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Does an HOA Rule Constitute an ‘Ordinance’?

An HOA sends out a letter outlining requirements for siding replacements. Does the carrier have to comply based on Ordinance or Law coverage?
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The home of a client who is insured under the HO-3 10-6 sustains hail damage. The carrier agrees to replace siding on about two-thirds of the house, but will not "match" or replace any undamaged siding.

Q: Of course, many of the neighbors' insurance carriers are apparently replacing their insureds’ siding. Needless to say, our insured is not happy. They recently forwarded us an interesting letter all neighborhood residents received from their homeowners association:

"Due to the fading of vinyl siding, the HOA will NOT approve the replacement of siding on one side of a house for most vinyl siding colors. The new siding may match the old today, but in a couple years will not. Please use this letter as the official communication of the Association's policy to insurance companies as well. Due to the extent of damages in our neighborhood and some non-compliance through the years, the HOA will take a hard line on compliance with this process."

Obviously, the HOA can’t just send out a form to the residents demanding that their insurance cover something. But the letter did make us realize that the policy does not define "ordinance." The standard definition of the word is:

1) a piece of legislation enacted by a municipal authority

2) an authoritative order; a decree

Referring to an HOA as a municipal authority may be a stretch, but referring to this letter is an “authoritative order" seems pretty accurate. We forwarded the HOA letter to the adjustor and cited "Additional Coverages," 12a(3), which provides 10% of Coverage A for 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 Perils Insured Against."

The adjustor responded, "In regards to the Ordinance or Law coverage: it applies to local ordinances and laws created by a local municipality for the town or city. A direction from a HOA would not constitute an ordinance or law."

I know this is probably a legal question, but does our thinking held any weight? Have you ever encountered a similar claims scenario?

Response 1: Only governmental authorities can issue ordinances or laws.  That said, if two-thirds of the siding is damaged and the replacement siding will not match the existing siding, the carrier is liable for replacing the siding on the entire house—depending on the state. Just like shingles or carpet, if the replacement causes disparity between the existing, undamaged property and the replacement of the damaged property, then the insured is not made "whole" unless the entire property is replaced.

Response 2: In order to take a stance, we'd need a copy of the policy in question. The coverage most often called on to meet HOA requirements is Loss Assessment coverage. The HOA's decree doesn't appear to be an assessment at this point, but it could become one. 

Response 3: An HOA is not a governmental authority.

Response 4: The adjuster is correct that Ordinance or Law coverage was not intended to cover decrees made by HOA boards that might, in some instances, send out whimsical orders meant to be authoritative. That said, a court of law might determine that HOA directives are valid and require an insurer to adjust the loss to comply.

You might be able to find something to help support your client's claim in this 2016 Rutgers University white paper on HO policies, "matching" and line-of-sight rules, which comments on states with regulations and some case law. 

Response 5: This is one of the most difficult areas to decide right or wrong. Carriers vary on what constitutes damaged property, and the line-of-sight argument doesn't clarify matters. The degree of damage is not clearly defined in any policy I’ve read. I have discussed this in many classes with students and adjusters and have never found a solid agreement. My feeling is that replacing only the damaged shingles or siding after a loss reduces the value of the dwelling, but not the functionality. The HO policy doesn't cover market value, actual cash value or sales price—it covers "replacement cost" without a concrete definition of the term.

Response 6: ISO has no 10-06 edition date of the HO policy, so read yours to see the wording. Also check out this Big “I” Virtual University (VU) article that touches on this topic. This is not an Ordinance or Law claim. Even if it were, the HOA letter means nothing.

Response 7: Since the HOA has the authority to regulate such repairs, I'd view their ruling as an ordinance. If a word is undefined in the policy, use its common meaning. This is not legal advice. I'm not aware of any court decisions on this matter.

Response 8: Although an HOA is not a traditional "regulatory" authority, it may have the statutory authority to regulate construction, reconstruction or repair of structures within the association. Most state statutes or local ordinances confer upon HOAs the ability to manage the appearance of the houses in the neighborhood.

Further, the HOA has the ability to levy liens against any property owner who fails to comply with the associational guidelines. And if the liens are not paid, the HOA can institute foreclosure procedures upon the home.

The grant of statutory authority to regulate construction, including repair, combined with the ability to take a person's home for failure to abide by the bylaws of the HOA make the association a very powerful authority in the homeowners world. Although the extension of Ordinance or Law coverage may sound like a stretch, it seems reasonable to expect it to respond to such authority.

Did the HOA have this level of authority before the loss? Has it decided differently in the past? These are just two of many key questions that may disallow this level of assertion due to the concept of estoppel. The HOA cannot take a position contrary to a previous position without undertaking the necessary legal steps. A lawyer would need to respond.

This question was originally submitted by an agent through the Big “I” Virtual University’s Ask an Expert service. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

Tuesday, June 2, 2020
Personal Lines