A recent Texas decision, Markel American Ins. Co. v. Lennar Corp., 342 S.W.3d 704 (Tex. App. 2011), illustrates that proper front-end documentation of the work subject to a potential liability insurance claim is imperative. Lack of proper documentation may trump a contractor’s good faith effort to voluntarily resolve the issue in a later insurance claim for the cost of replacing a defective product. In this case, Lennar Corporation (“Lennar”), a homebuilder, used exterior insulation and finish system (“EIFS”) on hundreds of its homes in the 1990s. Over time, it became apparent that the EIFS caused water to be trapped behind it, damaging the underlying materials. By 1998, Lennar stopped using EIFS. Thereafter, Lennar embarked on what the court called a “remarkable, voluntary business plan to address its EIFS issues and remediate in the interest of customer relations” by replacing the EIFS in all of the affected homes.
At first, Lennar attempted to repair parts of the EIFS on a few homes but found that the moisture problems persisted. Ultimately, after pursuing these limited measures, Lennar found that all of the EIFS would have to be removed and replaced with a different product to avoid current, or likely eventual problems. Once that plan was adopted, it took approximately four and a half years to replace all EIFS on all of the homes. Midway through
its extensive remediation, Lennar notified its insurer, Markel American Insurance Company (“Markel”) that it would seek its costs for its EIFS remediation under its liability policy. This policy covered the costs of remedying a defective product, but only if it was attributable to some “property damage” for which Lennar was liable. The insurer refused to cover this claim. At trial, Lennar prevailed, recovering roughly $6 million from the insurer. Markel appealed, arguing that the claimed amount was in fact Lennar’s entire cost for the remediation, and not limited to only those costs attributable to “property damage”; that is, Lennar failed to properly distinguish or apportion in its claim the covered costs from the uncovered costs.
Court Analysis: Lack of Documentation Precludes Recovery
Reviewing Markel’s argument, the court of appeals noted that the law is clear that “an insured is not entitled to recover under an insurance policy unless it proves its damages are covered by the policy.” Specifically, Lennar
was required to “present some evidence from which the jury can allocate the damage attributable to the covered peril.” Absent this evidence, “the failure to segregate covered and uncovered perils is fatal to recovery.” It was apparent to the appellate court that Lennar was unable to segregate its costs for the replacement of EIFS as a preventative measure from its costs for the replacement of EIFS resulting from existing “property damage.” This is presumably because Lennar did not contemplate what it would have to prove in order to recover in a liability claim when performing its remediation work.
Lennar argued that all of its costs in replacing the EIFS were attributable to “property damage.” Yet, the record reflected that Lennar chose to replace all of the EIFS mainly for reasons of efficiency. The court of appeals held that costs to repair water damage to the homes and costs to remove EIFS solely to repair underlying water damage were those that related to “property damage,” while costs to replace EIFS as a preventative measure were not related to covered “property damage.” Given its lack of data, Lennar simply could not accurately apportion its claim costs between the two categories. Because Lennar did not sustain its burden to segregate covered from non-covered costs, the Texas Court of Appeals concluded that “there is no evidence of its covered-loss damages” and reversed the verdict against the insurer.
Contractors faced with the decision to perform a significant remediation of a defective product – or, indeed, any contractor seeking to recover insurance proceeds based on their work - can learn much from Lennar’s total failure to recover its remediation costs from its insurer. The decision makes clear that a contractor’s good intentions and deeds in seeking to proactively remedy a defective product issue are not the controlling facts in a later assertion of a liability insurance claim to recoup its costs. In Lennar, the contractor undertook its full-scale remediation without a clear notion of what the policy required concerning defective work and cost documentation. The contractor developed its remediation protocol, including its documentation policy, based only on the practical aspects of correcting the EIFS issue. From the outset, the contractor should have anticipated its potential claim and closely-analyzed the required proof needed to establish liability coverage for its remediation costs so that it could document its work in a sufficient manner. This failure cost the contractor a $6 million recovery from the insurer. Thus, in any such remediation effort (or in any work effort that may give rise to a claim), contractors are wise to always first consider their prospects for a later insurance recovery for their costs – before undertaking or documenting the work itself.