Construction Defects Covered Even When Insurer Did Not Consent to Remediation; Property Damage Occurring Before and During Policy Period Also Covered: Lennar Corp. v. Markel American Ins. Co., No. 11-0394 (Tex. 2013)
This is a significant insurance decision issued by the Texas Supreme Court on Friday, August 23, 2013, culminating 12 years of litigation that began after production homebuilder Lennar undertook an effort to discover and remediate hidden damage due to defective EIFS it installed on homes it sold. Lennar sued its insurance carriers to recover the costs of settlement for 465 homes that had actual damage. Markel contended that Lennar could not recover for expenditures made without Markel’s consent, and it challenged coverage for Lennar’s costs other than those to repair physical property damage, including in particular the cost to remove the EIFS to determine whether damage had occurred. Markel also claimed its coverage did not extend to property damage that occurred outside its coverage period. The court, in an 8-1 decision, resolved these issues in favor of Lennar, holding:
- Insurer must show prejudice to enforce “no settlement without consent” rule.
- Insurer is responsible for costs incurred to (i) determine property damage as well as to repair it, and (ii) to remediate damage that began before and continued after the policy period.
The court decided the consent-to-settle issue based on standard contract law, which requires any breach to be “material,” meaning it results in loss of a substantial right, before the non-breaching party would be excused from performance. The jury rejected Markel’s argument at trial that Lennar’s effort resulted in claims that the homeowners would not have asserted had Lennar not contacted them. The court held the issue of prejudice presented a question of fact, not law, that the jury resolved against Markel. Because Markel was unable to prove prejudice, it was unable to enforce the contractual requirement that Lennar obtain its consent to hold it responsible for costs incurred in its program to remove EIFS and remediate damage. The court further held that, because Markel did not show prejudice, Lennar’s settlements with the homeowners established the amount of the damages it was entitled to recover from Markel. The court concluded that Markel’s cost to locate property damage, by removing the EIFS, in order to repair it, was within the scope of coverage for liability “because of” property damage, even without a broad reading of the term “because of.”
The court also rejected Markel’s argument that it could be responsible only for costs to remediate damage in existence during the policy period, and the loss should be apportioned accordingly. The court found based on the record, that at least some damage occurred during Markel’s policy periods, and that Markel agreed to pay the “total amount” of loss due to that damage, even that damage which began before its policy period and continued afterward. The court declined Markel’s request that it abandon this approach in favor of pro rata allocation. The court followed its earlier precedent in American Physicians Exchange v. Garcia, an opinion by John Cornyn, that “if a single occurrence triggers more than one policy . . . the insured’s indemnity limit should be whatever limit applied at the single point in time during the coverage periods of the triggered policies when the insured’s limit was highest . . . [t]he insured is generally in the best position to identify the policy that would maximize coverage . . . once the applicable limit is identified, all insurers whose policies are triggered must allocate funding of the indemnity limit among themselves according to their subrogation rights.”
We will cover this and other important developments of the year in our full day, fully accredited XVIII Annual Ultimate Claims Handling Seminar on October 11, 2013 at CityPlace Conference Center in Dallas, Texas. Registration is now open. Go to www.chmc-law.com and sign up now.