INSURER NOT PREJUDICED BY PREEMPTIVE REPAIRS MUST PAY COSTS

Lennar Corp. v. Markel American Insurance Co.
Supreme Court of Texas, No. 11-0394 (August 23, 2013)
Justice Hecht (Opinion), Justice Boyd (Concurrence)
In an opinion that has received national attention, the Texas Supreme Court held that a liability insurer was obligated to pay the costs of a homebuilder’s voluntary remediation of homes built with a defective exterior insulation and finish system (“EIFS”). Although Lennar, the homebuilder, incurred the remediation costs without obtaining the insurer’s consent as required by the policy, the Court held that the insurer was not prejudiced by Lennar’s breach of that provision. Justice Boyd concurred on the ground that the Court’s precedent compelled the result, but he urged the Court to acknowledge that the prejudice requirement is based on public policy grounds, not the text of the insurance agreement.

The facts of this case go back to the 1990s, when Lennar and other homebuilders constructed over 800 homes using EIFS in place of conventional stucco. Although EIFS had been used successfully in commercial construction, it proved disastrous when used on wood-frame houses, because it trapped moisture inside, causing rot, mold, and structural damage. The property damage, however, was undetectable from a visual inspection, and manifested at different times on different properties. To stem a tide of complaints and threatened lawsuits, Lennar proactively offered to remove the EIFS from all of its homes and replace it with conventional stucco. Its liability insurers, however, denied coverage for the voluntary remediation, and Lennar sued.

Twelve years later, after summary judgments for the insurers, a partial reversal and remand by the court of appeals, a jury verdict for Lennar, and another reversal by the court of appeals, the dispute reached the Supreme Court with Markel as the sole insurer remaining as a party. The law of the case included unappealed holdings that (1) the costs of removing and replacing the EIFS as a purely preventative measure were not covered, because they were not incurred “because of” property damage, and (2) Markel’s liability for any losses that were incurred in connection with repairing water damage would not be excused by Lennar’s failure to obtain consent unless Markel could prove it was prejudiced by the settlements. The issues addressed by the Supreme Court were whether Lennar’s settlements with the homeowners had established its liability so as to trigger coverage, and whether it had proved the amount of its loss attributable to Markel’s policy period. Justice Hecht’s opinion for the Court, reversing the court of appeals, rejected Markel’s efforts to set aside the jury’s finding that Markel was not prejudiced by Lennar’s proactive approach, noting that the jury was entitled to credit evidence that an alternative approach would have resulted in even greater damages. On the second issue, the Court held that where property damage began before or during the policy period (including continuous exposure to harmful conditions), the insurer was obligated to pay the “total amount” of the loss incurred until the damage was repaired, not just the amount of the loss incurred during the policy period.

In a lengthy concurrence, Justice Boyd agreed that the Court’s precedent required reversal of the appellate court and affirmance of the trial court’s judgment. He then reviewed in detail the history of the “prejudice” requirement in Texas, and argued that the Court should acknowledge that requiring an insurer to show prejudice by an insured’s breach to avoid coverage in most circumstances is a rule based on public policy, not the “plain meaning” of the insurance contracts at issue in each of the cases.

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