Recent Developments in Homeowners Insurance

The appellate courts recently addressed two issues in the homeowner arena. The 14th Court of Appeals recently provided guidance on the meaning of the “limit of liability” provisions under a standard homeowners Form B policy. In Coats v. Farmer’s Insurance Exchange, 2006 WL 1765925 (Tex. App. — Houston [14th Dist.] June 29, 2006), the Court addressed the “insurable interest and limit of liability” provision as well as the “loss settlement” provision in a Standard Form B Homeowners Policy. Previously, no state court has addressed an insurer’s limit of liability under a homeowner’s policy.

The Coats suffered three consecutive losses to their residence for which they made claims. The first claim occurred on or about April 18, 2001 for hail and water damage to the roof. The second claim occurred in June 2001 when the Coats filed a claim for water and roof damage to their home as a result of tropical storm Allison. In its investigation of that loss, Farmers discovered several water sources which had caused damage to the home including a leak in the air conditioning and heating system, several leaks in the roof and a hot tub leak. In March 2002, Farmers determined that the Coats residence was a total loss and paid the policy limit for dwelling and ALE. In July 2002, the Coats filed another claim alleging an HVAC overflow had caused water and mold damage. Farmers investigated that claim and determined the damage allegedly caused by the HVAC overflow was considered when the appellants received the policy limits in March. In December 2002, the Coats sued Farmers for non-payment of the HVAC claim and pursued causes of action for breach of contract, negligence, gross negligence, violations of the Texas Deceptive Trade Practices Act, violations of Articles 21.21 and 21.55 of the Insurance Code and Breach of the duty of good faith and fair dealing. Farmers filed a summary judgment motion contending that there was no genuine issue of material fact because Farmers paid appellant the policy limits. The Coats contended that they were entitled to receive a sum not to exceed the policy limits for each source of damage. The trial court granted summary judgment in favor of Farmers.

The Coats contended the phrase “any one loss” that appeared under the heading entitled “Insurable Interest and Limit of Liability” created an ambiguity or expressly required Farmers to pay an amount not to exceed the declared limit of liability for each loss sustained during the policy period. The Coats further argued that the omission of the reinstatement clauses for losses caused by perils other than fire supported their contention that the policy was ambiguous or that the carrier expressly agreed to remit policy limits for each loss other than fire, regardless of the number of losses during the policy period. Farmers contended no ambiguity existed because the policy, when read as a whole, clearly limited a carrier’s liability to the policy limits.

The court concluded that there was no ambiguity in the policy provisions and further concluded that the policy proceeds should be applied to indemnify the insured up to the amount of the policy, fulfilling the objective that the insured should neither reap economic gain, nor incur a loss, if adequately insured. Coats at p. 5

The policy unambiguously entitled appellants to the smaller of two amounts: (1) the limit of liability, or (2) the cost to repair or replace the home. It is undisputed that Farmers paid the limit of liability; therefore Farmers fulfilled its contractual obligation by paying the declared limit of liability. Ibid The court also noted that three federal district courts in Texas, applying Texas law had found that the limit of liability was absolute.

This opinion is the first state court opinion on this issue and clarifies this issue for both carriers and policy holders. Despite recent changes to most homeowner policies substantially curtailing or even eliminating coverage for mold, the limit of liability provisions have remained substantially unchanged.

The Dallas Court of Appeals recently re-visited the appraisal provision in the Texas Homeowner’s Insurance Policy. Again, despite changes to most homeowner policies in Texas, the appraisal provisions have remained largely unchanged. In Becky Ann Johnson v. State Farm Lloyds, 2006 WL 2053472 (Tex. App. — Dallas, July 25, 2006) a dispute arose after the roof of Ms. Johnson’s home was damaged by hail in April 2003. State Farm inspected the property and concluded only the ridge line of Johnson’s roof had been damaged by hail and estimated the repairs at $499.50 which was less than the deductible. At Johnson’s request, State Farm conducted a second inspection. The result was the same. Johnson argued that the entire roof needed to be replaced and submitted an estimate for the repairs over $6,400.00. She also hired an attorney who wrote State Farm demanding it submit to the appraisal process pursuant to the appraisal clause of the policy. State Farm declined stating the party’s disagreement about the extent of hail damage was a coverage issue that could not be decided by appraisal. Johnson filed a declaratory judgment action seeking to compel State Farm to submit an appraisal pursuant to the policy. Both parties moved for summary judgment. The trial court granted State Farm’s motion and denied Johnson’s motion. The Dallas Court of Appeals concluded that the dispute between Johnson and State Farm concerned the amount of loss and the appraisal clause applied. They reversed the trial court order granting State Farm’s summary judgment and rendered judgment granting Johnson’s motion compelling the appraisal.

On appeal, Johnson contended the appraisal clause required State Farm to submit to the appraisal process because the dispute concerned the amount of loss sustained as a result of hail damage, not whether the hail damage was covered by the policy. Johnson argued that the amount of loss included a dispute over the extent of the damage as well as a determination of what it would cost to fix the damage.

State Farm contended that it did not have to submit to the appraisal process unless the parties first agreed on causation, coverage and liability. It further contended that whether the hail damaged only the ridge line of the roof as it contended or the entire roof as Johnson contended was a causation, coverage and liability issue, not an issue concerning the amount of loss. State Farm argued that deciding the extent of the loss involved decisions about causation, coverage and liability that cannot be made pursuant to the appraisal clause. State Farm’s interpretation of the appraisal clause was that it and Johnson must first agree on which specific shingles were damaged and then, only if there is a dispute over the cost to repair those specific shingles, could Johnson compel State Farm to submit to an appraisal.

The court relied instead upon Lundstrom v. United Services Automobile Association – CIC, 192 S.W.3d 78 (Tex. App. — Houston [14th Dist.] 2006, pet. filed) in which the insured’s home was damaged by multiple water leaks. In determining that appraisal was appropriate in this the insurer in Lundstrom agreed to cover the losses caused by the initial water leak and asked the appraisers to determine the amount of that loss. In doing so, the appraisers in Lundstrom had to determine which damages were caused by the initial leak and distinguish those damages from the damages that occurred later due to the other causes. The court concluded that the appraisers in Lundstrom were not deciding a causation issue, but rather were deciding an issue concerning the amount of loss.

The Dallas Court of Appeals held that while Wells v. American States, 919 S.W.2d 679 (Tex. App. — Dallas 1996, writ denied) limits the appraiser’s authority, it does not prevent appraisers from making decisions about the extent of damage. “If the parties had to first agree on which specific shingles were damaged and approached every disagreement on the extent of damage as a causation, coverage or liability issue, either party could defeat the other party’s request for an appraisal by labeling the disagreement as a coverage dispute. Instead, as the process is designed, once it is determined that there is a covered loss and a dispute about the amount of that loss, the appraisal process determines the amount that should be paid because of loss from a covered peril. The process necessarily requires the appraiser to access the extent of the damage and exclude payment for causes not covered.” Johnson at p.5. The court further noted that simply because appraisers were differentiating between hail damage and normal wear and tear did not mean that the appraisers were making coverage decisions. The court went on to note that because the parties had agreed that the covered properties sustained damage from a covered peril, but failed to agree on the amount of loss, the appraisal clause applied. Ibid.