The Texas Supreme Court affirmed a Court of Appeals opinion concluding that the anti-concurrent-causation clause in a Lexington policy excludes coverage for cost of compliance with a city ordinance because the necessity of compliance resulted, at least in part, from flooding, which is expressly excluded by the policy.
JAW The Pointe, LLC ("The Pointe") purchased an apartment complex in Galveston, Texas, and purchased insurance for the complex though a group insurance program. 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.
The Pointe intended to repair the damaged complex, but Galveston City officials required the apartment owners to demolish the structures and rebuild to comply with current code requirements if the City determined a property was "substantially damaged," i.e. damaged in excess of 50% of the complex's market value. Based on The Pointe's permit application to the City, which did not distinguish between damage caused by flood or wind, the City determined that the damage to The Pointe's apartment complex exceeded 50% of the complex's market value. Accordingly, the City informed The Pointe that the complex must be brought into compliance with city code for flood reduction regulations.
The Pointe submitted a claim to Lexington for the wind damage and costs associated with bringing the building into compliance with city code. The policy provided coverage for wind damage and also contained two endorsements by which an insured could recover for an obligation to comply with city ordinances. The policy also included an anti-concurrent-causation clause that expressly excluded coverage for any "loss or damage caused directly or indirectly by any of the" listed causes, "regardless of any other cause or event that contributes concurrently or in any sequence to the loss." "Flood" was specifically listed in the policy as an excluded cause.
Lexington paid the damages resulting from wind damage, but denied coverage under either ordinance endorsement because the damages were caused by flood, and the endorsements only provide coverage for ordinance enforcement resulting from a "Covered Cause of Loss."
The Pointe sued Lexington and a jury awarded The Pointe $3.7 million, which included $2.5 million for Lexington's alleged knowing violations of the insurance code. Lexington appealed and argued 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 was 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 agreed with Lexington and determined the ordinance endorsements obligated Lexington to pay for demolition and increased rebuilding costs caused by ordinance enforcement only when resulting from a covered 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 that the wind damage alone was sufficient to cause "substantial damage."
The Pointe argued that the Court of Appeals erred because it met its evidentiary burden of showing that the wind damage was a "separate and independent" cause of its ordinance-compliance losses, and the court improperly shifted the burden of proof onto The Pointe to prove the city segregated between wind damage and flood damage. The Pointe further argued the anti-concurrent-causation clause did not apply when a covered peril, like wind, is a "separate and independent cause" of the loss.
The Texas Supreme Court had not previously addressed an anti-concurrent-clause, but noted that the Fifth Circuit and other federal courts and lower courts of appeals have interpreted and upheld the applicability of virtually identical clauses under Texas law and others states' law. The Court agreed with the Fifth Circuit finding the anti-concurrent-causation clause and the exclusion for flood loss, when read together, "exclude from coverage any damage caused by a combination of wind and water." ARM Props. Mgmt. Group v. RSUI Indem. Co., 400 F. App'x 938, 941 (5th Cir. 2010).
The Court further determined that, under the clause, the relevant inquiry is what actually caused enforcement of the ordinance, and not what theory was sufficient to do so. In other words, the question is not whether a covered peril itself is sufficient to trigger enforcement of the ordinance. The Court found that the City's decision to enforce code compliance was based on The Pointe's permit application to the City, which did not distinguish between damage caused by flood and that caused by wind. Accordingly, the City's enforcement of the ordinance was based on a finding that wind and flood combined to cause the loss, and Lexington sustained its burden of proving the policy's anti-concurrent-causation clause excluded coverage for the costs of complying with the city's ordinances.
A footnote in the Court's opinion addresses differences in the language of the two ordinance endorsements, pointing out that it could be argued one of the endorsements "requires that the enforcement of the ordinance cause the additional losses but does not require that covered losses cause the enforcement of the ordinance." That policy language argument was not raised by The Pointe, but the Court's statements suggest the result might have been different if The Pointe had raised the issue.
It should also be noted that although Lexington was granted summary judgment on The Pointe's breach of contract claim by the trial court, the Pointe recovered both its actual ordinance-compliance damages and additional statutory damages based on Lexington's "bad faith" statutory violations. The Texas Supreme Court commented on that finding and noted that typically there can be no claim for bad faith when an insurer has promptly denied coverage for a claim that is in fact not covered, absent some extreme conduct that produced damages unrelated to and independent of the policy claim. In this case, The Pointe did not allege such extreme conduct or seek such independent damages.