Texas Supreme Court Expands Liability for “Property Damage” and Limits Enforceability of Consent-To-Settlement Requirements
On Friday, the Texas Supreme Court rendered its decision in Lennar Corporation v. Markel American Insurance Company, No. 11-0394 (Tex. Aug. 23, 2013), drastically limiting a liability insurer’s ability to protect its interests in the settlement of claims between an insured and a third-party claimant. The coverage suit leading to the court’s decision arose out of Lennar Corporation’s (“Lennar”) use of an imitation stucco siding product known as Exterior Insulation and Finish System (“EIFS”). In the aftermath of NBC’s Dateline investigative report regarding the potential for water intrusion damage to homes using EIFS, Lennar received several complaints from homeowners. Instead of addressing the complaints on a case-by-case basis, Lennar unilaterally decided to replace the EIFS in all homes with stucco, regardless of whether the homeowners had asserted a claim. After making the business decision to replace the EIFS, Lennar submitted claims for the remediation project to Markel American Insurance Company (“Markel”) and several other insurers. The Texas Supreme Court considered three issues presented by Markel’s ultimate denial of Lennar’s claims, namely: (1) is an insurer responsible for the costs of a settlement to which it did not consent, absent a showing of prejudice; (2) is the cost of “finding property damage,” a loss “because of property damage”; and (3) where consecutive policies are triggered, should the insured’s costs to remediate damage occurring before or after a single policy’s period be allocated to other insurers.
First, the court considered whether Markel was responsible for the costs of Lennar’s remediation program, despite Lennar’s failure to obtain Markel’s consent to its settlement with homeowners or to the resulting remediation program. The court maintained that Markel could refuse to finance Lennar’s unilateral settlement only by demonstrating Lennar’s settlement was a material breach of the policy. A material breach of the policy is demonstrated only by showing prejudice. The court held that Lennar’s decision to unilaterally replace EIFS even for homeowners who had not, and might never, assert claims for property damage was not prejudicial to Markel.
In so finding, the court refused to distinguish the policy’s condition requiring consent to settlement from the policy’s insuring agreement limiting coverage to the “ultimate net loss.” The “ultimate net loss” definition required, in relevant part, that a loss be “established by . . . a compromise settlement to which we have previously agreed in writing.” The court dismissed the policy’s insuring agreement’s explicit requirement that an insured could establish loss through a settlement agreement only where the settlement was agreed to by the insurer. Applying the same rationale it applied to policy conditions, the court found that the insuring agreement’s consent requirement was not “essential to coverage.”
Turning to the issue of damages, the court ignored Lennar’s failure in the trial court to apportion the EIFS-related damages between its costs to remove and replace EIFS as a preventative measure and its costs to repair water damage to the homes. Instead, the court found the policy’s limitation of coverage to losses caused “because of” property damage did not preclude coverage for remediation costs solely related to “finding EIFS property damage.”
After concluding that the policy covered all the costs of “finding EIFS property damage” claimed by Lennar, the court addressed the proper allocation of the claimed damages. Markel argued that, because Lennar did not offer evidence segregating the damages occurring outside the policy period, it was entitled to nothing. Applying its prior holding in American Physician Insurance Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994), the court concluded that a policy insuring damage occurring within the policy period covers “‘the total amount’ of loss suffered as a result, not just the loss incurred during the policy period.” The court reasoned that the property damage claimed by Lennar “began before or during the policy period and continued until it was repaired,” and did not require establishing when the claimed property damage occurred, seemingly repudiating its adoption of the “injury-in-fact” trigger in Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008) (holding, under similar facts, that property damage occurred when home actually suffered wood rot or other physical damage). The court ignored the policy’s requirement that property damage occur during the policy period and assumed if damage was “continuing” during Markel’s policy term, the policy covered all damage, irrespective of when the damage occurred.
Lastly, the court rejected Markel’s argument that it should be responsible, along with Lennar’s other insurers, only for its pro rata share of the total of any covered remediation expenses. Again relying on Garcia, the court found that Markel was liable for all remediation costs and admonished that it was “up to insurers who share responsibility for a loss to allocate amongst themselves according to their subrogation rights.” Perplexingly, this instruction is entirely at odds with the court’s holding several years ago that an insurer has no subrogation rights against another insurer when the insured has been fully indemnified. See Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765 (Tex. 2007). The court concluded its decision, stating in no uncertain terms that, “Markel’s policy covered Lennar’s entire remediation costs for damaged homes.”
With its holding in Lennar, the Texas Supreme Court has put insurers between the proverbial rock and a hard place. The court effectively eliminates an insurer’s ability to require an insured to obtain consent before settlement of a claim, but leaves the insurer with no right to subrogation from other insurers if it capitulates to the insured’s demand for payment of the settlement. Additionally, the court’s “property damage” holding undoubtedly exposes an insurer to the possibility of being saddled with a disproportionate share of indemnity. As cogently expressed by Justice Boyd’s concurring opinion, the court’s attempt to justify its ruling on contract principles “has only muddied the waters and is no longer workable.”