Texas Supreme Court Applies “All Sums” Approach To Costs Incurred by Insured’s Remediation Program
In a recent decision, the Texas Supreme Court interpreted the provisions of a homebuilder’s commercial umbrella policy as
applied to remediation costs, and settled the question as to whether Texas applies the “all sums” or “pro rata” approach to allocating costs among multiple triggered insurance policies. Lennar Corp. v. Markel American Ins. Co., No. 11-0394 (Tex. Aug. 23, 2013).
Specifically, in Lennar, the court held that the insurer is responsible for the costs incurred as part of the insured homebuilder’s remediation program because it suffered no prejudice, even though it did not consent to the program. In addition, the Court reaffirmed and applied the “all sums” approach articulated in American Physicians Insurance Exchange v. Garcia, 876 S.W. 2d 842 (Tex. 1994) to find that the insurer’s policy covered the homebuilder’s entire remediation costs for damaged homes.
Plaintiff insured, Lennar Corporation (“Lennar”), brought suit against its insurers after all the insurers denied indemnification coverage for the costs Lennar incurred in a comprehensive remediation program to replace the exterior insulation and finish system (“EIFS”) it had installed in approximately 800 homes. Lennar proactively began this program after it determined, amidst widespread public reports, that EIFS caused frequent and substantial problems in homes because it traps water inside, causing rot, structural damage, mildew, mold, and termite infestation. Early in the process, Lennar informed its insurers that it would seek indemnification for the costs incurred, but the insurers refused to participate in Lennar’s program. The trial court granted summary judgment for the insurers and the appellate court affirmed this holding for all but two insurers: American Dynasty Surplus Lines Insurance Company and Markel American Insurance Company (“Market”). Thereafter, Lennar settled with American Dynasty on remand, leaving only its claims against Markel for trial.
A jury found that Lennar’s defective use of EIFS in home construction created an imminent threat to the health or safety of the homes’ inhabitants and that Lennar took reasonable steps to cure the construction defect as soon as practicable. The jury failed to find that Markel was prejudiced by Lennar’s failure to obtain
consent for the remediation program. The trial court entered judgment awarding Lennar $2,965,144.16 after interest, set-offs, and costs. The court of appeals then reversed and entered judgment for Markel. The Supreme Court granted a petition for review.
The Supreme Court first considered whether Lennar established its legal liability to the homeowners. The policy forbids Lennar from obtaining costs after voluntarily making any payment or assuming any obligation without Markel’s consent. However, Markel concedes that this provision does not excuse liability under the policy unless it was prejudiced by the settlements. The court rejected Markel’s argument that it established prejudice “largely because Lennar offered remediation to homeowners with damaged houses who would never have sought redress had Lennar left them alone.” As the court explained, “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.” Consequently, the court held that in the absence of prejudice, Lennar’s settlements with homeowners establish both its legal liability for the property damage and the basis for determining the amount of loss.
Second, the Supreme Court addressed the question of whether Markel is responsible for costs to remediate the damage that began before and continued after the policy. The Court, reaffirming the “all-sums” allocation approach outlined in American Physicians Insurance Exchange v. Garcia, 876 S.W. 2d 842 (Tex. 1994), concluded that Markel’s policy covered Lennar’s entire remediation costs for the damaged houses. The Court applied the
rationale outlined in Garcia, rejecting the concept that an insurer is only responsible for its pro-rata share, and instead of applying the all-sums approach – i.e., once the insured identifies the applicable limit of coverage, all insurers whose policies are triggered must allocate funding among themselves.