JAW the Pointe LLC v. Lexington Ins. Co., No. 13-0711 (Tex. October 3, 2014)
The Texas Supreme Court recently granted a Galveston apartment complex owner's petition for review in a case that may decide key questions under Texas insurance law regarding "concurrent causation" and coverage for losses arising when city ordinances mandate property demolition. The case may also clarify the insured's burden to prove the amount of a covered loss when covered and non-covered perils combine to cause a loss.
JAW The Pointe LLC ("The Pointe") purchased an apartment complex located near a seawall in Galveston, Texas. The Pointe purchased insurance from Lexington and other insurance companies through a group program covering several apartment complexes in many different states. Lexington provided the primary policy under the group program, providing $25 million in coverage per occurrence. On September 13, 2008, Hurricane Ike hit Galveston and caused substantial damage to The Pointe's apartment complex.
Although The Pointe intended to repair the damaged complex, Galveston City officials required the apartment owners to demolish the structures and rebuild to comply with current code requirements if the City determined that the damage exceeded 50 percent of the complex's market value. The City determined that the damage to The Pointe's apartment complex exceeded 50 percent of the complex's market value and informed The Pointe that the structure must be brought into compliance with local flood reduction regulations.
The Lexington policy contained two endorsements by which an insured could recover for an obligation to comply with city ordinances. Lexington received an estimate from its building consultant identifying wind damage totaling $1,278,000.00 and flood damage totaling $3.5 million. Lexington paid the damages resulting from wind damage but informed The Pointe that the claim was not covered under the ordinance endorsement because the damages had been caused by flood. The Pointe sued Lexington, and the case proceeded to trial. The jury awarded The Pointe a $3.7 million verdict, which included $2.5 million for Lexington's alleged knowing violations of the insurance code. Lexington appealed and argued that The Pointe's loss was not covered under the policy's ordinance endorsements because the damage to the complex was caused in whole or in part by flood, which is not a covered loss under the policy, and the City did not segregate between covered wind damage and excluded flood damage.
The Court of Appeals sided with Lexington and interpreted the ordinance endorsement to signify that Lexington would pay for demolition and increased rebuilding costs caused by ordinance enforcement resulting from a "Covered Cause of Loss." The Court of Appeals looked to the City's determination of damages to the apartment complex, and did not find any evidence the City determined the damage was caused by wind alone, rather than a combination of wind and flood. The Texas Supreme Court's treatment of these issues may impact the concurrent causation doctrine in the context of a demolition order from the City.