Expert Commentary

EIFS Repairs Covered without Insurer's Consent

The Texas Supreme Court affirmed a jury verdict in favor of a construction company against its insurer regarding the company's voluntary remediation efforts to fix water damage at over 400 homes that it had built. The damage was associated with use of a type of synthetic finishing on the exteriors of the homes referred to as "exterior insulation and finish system" (EIFS), which was shown to cause pervasive water damage that was not readily apparent.


Environmental
March 2014

The insurance company argued that the extensive remediation work was not covered by the policy because it had not consented to the voluntary payments, which the insurer said was required by multiple policy provisions. The Texas Supreme Court overturned the appeals court, reaffirming the jury's verdict that found that the insurance company was not prejudiced by the builder's failure to get its consent prior to the remediation efforts. Lennar Corp. v. Markel Am. Ins. Co., 56 Tex. Sup. Ct. J. 893 (2013).

Lennar Corporation used EIFS as exterior finish on around 800 homes before ceasing to use the stucco substitute in 1998. Some of the home owners made complaints to Lennar after a segment on NBC's Dateline exposed the propensity of water damage associated with EIFS. In particular, when EIFS is used as an exterior to wood frames—as is common in residential construction—the court explained that EIFS "traps water inside, causing rot and structural damage, mildew and mold, and termite damage." Lennar decided to proactively contact all the home owners and offer to remove the EIFS, replace it with stucco, and fix any related damage in an effort to avoid litigation with the individual home owners. Almost all of the home owners agreed to Lennar's remediation offers, which were conducted between 1999 and 2003.

The Insurance Dispute

Lennar notified its several insurers of this approach, and all denied coverage. Lennar then sued the several insurance companies for indemnification. The lawsuit only continued with one insurer, Markel American Insurance Company, after one settled and others successfully sought summary judgment. Markel had provided Lennar with a $25 million commercial umbrella policy during portions of 1999 and 2000.

During a jury trial, the insurer argued that the builder was not entitled to indemnification because the remediation was voluntary and without the consent of the insurer. The insurer pointed to a policy provision, "Condition E," which stated: "it is a requirement of this policy that ... no insured, except at their own cost, voluntarily make any payment, assume any obligation, or incur any expense ... without [the insurer's] consent." Following court precedent in Hernandez v. Gulf Group Lloyd's, an insurer can only deny coverage for lack of consent to the insured's settlements under a "consent-to-settlement" provision if it was "prejudiced" by the lack of consent.

The insurer argued that it was prejudiced because many of the home owners who were offered remediation would not have sought a legal remedy on their own. The jury found that the insurance company was not prejudiced by the remediation, which it found was a reasonable response to the threat posed by the defective exteriors. The jury awarded approximately $2.5 million in damages, plus nearly as much in attorney fees and over a million dollars in prejudgment interest. However, the court of appeals reversed the trial court's verdict in favor of the insurance company.

The Decision

On appeal at the state's high court, the Texas Supreme Court first addressed the issue of whether the insurance company was legally prejudiced by the lack of consent to the builder's remediation plan. The insurer argued that, despite the jury's finding, the company was prejudiced as a matter of law by the builder's approach to voluntarily fixing the homes as a settlement. The insurer characterized the prejudice as "stark" since the builder "actively solicited claims which might otherwise never have been brought." The court found that the finding of prejudice—whether the unilateral settlement significantly impaired the insurer's position—was a factual issue that was properly determined by the jury.

The insurer also pointed to another "Loss Establishment" provision in the policy that required the insured to receive previous written consent for any settlements. The insurer argued that this provision, unlike the previously quoted "Condition E," did not require a showing of prejudice because the provision was central to the policy and clear in its requirement. In other words, any violation of this provision was a breach, regardless of whether the breach was deemed material by a court. The court disagreed, finding the provisions similar and requiring a showing of prejudice to establish a breach of either.

The court next addressed whether the scope of the remediation efforts was covered by the policy language. The insurer argued in part that the extensive costs of removing the EIFS from the homes to find the damage was not covered by the policy. Instead, only the costs of actually repairing the home damage were covered. The insurer pointed to a familiar commercial insurance provision obligating payment for insured's loss that is "because of" property damage occurring during the policy period. The builder argued that the removal of exteriors was necessary to assess and repair the damage that is usually hidden from sight. The court agreed, pointing out that the builder had not sought recovery at trial for a subset of homes that showed no damage once the EIFS was removed. The court noted that the words "because of," as used in the policy, were clear such that the language covered the remediation effort.

Conclusion

In reversing the court of appeals, the Texas Supreme Court found that the evidence supported the jury's verdict in favor of the builder. The case is a reminder that "consent-to-settlement" and similar provisions may not be strictly enforced by state courts. Perhaps ironically, the insured's efforts to avoid protracted litigation with home owners resulted in 12 years of litigation with its insurer.


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