On October 3rd, the Texas Supreme Court granted a policyholder’s petition for review in a Hurricane Ike matter that potentially gives Texas’ highest court an opportunity to address several important insurance issues. They include concurrent cause in wind and flood losses and the insured’s burden of proof under policy provisions affording coverage when local ordinances mandate demolition and reconstruction and the authorities’ decision that those ordinances were triggered fails to differentiate between loss attributable to covered perils and loss attributable to excluded ones. The case that is going up on appeal is Lexington Ins. Co. v. JAW The Pointe, LLC, 2013 WL 3968445, 2013 Tex. App. LEXIS 9602 (Tex.Ct.App. 2013).
Policyholder JAW The Pointe owned an apartment complex in Galveston that was heavily damaged by Hurricane Ike in 2008, and it sought coverage from its primary carrier, Lexington Insurance Company. The insured initially intended to effect repairs, but the City of Galveston subsequently informed the policyholder that the damages exceeded 50% of the structure’s market value, requiring that the buildings be bought into compliance with local flood regulations. Because that would mean elevating the existing structures by fully 11 feet, the insured decided to demolish and rebuild instead.,
The Lexington policy afforded coverage for loss occasioned by “Ordinance or Law” and also for “Demolition and Increased Costs of Construction,” but only if the need to demolish and reconstruct was itself caused entirely by a covered peril. The insurer’s building consultants determined that the structures had sustained $1.278 million in damage from covered wind and $3.5 million in damages from excluded flood. In addition, as one would expect, there was no way to determine what role each of those perils played separately in the City’s decision that the ordinances had been triggered.
Lexington paid the $1,278 million but declined coverage for both the flood component and also for the wholesale demolition and reconstruction. The insured brought suit and recovered a $3.7 million jury verdict, but that was set aside on appeal. As the appellate panel explained in rendering a take nothing judgment against the insured, “[t]he key issue is the actual basis for the City’s . . . substantial damage determination triggering enforcement of the City ordinance [and the policyholder] cannot identify any evidence that the City made a substantial damage determination based on wind damage alone — as opposed to flood damage or a combination of wind and flood damage, both of which are excluded causes of loss.”