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Court of Appeals Finds Insurer Overpaid Claim: Fire Insurance Exchange v. Sullivan

April 10, 2006

The Fourteenth Court of Appeals in Fire Ins. Exch. v. Sullivan, recently reversed a trial court judgment and rendered judgment in favor of the insurer, finding that the insurer overpaid an insured’s mold and property damage claim and did not engage in bad faith. See Fire Ins. Exch. v. Sullivan, 2006 Tex.App. Lexis 976 (Tex. App. -- Houston [14th Dist.] Feb. 2, 2006, no pet.). Fire Insurance insured the Sullivans’ home under a standard Texas homeowners policy, Form B. In late May or early June of 2001, a pipe in the Sullivans’ attic burst. The Sullivans reported this leak to their agent on July 2, 2001 and also informed him of a second leak in the master bathroom shower. After an inspection, Fire Insurance estimated that repairs attributable to the attic leak would cost $2,944.75. Subtracting the Sullivans’ $880 deductible, he offered a net payment of $2,064.75. The Sullivans commissioned a second inspection, which estimated the repairs at $7,290. Because of the discrepancy, the Sullivans hired an attorney.

On July 31, 2001, the Sullivans sent a written claim to Fire Insurance for mold growth and water damage. In September 2001, the Sullivans hired a contractor to investigate the damage and discovered additional leaks to the air conditioner, the master shower and the hall bath. The contractor advised the Sullivans to leave the house because it was contaminated with mold and the Sullivans relocated on September 8, 2001. Fire Insurance initiated payment of additional living expenses and requested additional testing for the residence which was performed on January 3, 2002. The test revealed that mold growth consumed the entire house and on March 6, 2002 and April 3, 2002, Fire Insurance issued two checks to the Sullivans in the amounts of $66,734.02 and $15,696.55, respectively. The Sullivans then sued Fire Insurance alleging that the delay and mishandling of their claims resulted in the deterioration of their home. In their lawsuit, the Sullivans asserted claims for breach of contract, bad faith, insurance code violations and violations of the Deceptive Trade Practices Act.

After trial, the jury found that Fire Insurance breached the dwelling coverage portion of the policy, but not the personal property and additional living expenses coverage provisions. The jury found the total amount to repair the dwelling and replace the contents to be $98,565.11. (The court considered the prior payments Fire Insurance made to the Sullivans and attributed a credit to Fire Insurance in the amount of $84,495.32). The jury also found that the Sullivans were entitled to recover damages for their breach of contract and DTPA claims in the amount of $13,189.79 and were entitled to recover penalties under former Texas Insurance Code art. 21.55 of $31,450.67, pre-judgment interest of $1,798.28, and attorneys’ fees of $39,426.04, for a total judgment of $85,864.78.

Fire Insurance appealed the verdict arguing the trial court erred in including personal property costs in the judgment when the Sullivans failed to obtain findings that Fire Insurance breached the personal property coverage portion of the policy and that their loss was a covered named peril, in including the full amount of the remediation and repair cost in the judgment when the jury found that only 45% of these costs were attributable to a covered peril, and in finding that the Sullivans were entitled to interest, penalties under art. 21.55 and attorneys’ fees.

The Sullivans’ policy states that it does not cover loss caused by “rust, rot, mold or other fungi.” The Fourteenth District Court found that the policy does provide coverage for ensuing loss caused by water damage if the loss would otherwise be covered under the policy. The court, however, concluded that the trial court erred in awarding the full amount of the mold remediation costs found by the jury because the jury attributed only 45% of these costs to the cause covered by the policy, and reduced the award by these damages. The Court of Appeals also held that because the jury did not find that Fire Insurance had breached its contract regarding the Sullivans’ personal property, the trial court erred in not rendering a take-nothing judgment as to the Sullivans’ breach of contract and DTPA claims. Accordingly, the trial court should have stopped calculating penalty interest on April 3, 2002, the date the amount tendered by Fire Insurance exceeded the amount of coverage. Finally, the Court of Appeals recognized that the Sullivans could not recover attorneys’ fees based on their breach of contract and DTPA claims.

As of publication date of this article, the Sullivans have not filed a petition of review with the Texas Supreme Court.