Confirms “All Sums” Based on American Physicians Insurance Exchange v. Garcia
Lennar Corporation v. Markel American Insurance Company, No. 11–0394 (Tex. August 23, 2013) arose from a dispute over insurance coverage for damage to homes caused by an exterior insulation and finish system (EIFS). Lennar Corporation, a homebuilder, and its subsidiaries built some 800 homes using EIFS, but stopped using it in 1998. Following an exposé on NBC’s Dateline in 1999, Lennar was inundated with homeowner complaints. Lennar investigated the complaints and decided to address them by contacting all its homeowners to remove the EIFS and replace it with conventional stucco.
Lennar notified its insurers early on that it would seek indemnification for the costs of replacing the EIFS. Its insurers refused to participate in Lennar’s proactive efforts, preferring instead to wait and respond to homeowners as claims were made. All insurers denied coverage, and after litigation and settlement, only Markel remained. Markel had issued a $25 million commercial umbrella policy effective from June 1, 1999 to Oct. 19, 2000 to Lennar. Markel denied coverage for numerous reasons, including:
- Lennar failed to comply with a policy condition prohibiting Lennar from entering into settlements or assuming any obligation without Markel’s consent, which Markel had withheld. Similarly, the policy’s “Loss Establishment Provision” prohibited Lennar from determining loss unilaterally.
- Lennar’s costs to remove and replace the EIFS as a preventative measure were not incurred “because of property damage.”
- Markel was responsible only for damages occurring during its policy period.
The Texas Supreme Court found that unless Markel established that it suffered prejudice from a settlement to which it did not agree, the “voluntary payments” condition did not bar coverage. The court held further that the policy’s “Loss Establishment Provision” operated identically with the condition and thus also required a showing of prejudice. “Absent prejudice to Markel,” the court stated, “Lennar’s settlements with homeowners establish both its legal liability for the property damages and the basis for determining the amount of loss.”
Next the court discussed whether the policy covered the total amount of damages found by the jury. The policy obligated Markel to pay “the total amount” of Lennar’s loss “because of” property damage that “occurred during the policy period,” including “continuous or repeated exposure to the same general harmful condition.” The court of appeals, focusing on the “because of” language, held that the policy covered only the cost of repairing the damage—not the cost of locating it. The Texas Supreme Court made short shrift of the argument: “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 …. The court of appeals’ characterization of efforts to determine all the damaged areas of homes as preventative measures is not supported by the record.”
Markel next argued that Lennar was not entitled to damages that occurred outside the policy period, and that because Lennar had not offered evidence segregating the damages occurring outside the policy period, it was entitled to nothing. The court noted that although Markel’s policy was limited to property damage that occurs during the policy period, it expressly included damage from a continuous exposure to the same harmful conditions. The court thus concluded: “For damage that occurs during the policy period, coverage extends to the ‘total amount’ of loss suffered as a result, not just the loss incurred during the policy period.” The court found support for its reading of the policy in its prior decision, American Physician Insurance Exchange v. Garcia, 876 S.W.2d 842 (Tex. 1994), long cited by policyholders for the proposition that Texas is an “all sums” state. Markel argued, as insurance companies have argued for years in Texas, that the court’s decision in Garcia is dicta. The court disagreed, and found that Garcia provides the rule governing the situation at issue.
In response to Markel’s argument that it should be responsible for only its pro rata share of the total remediation expenses, the court found that Garcia rejected that approach, “leaving it up to insurers who share responsibility for a loss to allocate amongst themselves according to their subrogation rights.” The court was unpersuaded by recent decisions adopting the pro rata approach in Massachusetts, New Hampshire, and South Carolina. The court concluded: “Markel’s policy covered Lennar’s entire remediation costs for damaged homes.”