On August 23, 2013, in Lennar Corp., et al. v. Markel Am. Ins. Co., the Texas Supreme Court issued an opinion that confirms two important aspects of pro-policyholder insurance law, despite insurers’ repeated attempts to reverse and/or limit them. In the 1990s, Lennar Corporation built hundreds of homes using an exterior insulation and finish system ("EIFS"), marketed as an attractive alternative to traditional stucco. However, when installed on wood-frame homes, EIFS traps water in walls, causing rot, mildew, mold and termite infestations. After being inundated with consumer complaints, Lennar investigated and decided to replace all EIFS it had installed on homes and repair any damage in the homes caused by EIFS. Lennar spent several million dollars in this program, which took several years to complete.

Lennar notified its insurers that had issued liability policies in effect during the time EIFS had been in place and damaged homes, that it would seek indemnification of the program’s costs. None of the insurers consented to Lennar’s proactive and comprehensive efforts to fix the EIFS problems. All of the insurers denied coverage and Lennar sued. All but one of the insurers, Markel American Insurance Company, eventually settled with Lennar. Lennar and Markel tried the coverage case before a jury, which found in Lennar’s favor. The Texas Court of Appeals reversed the jury’s verdict on the grounds that Lennar had not complied with the Markel policy’s "voluntary payments" provisions, and that Lennar had not proved the amount of its loss "because of" property damage that "occurred during the policy period" as required by the policy.

The Texas Supreme Court reversed the Court of Appeals and reinstated the jury’s verdict. Although the policy prohibited Lennar from voluntarily making any payment, assuming any obligation, or incurring any expense without Markel’s consent, the Supreme Court noted that Texas law has long required an insurer to prove it was prejudiced by its insured’s payment without the insurer’s consent. The Supreme Court rejected Markel’s argument that it had been prejudiced as a matter of law because Lennar had solicited claims and thus made repairs to homes it would not otherwise have made. Instead, the Supreme Court found that prejudice was a fact-issue the jury had resolved in Lennar’s favor.

Markel argued that the policy’s definition of "ultimate net loss" also precluded recovery, because it stated that such loss "may be established by adjudication, arbitration, or a compromise to which we have previously agreed in writing." The Supreme Court held that Markel could not avoid the prejudice requirement by relying on the policy’s loss-establishment provision. The purpose of this provision is "exactly the same" as the "voluntary payments" provision, and therefore an insurer must prove it was prejudiced in order to avoid coverage under both provisions.

The policy requires that Lennar incur a loss "because of" property damage that "occurred during the policy period." Markel argued that the sums Lennar paid to find and determine the extent of damage caused by EIFS, as opposed to remediating the damage once found, were not covered. The Supreme Court, however, easily rejected this argument, finding that "under no reasonable construction of the phrase [‘because of’] can the cost of finding EIFS property damage in order to repair it not be considered to be ‘because of’ the damage." All of the homes at issue had been damaged to some extent, and thus Markel’s attempt to characterize the efforts to find the damage as "preventative measures" was not supported by the record.

Finally, the Supreme Court found that Markel’s policy obligation to pay the "total amount" of loss Lennar suffered because of the property damage meant that Markel had to pay all of the costs and expenses incurred in investigating and remediating the homes, not just the sums that could be linked to damage occurring during the policy period. The Supreme Court relied on its earlier holding in Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842 (Tex. 1994), disagreeing with Markel that the relevant language in Garcia was mere dicta. The Supreme Court further held, again in reliance on Garcia, that Markel could not reduce its liability to Lennar in the first instance because other insurers shared responsibility for the loss. Instead, insurers must first pay the amounts owed under their policies, but may re-allocate such payments among themselves afterwards according to their subrogation rights.

The Texas Supreme Court’s decision in Lennar Corp. is an important affirmation of critical rules of contract interpretation favorable to policyholders under Texas law. At the same time, the opinion demonstrates that insurance companies are unceasing in their efforts to have such rules limited and/or reversed outright. Reed Smith’s Insurance Recovery Group constantly monitors courts nationwide for such efforts and is always up-to-date regarding the latest developments in insurance law.