Insurance Law Blog

August 23, 2013
Dear Colleague,

Today, the Supreme Court of Texas, in an opinion authored by Justice Hecht and joined by seven other Justices, found in favor of an insured homebuilder in Lennar Corp. v. Markel American Insurance Co. (The Court’s majority opinion can be found here.) As we predicted on Wednesday, the Court’s decision centered on major issues that have been lurking for some time in Texas insurance law—whether an insurer must be prejudiced by an insured’s settlement without the insurer’s consent in connection with coverage under a CGL policy, whether such settlements constitute the insured’s legal obligation to pay damages and whether Texas truly is the “all sums” state that insureds have contended it is for years. The Court’s decision resoundingly answered “yes” to each of those questions, finding that coverage existed under Markel’s CGL policy that it issued to Lennar for settlements entered into by Lennar with homeowners whose homes were damaged as a result of the installation of defective EIFS.

At the outset, the Court addressed the prejudice issue and, consistent with its prior holding in Hernandez v. Gulf Group Lloyds, held that, even when a settlement-without-consent provision is incorporated into an insuring agreement (as opposed to just being a condition), the insurer still must establish that it was prejudiced by the insured’s failure to adhere to that requirement before the insurer can successfully avoid coverage. Like the Court did in Hernandez, it grounded its holding in Lennar in general contract principles. That is, because Lennar’s failure to adhere to the settlement-without-consent provision was not a material breach, Markel was not excused from adhering to the terms of the parties’ contract unless it could show that it had been prejudiced—something Markel did not accomplish. On that point, Justice Boyd, who issued an opinion concurring in the judgment, argued that the Court should have abandoned its “contract principles” claim and grounded the decision in public policy. Notably, Justice Boyd actually would have found that no prejudice requirement existed in the first place, but he agreed that the Court’s precedent, as set out in Hernandez and its progeny, could not be avoided.

Moreover, the Court found that the non-prejudicial settlements could be used by Lennar to establish the amount of its loss under the Markel policy. The Court said that a finding otherwise would enable Markel to “subvert the requirement that Markel show that Lennar’s non-compliance was material.” And, with respect to Markel’s legal obligation to pay, the Court noted that the jury’s finding of no prejudice could mean only one thing: “that Lennar’s loss as shown by the settlement is the amount Markel is obligated to pay under the policy.” This is a significant holding in that insurers oftentimes argue that an insured cannot be legally liable unless there has been an adjudication in litigation/arbitration or a compromise settlement to which the insurer consents. Here, there was no lawsuit or arbitration and the insurer did not consent to Lennar's remediation efforts.

Turning to coverage for the damages incurred by Lennar, the Court emphasized that Markel agreed to pay “the total amount” of its insured’s loss “because of” property damage that “occurred during the policy period.” Markel argued that Lennar could not recover anything because it failed to segregate its damages between the costs of repair of damage to the homes and the cost of locating that damage. The Supreme Court, however, disagreed, noting that the phrase “because of”—even without a broad reading of the phrase—could not be reasonably construed to preclude coverage for the cost of finding the damage so that it could be repaired. Markel conceded that each home was actually damaged, and the only way to find all the damage was to remove all the EIFS. Thus, the jury’s verdict was supported by the evidence. Accordingly, in addition to the "property damage" itself, the Court held that the investigation and access costs were covered as well. 

Further, the Court noted that the damage at issue all began before or during Markel’s policy period and continued thereafter. Markel, however, only wanted to pay for damage that existed during the policy period. The Court, emphasizing Markel’s agreement to pay for the “total amount” of loss, noted again that all the homes at issue suffered at least some damage during the policy period and, therefore, “the policy covered Lennar’s total remediation costs.” Additionally, the Court reasoned that its holding was confirmed by its prior decision in American Physicians Insurance Exchange v. Garcia, where the Court found that an insured could select the policy or policies that would maximize coverage and the insurer selected could then allocate funding of indemnity among themselves pursuant to their rights of subrogation. Thus, despite Markel urging the Court to adopt a “pro rata” approach, as courts in other jurisdictions have done recently, the Court refused to abandon its holding in Garcia. Likewise, the Court refused to findas many insurers have arguedthat its prior language in Garcia was merely dicta. As such, the Court concluded “that Markel’s policy covered Lennar’s entire remediation costs for damaged homes.”

In sum, the Court held that: (i) Markel is responsible for the costs incurred by Lennar's voluntary remediation program even though Markel had not consented because it could not demonstrate prejudice; (ii) Markel is responsible for the costs incurred to determine "property damage" as well as to repair it; and (iii) Markel is responsible for the entirety of Markel's damages even though only a portion of the damage occurred during its policy period. 

The opinion is a terrific victory for policyholders. The potential irony of the Court’s decision is that, after all of the Court’s hard work in resolving many thorny issues, the ultimate holding in Lennar quoted above—much like the holding in Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007)—could be rendered meaningless if the Court decides that the “contractual liability” exclusion applies in the manner urged by Amerisure in Ewing Construction Co., Inc. v. Amerisure Insurance Co. In Lennar, the damages at issue were to the subject matter of the construction contract (i.e., the homes Lennar contracted to build). Under the interpretation advanced by Amerisure in Ewing, both a duty to defend and a duty to indemnify would be barred in their entirety by the “contractual liability” exclusion because those damages could be recovered only through causes of action sounding in contract and/or warranty. Under Ewing’s interpretation, on the other hand, coverage is preserved because Lennar’s liability was not in any way increased or enlarged by the terms of its contracts with the homeowners. Lennar is typical of most construction defect cases in this regard and helps demonstrate that applying the “contractual liability” exclusion as urged by Amerisure would eliminate insurance for otherwise covered “property damage.”

Maybe we will find out next Friday what the Supreme Court has decided on that issue . . . so everyone keep their fingers crossed, say a prayer, meditate, or just think good thoughts. 

In the meantime, the Shidlofsky Law Firm is proud to note that it filed an amicus curiae brief on behalf of the Texas Association of Builders supporting the position ultimately adopted by the Supreme Court of Texas in Lennar


Lee Shidlofsky
Member of Shidlofsky Law Firm

Douglas P. Skelley
Senior Associate of Shidlofsky Law Firm