with an ordinance or law that regulate the construction or demolition of the building. This is not the same thing as compliance with OSHA standards. When a property was built, it must be assumed that the building was built in a safe manner, and estimating and paying OSHA costs on an ACV basis is merely returning the property back to the condition it was in at the time of the loss. OSHA compliance does not increase the value of the property or provide any betterment.  As a result, depreciation should not be applied to costs of OSHA compliance.  In the same way, holding back these costs as “Paid When Incurred” would be a misapplication of the policy provisions.

Commercial policies are much more complex when it comes to Ordinance or Law coverage and typically have three distinct coverages within the Ordinance or Law section. Like residential policies, these coverages are not usually automatic, and an additional premium must be made to have this type of “Code Upgrade” coverage.  An example of a commercial Ordinance or Law provision is shown below:

Coverage A – Undamaged Portion of the Building. When an Ordinance or Law requires an Insured to tear down the undamaged portion of a building, this coverage provides protection for the value of the undamaged portion of the building.

Coverage B – Demolition. When an Ordinance or Law requires an Insured to tear down the undamaged portion of a building, this coverage pays for the cost to demolish and haul away debris from the undamaged portion of the building.

Coverage C – Increased Costs of Construction. When an Ordinance or Law requires modifications in how a building must be repaired or reconstructed, this coverage provides protection for the increased costs of construction associated with repairing or rebuilding the structure to the code existing at the time of the loss. Coverage usually applies to both the damaged and undamaged portions of the building.

Again, just like residential policies, these additional commercial property coverages have nothing to do with the minimum standards set forth by the federal government to keep workers safe. Each of the above coverages are intended to remove, build, or upgrade covered property after a loss due to the enforcement of local code requirements. I do not believe that any insurance company or their adjusters intentionally want to put workers or the general public in any type of danger; however, by not applying the minimum safety standards to their repair estimates, they essentially are doing just that. The key points to know are these:

  1. OSHA standards must be followed on every single reconstruction project, large or small, residential or commercial.
  2. OSHA standards are not suggestions, they are federally mandated.
  3. The usual and customary costs for OSHA compliance must be paid on an ACV basis for claim settlement purposes.
  4. OSHA Standards are not code upgrades and they do not fall within the Ordinance or Law coverage provisions.

OSHA Standards should never be coded as “Paid When Incurred.”  By withholding the necessary costs of OSHA compliance, this is no different than depreciating or withholding the cost of labor to install or replace a damaged item, which the Tennessee Supreme Court ruled last year to be unlawful. A link to my blog about the depreciation of labor can be found here.

Do not let insurance adjusters tell you otherwise, the cost for OSHA compliance is not already built into Xactimate line item estimate pricing.  There are specific line item entries available to estimators within Xactimate that must be added to the estimate.  Also, remember that the premiums that most policyholders pay are based on a replacement cost valuation basis, meaning the cost of replacing the damaged property for today’s reconstruction costs.  Because policyholders are already paying a premium for OSHA compliance, they should be compensated for these costs on any loss where OSHA standards apply to the repair or replacement of damaged property.

The storm has passed and a new wave of obstacles and hurdles are sure to follow in its wake.  Out-of-state adjusters have already flooded the area, and not all of them know and understand policyholders’ rights in the State of Tennessee.  Here’s a few tips on a few areas that we at McWherter Scott & Bobbitt often run into when handling storm-damage claims:

  1. Matching – In the fall of 2017, the Tennessee Commissioner of Insurance adopted a rule requiring that in claims involving replacement cost policies, the insurance company must replace items “so as to conform to a reasonably uniform appearance,” at least in policies that don’t specifically contain language that makes clear that matching is not insured.  This means that insureds are entitled to a matching, uniform appearance, not patch-work repairs that leave a bad appearance.  Here is the link.
  2. Consequential Damage – In that same rule, the Commissioner of Insurance also made clear that “when a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making such repair or replacement not otherwise excluded by the policy, shall be included in the loss,” and “the insured shall not have to pay for any cost except for betterment and any applicable deductible.”
  3. Overhead and Profit – In Tennessee, general contractor’s overhead and profit must be included in the actual cash value payment as long as the work is of the type for which a person would reasonably be expected to utilize the services of a general contractor.  This is true even if the owner does the work himself or doesn’t perform any repairs at all.  In one of our recent cases, a federal court in the middle district of Tennessee held that our client stated a claim for bad faith and punitive damages when an insurer failed to include overhead and profit on a large, commercial roof-only project.
  4. Causation – Tennessee follows the “substantial factor” test when two losses operate together to cause a loss.  This means that if there are two perils that jointly contribute to a loss (one of which is covered and one of which is not), then the entirety of the loss is covered as long as the covered peril was a “substantial factor” of the loss or damage.  This means that losses are often covered even when wear and tear, deterioration, improper workmanship and materials, and other excluded causes contribute.
  5. Labor Depreciation – In one of my recent cases, the Tennessee Supreme Court ruled in Lammert v. Auto-Owners that labor may not be depreciated when calculating the insurer’s actual cash value payment obligations unless the policy clearly allows it.  Use of improper settings within estimating software can have a dramatic impact on claim payments.

This past Sunday morning I boarded  a plane for Naples, FL for a mediation in one of the labor depreciation class actions my firm is handling.  When I left, I had no idea that when I returned a few days later Nashville would be a very different place.  The storms that pummeled Tennessee on March 2 and 3 will impact our state for decades.  Lives were lost, buildings destroyed, businesses ruined, and churches toppled.  The recovery and reconstruction process will take years.  Our thoughts and prayers go out to those that were impacted, and our firm (McWherter Scott & Bobbitt, PLC) will proudly stand with those who have lost so much.

(photo by FOX 17 Nashville)

For the past few years, I’ve been involved in several labor depreciation cases around the Southeast, including one right here in Tennessee against Auto-Owners.  The threshold legal question in that case, Lammert et al. v. Auto-Owners Mutual Ins. Co., was whether an insurance company can depreciate the cost of labor when determining its actual cash value payment obligations.  The Supreme Court’s answer was a resounding “No”.

The Lammert case was filed as a class action in federal court in Nashville, but Judge Crenshaw certified this critical legal question to the TN Supreme Court.  Here is the exact question that Judge Crenshaw asked the Supreme Court to answer:

Under Tennessee law, may an insurer in making an actual cash value payment withhold a portion of repair labor as depreciation when the policy (1) defines actual cash value as “the cost to replace damaged property with new property of similar quality and features reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss,” or (2) states that “actual cash value includes a deduction for depreciation”?

In answering the question, the Supreme Court first explained the problem with an example, borrowing from a hypothetical we provided in our brief:

The following hypothetical illustrates the dilemma. Suppose that laminate flooring with half of its useful life remaining is damaged by a sewer backup and that the homeowner has an insurance policy providing that the insurance company will cover the actual cash value of damaged property, calculated by deducting depreciation from the replacement cost. Further suppose that it would cost $10,000 to replace the floor, with $5,000 in labor costs and $5,000 in material costs. If depreciation is deducted from material costs alone, then the actual cash value for the floor is $7,500. If depreciation is deducted from the total replacement cost, then the actual cash value of the floor is $5,000.

In the end, the Supreme Court’s based its decision on the general rule that any ambiguity must be construed in favor of the policyholder, and in light of the fact that the policy could be construed in two ways, the Court held as follows:

We conclude that the language regarding depreciation in the policies in question is ambiguous. Under Tennessee law, ambiguities in insurance contracts are strictly construed against the insurance companies and in favor of the insured. Therefore, with the insured’s interpretation controlling, labor may not be depreciated when the insurance company calculates the actual cash value of a property using the replacement cost less depreciation method.

This was a huge win for Tennessee policyholders.  Millions of dollars have been shortchanged over the past several years, and this decision is the first step putting that money into the pockets of who it belonged to in the first place – – the policyholders.

A copy of the opinion can be downloaded here.

In the case of Conley v Tennessee Farmers, the Court of Appeals held that a misrepresentation as to prior foreclosure on an application is sufficient to void coverage as such misrepresentations increased the risk of loss as a matter of law. The Court of Appeals held:

Continue Reading Misrepresentation as to prior foreclosure voids policy, even if innocently made

I draw your attention to the June 25 Tennessee Court of Appeals decision in the case of Dutton v. Tennessee Farmers Mutual Insurance Company which addressed the question of whether misrepresentations made on an initial policy application which unquestionably increased the risk of loss would still operate to void that coverage when multiple renewals of coverage had taken place. Dutton v TN Farmers. The applicants unquestionably made misrepresentations on the policy application which were material, specifically dealing with drug use and convictions for drug related crimes. After the policy was issued (based upon that application), time passed, and multiple renewals occurred. In pertinent part, the changes made to the policy included the deletion of the individual who had the drug related problems. The insured argued the changes to the policy meant the misrepresentations no longer had any bearing on the risk that Tennessee Farmers was insuring.

Continue Reading Misrepresentation at Inception of Policy is Effective to Void Coverage Even After Renewals

In the case of Jefferson County Schools v. Tennessee Risk Management Trust, et al., No. E2017-01346-COA-R3-CV (decided March 15, 2018) (Jefferson County Schools v. TN Risk Management), the Tennessee Court of Appeals addressed the question of whether a Fire Marshal’s directive qualified as an “ordinance or law” for purposes of insurance coverage. Following a major rainstorm, a building at the Jefferson County High School collapsed. Continue Reading What Constitutes an “Ordinance or Law”?

We don’t usually post liability related matters on this blog, but every once and a while there is a ruling that warrants mention.  That ruling was issued today by the Tennessee Supreme Court in Dedmon v. Steelman W2015-01462-SC-R11-CV (click on case for full copy of opinion).  While I may disagree with the result, it is an extremely well written opinion from Judge Kirby.  The bottom line is that the Tennessee Supreme Court unanimously held Tennessee law does allow plaintiffs to use the full, undiscounted amount of medical bills to prove their medical expenses instead of the discounted amounts paid by insurance companies and accepted by medical providers. The defense is no longer even permitted to introduce the amount of the discounted bills period.  I commend the full opinion to your reading, as it contains an excellent overview and history of the collateral source rule, as well as detailed analyses of the differing rationales used by other courts to allow introduction of those discounted and accepted medical expenses.

 

This past Friday (Aug. 4, 2017), Mississippi’s Insurance Commissioner, Mike Chaney, issued a bulletin that alerts insurers that they should not be depreciating labor in Mississippi unless policy language clearly allows it, and even then, estimates must clearly delineate that labor was depreciated.  I’ve quoted the bulletin below:

Continue Reading MS Insurance Commissioner Issues Bulletin Regarding Labor Depreciation