Voluntary acts undertaken by an insured without the consent of the insurer are nevertheless covered under the policy, the Texas Supreme Court has ruled.

After learning that homes built with exterior insulation and finish systems (“EIFS”), commonly used in home construction, had caused rot and structural damage, as well as mildew, mold, and termite infestations, homebuilder Lennar Corporation offered a remediation program to all of its customers.

During the four years it took to remove the EIFS and replace it with conventional stucco, Lennar’s insurers refused to cooperate with the remediation program. Twelve years of litigation followed until only Markel American Insurance Company – which had provided a $25 million commercial umbrella policy from June 1999 to October 2000 – remained. A jury found for Lennar on its indemnification claims, awarding almost $6 million, and Markel appealed.

The insurer argued that the proactive replacement of EIFS did not constitute costs incurred “because of…property damage” under the policy. It also pointed to Condition E of the policy, which stated that “it is a requirement of this policy that…no insured, except at their own cost, voluntarily make any payment, assume any obligation, or incur any expense…without [Markel’s] consent.”

But reversing an appellate court, Texas’ highest court said Markel was responsible for indemnifying Lennar.

Condition E did not excuse liability under the policy unless the insurer was prejudiced by the settlements, Markel conceded. But the insurer argued that it had been prejudiced because Lennar sought out homeowners for the remediation program – including those who would not have sought redress otherwise. “Markel’s argument boils down to this – had Lennar stonewalled the homeowners, fewer repairs would have been made,” the court wrote. But that issue was one of fact, not law, and had been resolved by the jury in Lennar’s favor.

“Markel failed to prove that it was prejudiced in any way by Lennar’s settlements,” the court said. “The jury’s failure to find prejudice leaves but one conclusion: that Lennar’s loss as shown by the settlements is the amount Markel is obligated to pay under the policy.”

In addition, the court found that Markel was obligated to pay the amount of damages awarded by the jury, despite the insurer’s argument that Lennar should have delineated the cost of repairing home damage from the cost of locating damage. But Lennar could not have located the damage – which was hidden from sight – without removing all of the EIFS, the court emphasized, and “[u]nder no reasonable construction of the phrase can the cost of finding EIFS property damage in order to repair it not be considered to be ‘because of’ the damage.”

The court also addressed coverage for property damage Markel claimed occurred outside of the policy period. Coverage for water damage from EIFS begins within 6 to 12 months after home construction is completed and continues until it is repaired. Lennar stopped using EIFS in 1998; Markel’s policy ran from 1999 to 2000. “A fair inference from the record is that most of the damage to the homes began before or during Markel’s policy period and continued afterward,” the court determined.

The policy expressly included damage from a continuous exposure to the same harmful conditions and “all 465 houses at issue suffered property damage during the policy period,” the court said. “Thus, the policy covered Lennar’s total remediation costs.”

To read the decision in Lennar Corp. v. Markel American Ins. Co., click here.

Why it matters: The decision is a significant victory for the policyholder, with the unanimous court finding coverage for the costs of both locating and remediating the property damage, which were undertaken without the insurer’s consent. “Lennar’s responsible efforts to correct defects in its home construction did not absolve Markel of responsibility for the costs under its liability policy,” the court concluded.