American Family ordered to pay replacement costs to Minnesota homeowners
American Family Mutual Insurance Co. has been ordered by a judge to pay replacement costs to policyholders who say the insurer paid only for materials that were of lesser quality than existing materials on their homes.
Hennepin County District Court Judge Patricia Karasov ordered American Family to reimburse policyholders for full replacement costs for damages, and that all materials are to "reasonably match in terms of color, quality, texture, or type of material."
Karasov's decision stems from a lawsuit filed by Minnesota Attorney General Michael Hatch against American Family in 1998 after a series of storms inflicted much damage across the state. Hatch's office received more than 600 complaints from residents who claimed that the materials used in the repairs did not match the materials already on their homes. Hatch says that American Family's refusal to pay for materials of like quality resulted in homes being left with "part wood grain, blue colored siding, and part smooth white siding."
"Consumers do not pay their premiums to live in a two-toned house or have a checkerboard roof," Hatch says. "Hopefully, this decision will ensure that American Family and other insurance companies comply with the law and provide policyholders the insurance coverage they have purchased."
American Family says that when there is a mismatch between new and old materials on a house due to "natural weathering" of existing materials, the insurer does not have to replace existing materials on the house.
Corey Ayling, an attorney representing American Family, says the insurer handled 60,000 claims as a result of the storms and paid out $334 million to Minnesota residents. He says he does not know how many policyholders will file claims with American Family, nor how much the judgment will cost the insurer.
In response to an enormous amount of claims in 1998, American Family raised Minnesota homeowners insurance premium by an average of 6.5%. Mark Kulda, speaking to Minneapolis based Finance and Commerce Magazine, said the insurance industry had its worst year ever in 1998 when it paid out a record $1.5 billion in claims and expenses in Minnesota, mostly from storm-related damages, including the St. Peter tornado. Kulda, spokesman for the Insurance Federation of Minnesota, a trade group based in St. Paul, indicated the 1998 payments were more than the previous 50 years combined in the state.
Kulda said that despite the premium rate increases, Minnesota still ranks in the bottom one-third of states for the cost of insuring houses. By comparison, the average Texas homeowner pays $1,000 a year for insurance, compared with $400 in Minnesota, Kulda said.
"We're pretty much a bargain for homeowners insurance," Kulda concluded.