September 19, 2013
When continuous, progressive damage or injury triggers coverage under multiple liability policies, courts must decide how much of the injury or damage each triggered policy covers. Must the insured allocate the loss among all triggered policies? Or, may the insured choose a policy to pay “all sums” it is legally obligated to pay, up to policy limits, and force the insurers work out allocation questions among themselves later?
On August 23, 2013, in a significant opinion favorable to policyholders, the Texas Supreme reaffirmed the “all sums” approach with respect to insurance indemnity obligations in Lennar Corporation v. Markel American Insurance Company, No. 11–0394, 2013 WL 4492800. The court also found the insurance company was liable for settlements the policyholder entered into without the insurer’s consent absent prejudice to the insurance company.
Lennar Corporation v. Markel American Insurance Company arose from a dispute over insurance coverage for damage to homes caused by an exterior insulation and finish system (EIFS). Lennar Corporation, a homebuilder, and its subsidiaries built some 800 homes using EIFS, but stopped using it in 1998. Following an exposé on NBC’s Dateline in 1999, Lennar was inundated with homeowner complaints. Lennar investigated the complaints and decided to address them by contacting all its homeowners to remove the EIFS and replace it with conventional stucco.
Lennar notified its insurers early on that it would seek indemnification for the costs of replacing the EIFS. All insurers denied coverage, and after litigation and settlement of the coverage actions, only Markel remained. Markel had issued a $25 million commercial umbrella policy effective from June 1, 1999 to October 19, 2000 to Lennar. Markel denied coverage for numerous reasons, including:
- Lennar failed to comply with a policy condition prohibiting Lennar from entering into settlements or assuming any obligation without Markel’s consent, which Markel had withheld.
- The policy’s “Loss Establishment Provision” prohibited Lennar from determining loss unilaterally.
- Lennar’s costs to remove and replace the EIFS as a preventative measure were not incurred “because of property damage.”
- Markel was responsible only for damages occurring during its policy period.
Proof of Prejudice Not Required
The Texas Supreme Court found that unless Markel established that it suffered prejudice from a settlement to which it did not agree, the “voluntary payments” condition did not bar coverage. Markel had argued that had Lennar waited to respond to homeowners as claims were made, amounts paid would have been less. Or as the court stated, “had Lennar stonewalled the homeowners, fewer repairs would have been made.” Because the jury had resolved that fact question in Lennar’s favor, the court found Markel had made no showing of prejudice, and the voluntary payment provision did not apply.
Markel then argued that the “Loss Establishment Provision,” which was found in the policy’s insuring agreement, did not require a showing of prejudice. The Loss Establishment Provision stated that Lennar’s loss “may be established by adjudication, arbitration, or a compromise settlement to which [Markel] previously agreed in writing.” Markel argued that the provision prohibited Lennar from determining the loss unilaterally. The court was unpersuaded, finding that the policy’s Loss Establishment Provision, regardless of its location in the policy, operated identically to the condition and thus also required a showing of prejudice. Absent prejudice to Markel, Lennar’s settlements with the homeowners established both its legal liability for the property damage and the basis for determining the amount of loss, therefore satisfying the Loss Establishment Provision.
Next the court discussed whether the policy covered the total amount of damages found by the jury. The policy obligated Markel to pay “the total amount” of Lennar’s loss “because of” property damage that “occurred during the policy period,” including “continuous or repeated exposure to the same general harmful condition.” The court of appeals, focusing on the “because of” language, held that the policy covered only the cost of repairing the damage—not the cost of locating it. The Texas Supreme Court made short shrift of the argument: “Under no reasonable construction of the phrase [‘because of’] can the cost of finding EIFS property damage in order to repair it not be considered to be ‘because of’ the damage …. The court of appeals’ characterization of efforts to determine all the damaged areas of homes as preventative measures is not supported by the record.”
Markel next argued that Lennar was not entitled to damages that occurred outside the policy period, and that because Lennar had not offered evidence segregating the damages occurring outside the policy period, it was entitled to nothing. The evidence at trial proved that water damage from the EIFS began within six to twelve months after the homes were constructed and continued until they were repaired. Lennar stopped using EIFS in 1998. Thus all the damages began before the 1999 – 2000 policy period. The court found that the record supported a fair inference that most of the damage began before or during Markel’s policy period and continued afterward. The court noted that although Markel’s policy was limited to property damage that occurs during the policy period, it expressly included damage from a continuous exposure to the same harmful conditions. Moreover, the policy required Markel to pay Lennar’s “ultimate net loss” defined as “the total amount of [property] damages for which [Lennar] is legally liable.” The court concluded: “For damage that occurs during the policy period, coverage extends to the ‘total amount’ of loss suffered as a result, not just the loss incurred during the policy period.”
The court found support for its reading of the policy in its prior decision, American Physician Insurance Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994), long cited by policyholders for the proposition that Texas is an “all sums” state. Markel argued, as insurance companies have argued for years in Texas, that the court’s decision in Garcia was dicta. The court disagreed, and found that Garcia provides the rule governing the situation at issue—Garcia rejected the pro rata approach, “leaving it up to insurers who share responsibility for a loss to allocate amongst themselves according to their subrogation rights.”
Markel urged the Texas Supreme Court to abandon Garcia and follow the pro rata approach, consistent with recent decisions in Massachusetts, New Hampshire, and South Carolina. The court was unpersuaded by those decisions, and concluded that Markel’s policy covered the entire costs of remediating the damaged homes, including damages that occurred before and after the Markel policy period.