A Texas appeals court has overturned a jury award in excess of $5 million rendered in favor of a home builder, finding that (i) the builder failed to distinguish at trial between the work it did to remove and replace defective stucco siding as a preventative and its costs to repair water damage to the homes, and (ii) the insurance policy at issue did not cover losses the builder incurred by settling homeowner claims without the insurer’s consent. Markel Am. Ins. Co. v. Lennar Corp., No. 14-10-00008 (Tex. App., decided April 19, 2011).

The insurance coverage claim arose from an imitation stucco siding product that the home builder applied to hundreds of Houston-area homes. The product apparently traps water behind it, causing damage to underlying structures from ongoing exposure to moisture. When the product began to fail, the home builder embarked on a “remarkable, business plan to proact upon its [siding] issues and remediate in the interest of customer relations.” This ultimately led the home builder to strip the siding off every house to which it had been applied and replace it with conventional stucco, a project that consumed four and one-half years. The home builder sought coverage from its insurers, and only two remained after a first appeal of the case. After a settlement, a single insurer, which provided to the home builder a commercial umbrella policy with a $25 million limit that was excess to the primary policy, remained at trial. A jury awarded the home builder $2.9 million in actual damages, $1.2 million in prejudgment interest, $2.1 million for attorney’s fees for trial, $250,000 for an appeal to the court of appeals, and $100,000 for an appeal to the Texas Supreme Court.

The appeals court agreed with the insurer that the home builder’s failure to apportion or distinguish covered losses from uncovered losses at trial resulted in a lack of sufficient evidence to prove that it had suffered a loss covered by the policy. According to the court, it rejected during the first appeal the home builder’s argument that all costs to fully remove and replace the defective siding were covered property damage; as the court interpreted the policy, costs to remove and replace the product as a preventative measure were not covered property damage.

The court also determined that the losses were not recoverable under the policy because the home builder failed to obtain the insurer’s consent to its homeowner settlements. So ruling, the court rejected the home builder’s argument that the policy required the insurer to show it was prejudiced by the failure; the jury specifically found no prejudice to the insurer from the home builder’s failure to obtain written consent. The court refused to rewrite the parties’ policy or add a “prejudice” condition to its language.