Court Finds No Coverage for Encroachment on Easement

In 1996, the Mittlestadts entered into an agreement to purchase real property and a house from Moneyline Construction Company (“Moneyline”). At the closing of the sale, the Mittlestadts learned for the first time that part of the house was constructed over a pipeline easement owned by Citgo. The Moneyline representative at closing induced the Mittlestadts to close on the sale by representing to them that Citgo had agreed to permit the house to remain on the easement permanently. The Mittlestadts proceeded to close on the sale in reliance on the representation. After the sale, however, they discovered that Citgo would only allow the house to remain on the easement on a conditional basis. In other words, if at a future time Citgo needed to make use of its pipeline easement, the Mittlestadts would be required to remove the house from encroaching on the easement.

The Mittlestadts brought suit against Moneyline, alleging that it was negligent in constructing the house on the easement, constructing the house in reliance on a plot plan that did not reflect the easement, and in representing that Citgo would allow the house to remain on the easement. Moneyline was insured by Great American. After initially defending Moneyline in the Mittlestadts’ lawsuit, Great American later withdrew its defense based on its belief that the damages sought by the Mittlestadts from Moneyline were not covered by the policy’s basic insuring agreement. Great American’s position was that the Mittlestadts’ claim did not involve “property damage” caused by an “occurrence” as those terms were defined in Moneyline’s CGL policy. The Mittlestadts proceeded to trial against Moneyline and obtained a judgment. Because the court granted Moneyline’s motion for a directed verdict on the Mittlestadts’ fraud, DTPA and breach of contract claims, the judgment was based solely on the Mittlestadts’ negligence causes of action. The court entered judgment against Moneyline for $80,000 in actual damages, and over $30,000 of interest.

The Mittlestadts then filed suit against Great American to recover as judgment creditors of Moneyline. Following a bench trial, the trial court rendered judgment in favor of the Mittlestadts. Great American appealed. The Fort Worth Court of Appeals reversed the trial court and rendered judgment in favor of Great American. First, the court of appeals noted that a duty to indemnify arises only if the underlying litigation establishes liability that is covered by the policy. The evidence in the Mittlestadts’ suit against Moneyline showed that the Mittlestadts relied on Moneyline’s representation in closing on the sale of the house. However, the evidence showed that the house was not physically damaged and that no loss of use had been suffered. The Mittlestadts introduced evidence in the underlying lawsuit that the house constructed across the easement was worth considerably less than it would have been had there been no encroachment. The damages awarded in the underlying lawsuit were based on amounts proved up by the Mittlestadts’ expert. This expert, an appraiser, testified as to the difference in the value of the house and property with or without the encroachment on the easement.

No evidence that the Mittlestadts had lost the use of any portion of the house was produced at the trial of the underlying lawsuit. Additionally, at the trial of the case against Great American, Mr. Mittlestadt admitted that Citgo had never disturbed the house or given any indication that it intended to do so. The Mittlestadts had never actually lost the use of any portion of the house. Further, no portion of the house had been physically injured by its presence across the easement. The evidence in both the underlying lawsuit and the insurance lawsuit showed that the Mittlestadts had recovered against Moneyline for the difference in value between the property with or without the encroachment on the easement.

The court of appeals concluded this was economic loss and not “property damage” within the meaning of that term as defined in the Great American policy. Having concluded that the damages recovered by the Mittlestadts in the underlying lawsuit were not damages because of “property damage,” the court of appeals did not reach the “occurrence” issue. The judgment of the trial court was reversed and judgment was rendered that the Mittlestadts take nothing from Great American.