Insurance Coverage for Construction Defects:
New Ruling from Texas Supreme Court is a Game Changer
Michael A. Logan
The Texas Supreme Court recently issued an important decision settling insurance coverage issues in the construction defect context that had been undecided or inconsistently applied in the past. Lennar Corp. v. Markel American Insurance Co. involved homes built by Lennar with an exterior insulation and finish system (“EIFS”), or synthetic stucco, that suffered from water damage as a result of issues related to the EIFS. The property damage to the homes typically began six to twelve months after the EIFS was installed and usually became worse over time. Lennar decided not merely to address homeowner complaints regarding the EIFS as it received them, but rather to take a proactive approach by contacting homeowners, removing the EIFS from the homes, repairing the damage and installing conventional stucco. Almost all of the homeowners accepted Lennar’s offer of remediation. A few were paid cash. Only three ever sued. All settled.
Early in the process, Lennar notified its insurers, including Markel, that it intended to seek indemnification from its insurers for the remediation costs. Markel refused to participate and denied coverage. Markel listed multiple reasons for denying coverage, including Lennar’s failure to comply with the requirement in the policy to obtain Markel’s consent before voluntarily making payments or assuming obligations related to the loss. Markel did not consent to Lennar’s remediation settlements. Markel also contended that it was undisputed that property damage began before its policy period and continued after its policy period; therefore, Lennar was seeking to recover damages that should not and would not be covered under the Markel policy. Markel contended that the definition of “ultimate net loss” in the policy precluded coverage because it included a provision that the loss “may be established by adjudication, arbitration or a compromise to which [Markel has] previously agreed in writing.” In this case, the damages Lennar sought to be covered were not adjudicated, arbitrated or settled by a compromise agreed to by Markel. Markel also contended that expenses incurred to investigate the property damage should not be covered because they did not constitute property damage.
The Texas Supreme Court considered these and other issues, and held that Lennar was entitled to be indemnified under the Markel policy for the total amount of expenses it incurred in the remediation process. In so doing, the Texas Supreme Court ruled on several key issues:
1. Even though Markel did not consent to the voluntary payments and settlements made by Lennar in the remediation process, that did not constitute a defense to coverage because Markel was not prejudiced as a result.
2. Even though the damages did not meet the definition of “ultimate net loss” in the policy, this did not constitute a defense to coverage because Markel was not prejudiced as a result. Although the definition of “ultimate net loss” required an adjudication or an agreement to which Markel consented to in writing, the Court concluded that Lennar’s settlements with the homeowners established its legal liability for the property damages and the basis for determining the amount of the loss.
3. The costs incurred by Lennar to investigate and discover property damage were covered under the policy. The Court reasoned that these costs were incurred “because of” property damage covered under the policy.
4. Even though damages began before the Markel policy period and continued after the Markel policy period, the total amount of expenses incurred by Lennar in the remediation process was covered under the Markel policy. The Court rejected Markel’s argument that the loss should be apportioned on a pro rata basis among the various policies and policy periods in place during the time period that the property damage occurred.
These rulings are very favorable to insureds in the construction industry and they clarified existing law on contract/insurance policy interpretation. The ruling requires insurers to cover reasonable settlements reached by their insureds even if the matter is settled without the insurer’s consent. The ruling requires insurers to cover the total amount of the loss if the property damage occurred during the policy period even if the damage began before the policy period and/or continued after the policy period. The ruling also requires insurers not only to cover remediation expenses, but also expenses incurred to determine whether or not remediation or repair is necessary. The opinion will likely lead to further litigation regarding the application of these rulings and likely cause insurers to amend their policies. It should be interesting to see what developments follow the issuance of this opinion.
This Litigation Alert is a summary of recent developments in the law and is provided for informational purposes only. It is not intended to constitute legal advice or to create an attorney-client relationship. Readers should obtain legal advice specific to their situation in connection with topics discussed.
Copyright © 2013 Kane Russell Coleman & Logan PC. All rights reserved. Unless otherwise indicated, the authors are not certified by the Texas Board of Legal Specialization.