On August 23, 2013, in a case involving coverage for a homebuilder’s costs in removing an exterior insulation and finish system which resulted in serious water damage that worsens over time, and replacing the system with stucco, the Texas Supreme Court addressed the following issues:  (1) was the insurer, Markel American Insurance Company (“Markel”), responsible for the costs of Lennar’s remediation program, where Markel did not consent to the costs but it was not prejudiced as a result; and (2) was Markel responsible for: (i) costs incurred to determine and repair property damage, and (ii) costs to remediate damage that began before and continued after the policy period.  Lennar Corporation v. Markel American Insurance Company, No. 11–0394 (Tex. August 23, 2013). The Court resolved each of these issues in favor of the homebuilder, Lennar. 

As an initial matter, the Texas Supreme Court reversed the court of appeals and upheld the jury’s determination that Markel was not prejudiced by Lennar’s “‘failure to obtain Markel’s consent (a) to enter into any compromise settlement agreement, or (b) to voluntarily make any payment, assume any obligation or incur any expense.’” The Court rejected Markel’s argument that it had established prejudice as a matter of law “largely because Lennar offered remediation to homeowners with damaged houses who would never have sought redress had Lennar left them alone.” As explained by the Court, “Markel’s argument boils down to this — had Lennar stonewalled the homeowners, fewer repairs would have been made.”  The Court found that “[o]n this record, that is a question of fact, not of law, which the jury resolved in Lennar’s favor.”

The Supreme Court further rejected Markel’s argument that the language in the policy’s Insuring Agreement, obligating Markel to pay Lennar’s “ultimate net loss,” which was defined as “the total amount of [property] damages for which [Lennar] is legally liable and stating that such loss “may be established by adjudication, arbitration, or a compromise settlement to which we have previously agreed in writing” (the so-called “Loss Establishment Provision”) comprises a separate policy condition which obligates Lennar to obtain Markel’s consent prior to entering into any settlement, and as to which Markel can insist on compliance without proving prejudice. The Court held that the “Loss Establishment Provision is no more central to the policy than Condition E [the “voluntary payments provision”], and the requirement that Markel show prejudice from Lennar’s non-compliance with either operates identically.” Thus, the Court concluded that “[a]bsent prejudice to Markel, Lennar’s settlement with homeowners establish both its legal liability for the property damages and the basis for determining the amount of loss.”

 With respect to the amount of damages covered by Markel’s policy, the Court found that the cost of determining the areas of water damage was covered, finding that “under no reasonable construction” of the phrase “because of” (which is to be interpreted broadly in determining a covered loss under a commercial general liability policy) can the cost of finding property damage in order to repair it not be considered to be “because of” the damage. In addition, the Court’s decision obligates Markel to pay for all of Lennar’s remediation costs, including costs for remediation of damage that occurred before or after its policy period because some of the damage occurred during the Markel policy period. 

 Finally, the Texas Supreme Court reaffirmed that Texas courts apply the “all sums” approach with respect to insurers’ indemnity obligations. The Court rejected Markel’s argument “that it should be responsible along with Lennar’s other insurers only for its pro rata share of the total remediation expenses,” relying upon the decision in American Physicians Insurance Exchange v. Garcia, 876 S.W. 2d 842 (Tex. 1994). As explained by the Court, “Garcia rejects this approach, leaving up to insurers who share responsibility for a loss to allocate it among themselves according to their subrogation rights.” The Court rejected Markel’s request that Texas “abandon Garcia, based on recent cases in other jurisdictions that take a pro rata approach,” finding that “the decisions of those courts do not persuade us to reconsider ours in Garcia.”