Last week, the Texas Supreme Court handed down an opinion that involved two unique (and somewhat troublesome) creatures of state law – the so-called “anti-technicality” statute and the material breach doctrine – and in Greene v. Farmer’s Ins. Exc., 2014 WL 4252271, 2014 Tex. LEXIS 758 (Tex., Aug. 29, 2014), it effectively limited the scope of both. The court thereby gave effect to a provision in a homeowners policy that suspended coverage if a dwelling was allowed to remain vacant for more than sixty days.
The case arose after Lewayne Greene moved into a retirement community, vacating her home in Irving, Texas and placing the structure on the market. She notified her insurer of the move, but she did not purchase an endorsement offered by the carrier, Farmers Insurance Exchange, that would covered an extended vacancy. Four months later, fire from a neighboring house spread to her home and damaged it. Farmers denied the subsequent insurance claim because the structure had been vacant for over sixty days, and the policyholder brought suit. She prevailed in the trial court, but the Court of Appeals reversed and rendered judgment for Farmers. On appeal, a unanimous Texas Supreme Court affirmed.
The policyholder sought to invoke Sec. 862.054 of the Texas Insurance Code, the anti-technicality statute. That provision recited that unless a breach or violation of “a warranty, condition, or provision of a fire insurance policy or contract of insurance on personal property . . . contributed to cause the destruction of the property,” the insurer could not raise it as “a defense to a suit for loss.” The parties had stipulated that the vacancy did not cause or contribute to the fire damage. The insured therefore argued that the statute precluded Farmers from denying the claim based upon the vacancy clause.
The majority opinion by Justice Phil Johnson, in which seven of the nine members of the court joined, stated that the clause “does not contain a promise or obligation [by the insured] to occupy her house.” The provision was instead “substantively an agreement . . . that Farmers will continue insuring the house for sixty days after it no longer is [the insured’s] residence.” Consequently, it could not be “breached” or “trigger” a breach and thereby fall within the ambit of the anti-technicality statute. The majority opinion can be found here.
The policyholder also raised Texas’ material breach doctrine. The doctrine — adopted twenty years ago in Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691 (Tex. 1994) and subsequently applied in PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008), Prodigy Commc’ns Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009), and Lennar Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750 (Tex. 2013) – stands for the proposition that if the insurer receives its reasonably anticipated benefit despite an insured’s breach, then the breach is immaterial and the insurer is neither prejudiced nor excused from performance. In the four cases cited above, policyholders were held entitled to coverage despite having made settlements without the carrier’s consent and failed to provide notice of loss “as soon as practicable.”
The insured argued that this doctrine required a showing of prejudice by the insurer as a prerequisite to a denial and that such a showing couldn’t be made because the vacancy was not causally related to the loss. Justice Johnson held, however, that the doctrine did not apply because the policyholder had not breached the vacancy clause. As his opinion explained, “[b]ecause the insured did not breach her obligations under the policy, . . . the question of materiality of a breach and its subsidiary issue of prejudice are not raised” by a vacancy clause.
Justice Jeffrey S. Boyd and one other member on the panel concurred in the result in a lengthy opinion. They were troubled by the majority’s failure to address whether the anti-technicality statute applied to real (as opposed to personal) property, however. In addition, the concurring justices, after conducting an exhaustive analysis of the genesis of the material breach doctrine, concluded that the facts at bar were not in any meaningful way distinguishable from those in Hernandez and its progeny. The two felt that the Hernandez line of cases were based on “flawed logic” and that the majority should openly acknowledge that and simply decline to extend the doctrine to any other insurance policy provisions, thereby restricting its judicially-imposed prejudice requirement to clauses requiring either prompt notice of loss or consent to any settlements. In their view, the majority opinion left confusion as to when prejudice would or would not be required before allowing a claim denial. The concurring opinion can be found here.