THE TEXAS SUPREME COURT RECENTLY CONCLUDED THAT COSTS TO DETERMINE AREAS OF WATER DAMAGE COVERED BY CGL POLICY

Lennar Corp. v. Markel American Insurance Co. is a construction defect case, which involved a homebuilder (Lennar), who undertook to remove exterior insulation and finish system (“EIFS”) from all the homes it had built and replace it with conventional stucco.  Lennar’s insurers refused to cooperate with the remediation program, and thus, Lennar removed the EIFS from the homes, and sought reimbursement from its carriers.  Although the appellate court concluded that preventative measures were not covered by a CGL policy, the Texas Supreme Court found that the lower court’s characterization of efforts to determine all the damaged areas of homes a preventative measures was not supported by the record.  The Texas Supreme Court resolved the following issues in favor of Lennar: whether an insurer is responsible for (1) costs incurred to determine property damage as well as to repair it, and (2) costs to remediate damage that began before and continued after the policy period.   

            The supreme court concluded that although the phrase “because of” in the insuring agreement of a CGL policy “is susceptible to a broad definition”, it need not be read broadly to reach all of Lennar’s remediation costs.  Instead, the court brazenly stated that “under no reasonable construction of the phrase” can the cost of locating EIFS property damage in order to repair it not be considered to be “because of” the damage.  The court noted that Lennar could not have located all the damage, which was hidden from sight, without removing all the EIFS. 

            As to the timing of the damage, the court found that a fair inference from the record was that most of the damage to the homes began before or during Markel’s policy period, and continued afterward.  Markel agreed that all the homes for which Lennar claimed remediation costs sustained some damage during the policy period, but insisted that only the costs for remediating the damage in existence during the policy period were covered losses.  Lennar conceded that it did not attempt to prove the specific amount of damage to each home, but contends that it would be practically impossible to do so and that the policy does not require it. 

            The court reasoned that coverage under Markel’s policy was limited to property damage that occurs during the policy period, but expressly included damage from a continuous exposure to the same harmful conditions.  For damage that occurred during the policy period, coverage extended to the “total amount” of loss suffered as a result, not just the loss incurred during the policy period.  The court stated that “no question remains that all 465 houses at issue suffered property damage during the policy period, which began before or during the policy period and continued until it was repaired, all because of water trapped in home walls by EIFS applied to wood-frame construction.”  Thus, the Supreme Court concluded that Markel’s policy covered Lennar’s entire remediation costs for damage homes.    

            Not surprisingly, the case is not over.  On October 9, 2013, Markel filed a motion for rehearing asserting that the court’s opinion has nullified the effect of a CGL’s policy’s policy period for any continuing loss, and Texas law required the insured segregate covered damage from uncovered damage, which Lennar did not do.  Further, an amici curae brief was filed by the other insurers in support of the motion for rehearing, which argued that the Texas Supreme Court’s opinion changes and shifts the insured’s burden to establish coverage under the duty to defend and indemnify contrary to prior opinions by the supreme court. 

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