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Courts and Coverage

Burden of Proof in Coverage Litigation (Part 4)

Brent Cooper | July 19, 2014

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Part 1 of this series dealt with the burden of proof of showing that a claim initially was covered by the policy. Part 2 dealt with the placement of the burden of proof for an exclusion. Part 3 dealt with placement of burden of proof on exceptions to exclusions and whether the person making the claim was an insured. Part 4 will address two very important issues. The first is who has the burden of proof to show that a claim falls within the policy period. The second is the burden of proof on causation and allocation of damages.

The term "trigger" refers to the event that activates coverage under one or more insurance policies. See Allstate Ins. Co. v. Hunter, 242 S.W.3d 137 (Tex. App.—Fort Worth 2007, no pet.). Issues often arise in determining exactly what must take place during the policy period to trigger coverage. The insured bears the burden of proof to establish coverage, which includes whether the loss occurred during the policy period. See Gilbert Tex. Constr. LP v. Underwriters at Lloyd's, London, 327 S.W.3d 118 (Tex. 2010). Therefore, the insured bears the burden to establish the event that triggers coverage under the policy period. The trigger of coverage depends on the wording of the actual policy at issue.

Most general liability policies have trigger language stating that, for Coverage A, coverage is provided if there is property damage or bodily injury occurring during the policy period. Prior to 2008, most Texas courts applied the manifestation rule for determining when coverage was triggered. The Dallas Court of Appeals set this standard in Dorchester Dev. Corp. v. Safeco Ins. Co., 737 S.W.2d 380 (Tex. App.—Dallas 1987, no writ). B&L Sunflower filed suit against Dorchester for damages resulting from construction by Dorchester, as general contractor, of an apartment complex in Dallas.

Insurer Safeco refused to defend Dorchester in the suit and sought a declaratory judgment to determine their duties under the Dorchester policy. Dorchester counterclaimed that Safeco was obligated to defend and provide coverage. The trial court granted Safeco's motion for summary judgment, and on appeal, the court analyzed whether there was an "occurrence" during the policy period: "The question becomes whether there is coverage for property damage resulting from workmanship performed during the policy period when the property damage is not manifested until after the policy period." Id. at 383.

The court looked to precedent from other jurisdictions and held that "no liability exists on the part of the insurer unless the property damage manifests itself, or becomes apparent, during the policy period." Id. Because Dorchester admitted that the damages were not manifested during the policy period, there was no "occurrence" during the policy period and thus no coverage. Id. Other Texas courts followed this rationale.

  • State Farm Mut. Auto. Ins. Co. v. Kelly, 945 S.W.2d 905 (Tex. App.—Austin 1997, writ denied)
  • State Farm Fire & Cas. Co. v. Rodriguez, 88 S.W.3d 313 (Tex. App.—San Antonio 2002, pet. denied)
  • Summit Custom Homes, Inc. v. Great American Lloyd's Ins. Co., 202 S.W.3d 823 (Tex. App.—Dallas 2006, pet. withdrawn).

Two Texas courts of appeals declined to follow the manifestation rule and instead adopted and applied the exposure rule. In Pilgrim Enters., Inc. v. Maryland Cas. Co., 24 S.W.3d 488 (Tex. App.—Houston 1st Dist. 2000, no pet.), numerous property owners sued Pilgrim, claiming personal and property damages arising from a hazardous dry cleaning solvent released from Pilgrim's facilities. Maryland issued several policies to Pilgrim covering the years 1981–85 and initially agreed to defend Pilgrim but withdrew its offer after other insurers declined to defend. The trial court granted Maryland's motion for summary judgment in Pilgrim's suit against Maryland, reasoning that because the tort plaintiffs' claims did not allege that property damage or bodily injury became manifest during the policy period, Maryland had no duty to defend.

The court noted that the Texas Supreme Court had not ruled on the proper test for determining when coverage is triggered and so decided that the exposure rule was proper for the occurrence-based policies at hand. Thus, injury can occur as the exposure takes place. "[T]he policies contemplate that harm caused by continuous exposure during a policy period will be covered by that policy." Id. See also Pine Oak Bldrs., Inc. v. Great Am. Lloyd's Ins. Co., 292 S.W.3d 48 (Tex. App.—Houston 14th Dist. 2006) (applying the exposure rule from Pilgrim to claims involving property damage from water intrusion because of defective stucco-type wall siding), reversed, 279 S.W.3d 650 (Tex. 2009).

The Texas Supreme Court finally resolved the split among the courts of appeals as to the proper rule for triggering insurance coverage. Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008). Don's Building involved another case of damages from water intrusion due to defective stucco-type wall siding. The court declined to apply the manifestation and exposure rules adopted by other courts and determined that the policy language should control. "[W]e hold that property damage under this policy occurred when actual physical damage to the property occurred." Id. at 24. The court thus adopted the "actual injury" or "injury-in-fact" rule and stated that "the date that the physical damage is or could have been discovered is irrelevant under the policy." Id.

Ultimately, the court's holding meant that the insured pursuing a general liability claim must establish the time of injury in order to meet its burden of showing that coverage is triggered. The court conceded that such a showing might be difficult but that the parties' agreement must control: "Pinpointing the moment of injury retrospectively is sometimes difficult, but we cannot exalt ease of proof or administrative convenience over faithfulness to the policy language...." Id. at 29. Practitioners have noted that after Don's Building, insureds will face a higher hurdle to prove the moment of damage, a showing that will likely necessitate expert testimony.

In construction defect cases, this burden is particularly difficult. The defect may not be discovered until well after the actual injury. However, the discovery date is irrelevant under Don's Building. The burden is on the insured to show the actual date of the actual injury. Many courts have held that pinpointing a date is beyond the knowledge of the average layperson and will require expert testimony.

Some insureds have taken the position that if coverage existed before the construction started and was in effect after discovery, the burden has been met. This is not necessarily the case. Some courts have held that because of issues such as ongoing versus completed operations exclusions, ongoing loss exclusions, and similar provisions, the exact date of loss must be established.

Some have contended that the burden is on the insured to show that there is a covered loss within the policy period and that the burden then shifts to the insurer to show what part of the loss is outside the policy period. However, there does not appear to be any case authority in support of this position. Readers should be cautioned that this area is one of the most difficult where the burden of proof is concerned. If you are prosecuting a case where there is an issue on the policy period trigger of coverage, you should pay extra attention.

Burden of Proof on Causation and Allocation of Damages

It is clear that the insured has the burden to prove that the loss is covered by the policy, and courts have extended this reasoning in those cases where the precise cause of the loss is unclear. Often, both covered and noncovered perils combine to create a loss. Texas courts have determined that these scenarios present a coverage issue on which the insured bears the burden of segregating the damage between covered and noncovered perils. See Wallis v. United Servs. Auto. Ass'n, 2 S.W.3d 300 (Tex. App.—San Antonio 1999, pet. denied). Causation is often inextricably intertwined with issues of exclusions and exceptions.

One of the earliest cases suggesting that the insured had the burden of proof on the allocation of damages was Coyle v. Palatine Ins. Co., 222 S.W. 973 (Tex. Comm'n App. 1920, holding approved). The policy insured against all direct loss or damage by "tornado, windstorm, or cyclone" but excluded loss "caused by water or rain, whether driven by wind or not," with the exception of rain water entering the house because of wind damage. Id. at 974. The parties stipulated that damage resulting from the combined action of water and wind amounted to about $3,300, but inspectors could not determine to what extent each force was an element in causing the loss.

While the insureds argued that the wind was the "direct, proximate, and efficient cause" of the damage, the Commission of Appeals held that analysis of the argument was unnecessary because of the parties' stipulations that damages could not be allocated to wind or water. The supreme court approved the judgment of the Commission of Appeals but added its own view of the case. The high court noted that as a concurrent cause, the water had been put out of issue by the policy exclusions, leaving only the damage as to the wind in question. Because the parties agreed that the extent of damage due to the wind could not be determined, the plaintiff was left with no proof on the subject and was not entitled to judgment for the loss. By this ruling, the court clearly suggested that the insured had to present evidence allowing allocation of damages between covered and noncovered risks.

In Paulson v. Fire Ins. Exch., 393 S.W.2d 316 (Tex. 1965), the Texas Supreme Court explicitly ruled that where covered and excluded risks combined to cause damage, the insured had the burden to produce evidence by which the fact-finder could estimate the amount of damage caused by a covered risk. Paulson concerned yet another hurricane scenario and was decided the same day as Berglund, supra. In Paulson, the insured's house was severely damaged as a result of the high winds and water that accompanied Hurricane Carla. The policy covered loss from hurricanes but specifically excluded loss caused by "tidal wave, high water, or overflow, whether driven by wind or not." Id. at 317. In answer to submissions, the jury found that the damage was the result of Hurricane Carla but that the Paulsons' house "did not sustain loss which was directly caused by high water, whether driven by rain or not." Id. at 318. After looking at the statement of facts, the court of appeals and supreme court disagreed with the jury and found that the evidence established conclusively that a large portion of the loss was attributable to wind-driven water.

As to damage that may have been caused solely by the wind, the court ruled that "[i]t is essential that the insured produce evidence which will afford a reasonable basis for estimating the amount of damage or the proportionate part of damage caused by a risk covered by the insurance policy." Id. at 319. Because the Paulsons had presented no evidence as to damage created by wind action alone, nor any estimate of the proportion of the damage caused by wind action, independent of all other causes, there was no basis for allocating damages to a covered risk. As a result, the high court ruled that the Paulsons take nothing. See also Travelers Indem. Co. v. McKillip, 469 S.W.2d 160 (Tex. 1971) (citing Coyle, Paulson, and Berglund for the rule that the insured has the burden to introduce evidence segregating damage caused by included and excluded perils); Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597 (Tex. 1993) (ruling that circumstantial evidence can provide a reasonable basis for the jury to allocate damages).

Because the insured bears the burden of proving what damages are covered by the policy, the determination of causation and allocation of damages will often necessitate expert testimony. In Lyons, the insureds claimed coverage for damage to a brick veneer and an exterior staircase. Lyons, 866 S.W.2d at 599. Both parties hired experts (two engineers and a reconstruction expert) to explain the cause of the damage, and not surprisingly, the opposing experts disagreed. The engineer hired by the Lyonses stated that the damage was caused by a nearby tree during a storm (a covered peril), while the insurer's experts claimed that settling and shifting of the foundation (an excluded peril) caused the damage. In this battle of the experts, the jury found that 25 percent of the damages were attributable to the wind.

On appeal, the insurer complained that there was no evidence providing a basis for the jury to allocate damages, but the court disagreed. Even though the expert had not specifically allocated damages, he had provided evidence of causation, and testimony of other witnesses provided circumstantial evidence of the extent of damage attributable to the windstorm.

In contrast, the Wallis court determined that an expert's testimony was not sufficient evidence upon which the jury could rely to allocate damages. The Wallises claimed the damage to their home's foundation was due to plumbing leaks, a covered peril, while the insurer argued that the damage was caused by settlement and other excluded perils. Wallis, 2 S.W.3d at 301–02. The insurer's experts opined that improper compaction caused the home to move downhill and that the plumbing leaks had not caused the damage, while the Wallises' expert claimed that the plumbing leaks could not be excluded as a cause of the damage. The jury found that damage was caused both by earth movement and the leaky plumbing, attributing 35 percent of damages to the plumbing leaks. But the trial court rendered judgment notwithstanding the verdict for the insurer on the grounds that the insureds produced no evidence to demonstrate what portion of the loss was caused solely by the plumbing leaks.

The court of appeals agreed, stating that while the insured is not required to demonstrate damages with mathematical precision, the jury heard no testimony regarding how much of the Wallises' damage was caused by the plumbing leaks. "[T]he engineers could not indicate the extent to which this peril damaged the Wallises' home. This is fatal to their claim." Id. at 304. Thus, an expert's opinion on causation alone will not support a jury's leap of logic in allocating damages. 1

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1 R. Brent Cooper, "Don's Building—Trigger of Coverage—Misfire or Direct Hit," 16th Annual Insurance Symposium (April 3, 2009).