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Nov 15, 2013 | Fred Shuchart

Texas Supreme Court Rules Damages Covered Even if Loss Incurred After Policy Period

By: Fred Shuchart

     The Texas Supreme Court issued its decision in Lennar Corporation v. Markel American Insurance Company on August 23, 2013.

     Lennar built numerous homes in Texas using EIFS instead of conventional stucco exterior. After Lennar learned of the problem in 1999, it “decided not merely to address complaints as it received them but to contact all its homeowners and offer to remove the EIFS and replace it with conventional stucco." Lennar began its remediation program in 1999 and finished in 2003. Almost all of the homeowners accepted Lennar’s offer of remediation. A few were paid cash. Only three ever sued. All settled. Early in the process, Lennar notified its insurers that it would seek indemnification for the costs. The insurers refused to participate in Lennar’s proactive efforts.  Lennar filed suit seeking coverage.  After a decade of litigation, Markel, Lennar's excess carrier from June 1999 to October 2000, was the only carrier remaining.

     In the Supreme Court, Markel argued that the costs to remediate and repair the damages were not covered because Markel did not consent to Lennar incurring them and therefore violated the "voluntary payment provision."   The Court rejected Markel's position and concluded that they were covered.  In doing so, the Court reiterated that, in order for a voluntary payment to be excluded, the carrier must establish that it was prejudiced by the payment.  The Court acknowledged that prejudice was a fact issue and the evidence at trial supported the jury's decision that there was no prejudice.  The jury concluded that Lennar's actions were reasonable and any delay might have resulted in higher remediation costs.

     At trial, Lennar sought coverage for the cost to tear out all of the EIFS to find out whether there was damage to the home's structure.  In other words, Lennar argued that the cost to locate the structural damage, if any, was covered.  Markel argued that only the cost to repair damage was covered because the cost to locate was not "because of" property damage.    The Court rejected Markel's assertion and concluded that all removal costs were covered.    The Court noted that all of the costs for which Lennar sought coverage were on homes that actually suffered damage and it would be unreasonable to construe "because of" not to include the cost to find the damage.  Please note that Lennar did not seek coverage for the cost of removal on the homes that did not suffer any actual damage.

     Finally and most importantly, Markel argued that Lennar failed to segregate covered from uncovered costs because it did not establish which costs were incurred as a result of damage that actually occurred during the Markel policy period.  Surprisingly, the Court rejected Markel's argument.  Although the Court acknowledged that some of the property damage occurred prior to and after the Markel policy period, the Court concluded that Markel was responsible for all of the damage.  The Court noted that the policy is limited to damage which occurs during the policy period, but expressly includes damage from a continuous exposure to the same harmful conditions. The Court then reasoned that, as a result, for damage that occurs during the policy period, coverage extends to the total loss suffered as a result, not just the loss incurred during the policy.  Markel responded that it should be liable on a pro rata basis.  The Court rejected that position with respect to the insured.  Based on its previous APIE v. Garcia decision, the Court stated that the insured is allowed to pick the carrier from which it wants coverage and that carrier is solely responsible.  The Court did note that the selected carrier can sue the other carriers for their share.