How to Adjust Property Casualty Claims Amidst Global Roofing, Exterior Materials Shortages

Companies across the entire economy are experiencing unprecedented labor and material shortages.

Whether from global supply chain disruptions caused by governmental responses to the novel coronavirus, or from the devastation wrought by historically powerful Hurricane Ida, or the extensive wildfires raging across the western United States, we are seeing delays, increased costs, limited inventory, and outright stock-outs from microchips to gasoline, from grocery store shelves to industrial supply warehouses. 

In the roofing industry, there are consequences of shortages to EPDM, TPO, PVC, and sealants in terms of the cost of roofing and exteriors restoration projects, the timeline to complete repairs, and the indemnification of insured property owners.

Many of the restoration contractors who install roofs and exteriors have their work funded by insurance proceeds.

Because insurance executives and adjusters are responsible for this critical financial supply chain we offer recommendations for the proper adjustment of property and casualty (“P&C”) insurance claims.

Our recommendations are to fully account for the increased costs and extensive delays caused by global supply chain shortages and to make accommodations to the restoration contractors and policyholders to avoid even further exacerbation of disruptions flowing from wrongfully underpaid or denied P&C insurance claims. 

The issue of extensive delays for roofing and siding materials

It is undeniable that the restoration industry for roofing and exteriors faces unprecedented shortages and supply disruptions, causing extensive delays in the fulfillment of orders of certain products indispensable to the completion of repairs to roofing systems and exteriors damaged by storms. 

To illustrate the extent of shortages, here is an excerpt of the timeline for delivery dates of several common roofing and siding materials from a company, Mule-Hide Products Co., Inc., that prides itself on the nationwide availability of the industry’s premier low-slope roofing system products.

Despite this goal and distribution centers serving the United States and parts of Canada, in a weekly update issued by Dan Deprey, strategic pricing manager, on Oct. 15, 2021, the company issued a stark notice of extensive delays across product categories: 

These delays will cause ripple effects throughout our industry, including increased pricing, the lapse of timelines to complete repairs to obtain withheld depreciated amounts, and the failure to obtain matching roofing and siding materials. 

The issue of increased prices due to shortages

Often the settlement amount of property damage claims is estimated using software such as Xactimate that provides basic assumptions about pricing for materials and other components of a reconstruction job.

It is not proper to treat the Xactimate assumptions of pricing for roofing or exterior components as if they were Gospel—pricing for these components should be based on the actual costs for a reputable contractor operating in the actual market where repairs are being made. Thus, the increased costs of labor and materials due to Covid-19 related disruptions, catastrophes, and other physical supply chain disruptions should be reflected in the adjustment of claims. 

For instance, according to a Nov. 5, 2020, letter to customers issued by Louisiana-Pacific Corporation LP Building Solutions, “In order to align more closely with market prices, we are announcing a 2021 price change. The weighted average price impact of these changes is projected to be between three to five percent . . . Due to market demand, we will be unable to allow any additional quantity of products to be purchased in Q4, 2020 in excess of your current allocation.” 

Furthermore, according to an April 21, 2021 customer letter from ABC Supply Co. Inc., “Steep slope roofing manufacturers have announced their third price increase of 2021. The most recent is for all orders shipped on or after June 14, 2021, regardless of the order date. ABC Supply will raise prices on all shingles and related accessories five to seven percent for deliveries on or after June 14, 2021.” 

The increased cost of materials should be reflected in the payments made on P&C insurance claims to cover the additional cost of roofing and exterior materials. 

The issue of withheld depreciation and the timeline to complete repairs

Most P&C insurance policies provide the insured has 180 days to complete repairs after the payment of an actual cash value settlement to recover withheld depreciation.

Depending on the extent of wear and tear and the age of a roofing system or building envelope, claims can be subject to substantial depreciation.

When the carrier pays only the actual cash value of a claim pending the completion of repairs, and there is a deadline of 180 days to complete repairs to release the remaining funds, a material shortage could jeopardize a significant percentage of the entire claim value. 

Delays in the fulfillment of orders prevent the insured from completing repairs within the prescribed time window to recover withheld depreciation. Insurance executives know or should know about these delays and shortages.^[1] 

They should understand these delays are not the fault of the insured.

They should know that impossibility of performance is a valid excuse for policyholders to delay performing repairs after a loss.

They should freely grant extensions of the deadline to recover depreciation to provide time for restoration contractors to obtain the building materials necessary to repair the insured’s property with like kind and quality materials. 

The timeline for completing repairs should be tolled until the delivery date of materials, rather than running from the date of payment by the carrier of the actual cash value amount. 

The issue of matching and repair vs. replacement

The Norandex brand boasts siding, windows, doors and other exterior products in a vast array of styles and colors.

Yet in a May 14, 2021 letter to customers, Norandex wrote: 

“In March [of 2021], we communicated a temporary suspension of a few select colors due to an interruption in raw material supply. While we had previously anticipated that production of these colors would resume within 90 days, the material supply has not sufficiently improved to support our increasing demand rates[.] We understand color suspensions are a challenge to manage, and we worked diligently to identify the colors being suspended based on overall popularity. Effective immediately, we have temporarily suspended order placement and production of the following colors throughout the Norandex Siding portfolio: [list of 15 different colors]. Current accepted orders against these colors will be reviewed and supported to the best of our ability. No new orders of suspended colors will be accepted. If these colors are inadvertently included on a Purchase Order, they will be automatically removed.”

The difficulties of managing color suspensions trickle down from the restoration contractors to the detriment of policyholders.

The problem posed by shortages is that the limited availability of certain colored roofing or siding materials prevents the insured from installing a replacement roofing or siding that is of like kind and quality to what they had before the loss.

Forcing the insured to substitute colors that do not match when making spot repairs results in a leopard print roof or siding that may violate local ordinance or diminish the value of the property.

If the P&C carrier pays only for roofing or siding materials that are available on time, that results in a violation of the general principle of indemnification. 

Most P&C insurance policies promise to pay for the replacement of property damaged by a covered peril with roofing and exterior materials of “like kind and quality” to what the insured had before the loss.

This is a general principle of indemnification or making the insured whole again after a loss, that is the north star that should guide the adjustment and settlement of P&C claims.

P&C insurance policies should pay for matching materials so that roofing systems and sidings are of a uniform color and appearance.

If this means a partial repair becomes a total roof replacement because of the limited availability of matching materials, this risk should be borne by the insurer rather than the insured unless unambiguously disclaimed in the insurance policy. 

If repairs cannot be made with colors that match the undamaged portion of a roof or siding system, then the entire system should be replaced with the color of the insured’s choice.

The color may not be the same as before the loss, but at least the insured would have a roof or siding that appeared uniform and matching which is what they had before the loss and what the P&C insurer insured. 

Conclusion 

In the professional opinion of the authors, good faith claims handling requires insurance companies to extend the deadlines for recovering withheld depreciation, to pay the extra costs for replacement instead of repairs to ensure matching, and to pay for the additional cost of materials due to shortages, in light of these extensive and well-documented supply chain disruptions.

Failure to do so will hurt consumers, restoration contractors, materials suppliers, and will ultimately breed litigation.

We hope professionals in the roofing and exterior restoration industry promulgate these arguments to their clients and work with professional loss adjusters and policyholder advocates to ensure their clients are made whole in light of the global supply chain disruptions affecting US markets. 

[1] Upon request the authors can provide extensive examples of letters from manufacturers about limited availability and delays in distribution of materials, as well as mandates from insurance commissioners regarding extensions of timelines for supplements and tolling of deadlines for P&C claims because of COVID-19-related delays.