JAW The Pointe, LLC v. Lexington Insurance Company
Texas Supreme Court, No. 13-0711 (April 24, 2015)
Opinion by Justice Boyd
Following Hurricane Ike, Lexington paid JAW, an insured property owner, for business-interruption losses, as well as property damage caused by wind; the parties agreed flood damage was not covered. The carrier refused, however, to pay any portion of the demolition and increased repair costs attributed to an ordinance requiring the structures to comply with new mandatory flood elevations, despite an endorsement apparently covering those costs. The Texas Supreme Court held the insured could not recover statutory bad faith damages from its property insurer for losses attributed to the ordinance, because the policy’s “anti-concurrent causation clause,” coupled with the insured’s failure to segregate wind and flood damages in requesting a building permit, excluded coverage for the increased costs. And without coverage, there could be no bad faith under the Insurance Code.
Hurricane Ike severely damaged residential and commercial property in Galveston, including an apartment complex owned by JAW and insured by Lexington. A Galveston ordinance required any apartment complex that sustained damage of 50% or more of its market value be made to comply with current code requirements—including elevating the structures to a base flood elevation. JAW requested a permit to repair the apartment complex, but estimated that repairs would cost over $6.2 million, far in excess of the calculated market value of about $2.2 million. Code compliance would therefore require demolishing the existing structures and significantly increase the repair costs. JAW submitted its claim to Lexington, which made separate payments for business-interruption loss and wind damage. When Lexington refused to pay the increased repair costs stemming from compliance with the ordinance, JAW obtained a jury verdict for violations of the Texas Insurance Code, resulting in a judgment for actual damages, a statutory penalty, and attorney’s fees. The court of appeals reversed and rendered a take-nothing judgment, and JAW sought review by the Texas Supreme Court.
The Supreme Court affirmed. First, the Court reiterated its previous holding that denial of a covered claim is an essential predicate for statutory bad faith absent a showing of “extreme” conduct or independent damages. It then turned to the coverage question. The policy’s anti-concurrent causation clause barred coverage for any “loss or damage caused directly or indirectly by any” of several excluded causes, “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” The list of excluded causes included water from flooding and enforcement of an ordinance requiring demolition of property. Two separate endorsements, however, modified the ordinance exclusion to provide coverage for demolition required by ordinance. One of those endorsements expressly provided that if “a Covered Cause of Loss occurs to covered . . . property,” the insurer will pay for “loss or damage caused by enforcement of any ordinance or law that . . . [r]equires the demolition of parts of the same property not damaged by a Covered Cause of Loss.” Because the parties agreed both endorsements applied only if enforcement of the ordinance was caused by a covered loss, the Court focused on JAW’s permit application to the city, which did not distinguish between flood damage and wind damage in estimating repair costs. (Presumably only the cost of repair, not the cause of the damage, was relevant to the city’s decision.) According to the Court, evidence that JAW had submitted—and Lexington had paid—wind damages exceeding 50% of the property’s value was “no evidence of what the led to the city’s determination.” Consequently, flood and wind were deemed concurrent causes of the city’s enforcement, which barred coverage as well as any statutory bad faith claims.
