In Dallas National Insurance Co. v. Calitex Corp., —S.W.3d—, 2015 WL 968308 (Tex. App.—Dallas Mar. 3, 2015, no pet. h.), the Dallas Court of Appeals reversed a trial court judgment finding coverage for almost $700,000 in damages and attorney’s fees and rendered a take nothing judgment in favor of Dallas National Insurance Company (DNIC) because the insured’s judgment creditor failed to meet its burden of segregating covered from non-covered damages.

Factual and Procedural Background

In October 2006, Calitex Corporation (Calitex) entered into a written contract with Turnkey Residential Group, Inc. (Turnkey) under which Turnkey agreed to construct a 12-unit townhome complex in Dallas. Pursuant to that contract, the project was to be completed no later than October 26, 2007. Before completion, however, Calitex began to encounter problems with Turnkey’s “execution and performance” as evidenced by defective exterior stonework and leaking windows.

Calitex later filed suit against Turnkey, its owner, and its subcontractor asserting causes of action for breach of contract, breach of warranty, and negligence. Turnkey provided notice under a CGL policy issued by DNIC, but DNIC denied that it had any duty to defend or indemnify Turnkey. The case proceeded to trial where the jury awarded Calitex $500,000 in damages and $193,000 in attorney’s fees against Turnkey and $500,000 in damages against the subcontractor.

Several months later, Calitex filed suit against DNIC asserting a claim for breach of contract as a third-party beneficiary of Turnkey’s policy and seeking a declaratory judgment on coverage under the policy. DNIC answered the lawsuit, and the parties eventually filed competing motions for summary judgment.

The trial court granted both motions in part and denied both in part and ultimately ordered that Calitex’s motion should be granted to award Calitex $500,000 as reflected in the underlying judgment, an additional $193,000 in attorney’s fees awarded in the underlying judgment, and attorney’s fees in the coverage case in an amount to be determined by a jury. DNIC filed a timely appeal.

Burden of Proof

The Dallas Court of Appeals began its analysis with a review of the parties’ respective burdens of proof in a coverage dispute. Under Texas law, the insured bears the initial burden of establishing the insurer’s duty to indemnify “by presenting sufficient facts to demonstrate coverage under the policy.” It is the insurer’s burden, however, to prove that an exclusion applies, in which case the burden then shifts back to the insured to show that an exception to the exclusion brings a claim back within coverage.

The insured also bears the burden of segregating between covered and non-covered losses. Under the doctrine of concurrent causes, when covered and non-covered perils combine to create a loss, the insured is entitled to recover that portion of the damage caused solely by the covered peril. This doctrine, the court emphasized, “is not an affirmative defense or an avoidance issue.” Instead, the court explained, “it is a rule embodying the basic principle that insureds are not entitled to recover under their insurance policies unless they prove their damage is covered by the policy.”

For this reason, when covered and non-covered perils combine to create a loss, “the burden of segregating the damage attributable solely to the covered event is a coverage issue for which the insured carries the burden of proof.” This requires the insured to produce evidence that will afford “a reasonable basis for estimating the amount of damage or the proportionate part of damage caused by a risk covered by the insurance policy.” The failure to do so “is fatal to recovery.”

Analysis

The Dallas Court of Appeals first reviewed the summary judgment evidence and held that DNIC had met its burden of proving that exclusion j(5) was applicable to some of the damage proved by Calitex in the underlying lawsuit. The exclusion stated that the policy did not apply to “property damage” to “[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” That some of the damage may not have been discovered until after Turnkey was no longer doing any work was irrelevant, the court held, because property damage under a CGL policy occurs when the actual physical damage occurs, not when it was or could have been discovered.

The court next addressed Calitex’s argument that DNIC’s segregation argument was tantamount to a collateral attack on the underlying judgment (i.e., an attempt to avoid the effect of a judgment in a proceeding brought for some other purpose) and should be rejected. The court disagreed, citing case law that, where the determination of a coverage issue would in no way affect an underlying liability judgment against an insured, but rather who would pay for that judgment, the insurer’s challenge to coverage in a declaratory judgment suit is not a collateral attack on the underlying judgment.

Since Calitex had not described, and the record did not show, how a coverage determination would have any impact on the liability established in the underlying judgment, the court held that Calitex “had the burden to segregate covered damage from non-covered damage in order to recover in this case.” It had failed to meet its burden, however, because there was no “reasonable basis” in the record for estimating the amount or proportionate amount of damage caused by a covered risk because testimony about what had been spent on repairs failed to apportion costs between covered damages and damages excluded by exclusion j(5). Because the failure to segregate is “fatal to recovery,” the court reversed the trial court’s judgment and rendered a take-nothing judgment in favor of DNIC.

Implications

This decision is significant because it reaffirms that when a covered and a non-covered peril combine to create a loss, it is the insured’s burden to prove what is covered — that is, to prove what damage is attributable solely to the covered peril and produce evidence that will afford a reasonable basis for estimating the amount or proportionate amount of damage caused by the covered peril. Thus, even though it is the insurer’s burden to prove the applicability of an exclusion, it need only prove that some of the damage falls within the exclusion, and there is no burden on the insurer to segregate and prove what damage is attributable to the non-covered peril.