Contractors responding to construction defect claims often face a conundrum: to repair or not to repair. Early claims on projects may give contractors notice of widespread problems. A contractor risks its long-term relationship with an owner if it fails to respond appropriately. Adding to the uncertainty, insurance carriers often deny coverage of remediation efforts, including the costs of determining the scope of damages, until the carrier consents to a remediation plan.
Contractors can either attempt to minimize property damage by proactively commencing remediation, which could lead to a denial of coverage, or wait until owners assert claims, which could result in higher repair costs and allegations of failure to mitigate damages. The Texas Supreme Court recently issued an opinion that is considered a victory for policyholders and a catalyst for more litigation and overhauls to policy language. The ruling is of national significance because the language used in the policy at issue is common and the basic contract principles applied by the Court are relevant to cases in all jurisdictions. Therefore, Lennar’s arguments may be persuasive in coverage disputes elsewhere.
In Lennar Corp. v. Markel Am. Ins. Co., 2013 WL 4492800 (Tex. 2013), the Court addressed two issues: (1) whether an insurer is responsible for the costs of a remediation program that the insurer did not consent to; and (2) whether an insurer is responsible for (i) costs to determine the scope damages, and (ii) costs to remediate damage accruing before the policy period ended but continuing afterward. The Court ruled against the insurer on both issues.
Through 1998, Lennar built approximately 800 homes using an exterior insulation and finish system (EIFS). It was later discovered that EIFS installed on wood-frame walls traps water, causing structural damage. Because EIFS must be removed before damage can be detected, Lennar approached homeowners and offered to remove the EIFS and replace it with stucco. Nearly all of the homeowners accepted Lennar’s offer. Lennar began remediation in 1999 and finished in 2003.
Lennar sought indemnification from its insurers for the costs to repair the homes. All of the insurers denied coverage for Lennar’s plan, preferring to evaluate homeowners’ claims individually, perhaps hoping that many homeowners would never make a claim. In 2000, Lennar sued its insurers based on their denials of coverage.
At trial, the one carrier remaining in the case argued that the policy required Lennar to obtain its consent before voluntarily incurring remediation costs. By not consenting, the carrier argued that it was prejudiced as a matter of law. Even worse, argued the carrier, Lennar “actively solicited claims” that might not otherwise have been made.
The carrier’s argument did not persuade the Court. The Court explained that only a material breach excuses the nonbreaching party’s performance. One factor in determining materiality is whether the nonbreaching party suffered prejudice. The carrier alleged that it was prejudiced by the remediation agreement because, if Lennar had waited, fewer repairs would have been required. At trial, Lennar presented evidence showing that waiting to remediate would have resulted in increased remediation costs. Based on the evidence, the jury ruled that Lennar did not materially breach the policy, and the Texas Supreme Court concluded that the carrier could not escape liability merely because it did not consent, as the carrier suffered no prejudice.
The carrier’s next argument focused on whether Lennar’s damage award was covered by the policy. The policy expressly covered the total amount of Lennar’s loss because of property damage occurring during the policy period. The carrier argued that this meant the policy covered only the costs to repair, not the costs to locate damage. In addition, the carrier argued that Lennar’s evidence improperly included the costs of repairing damage that occurred outside the policy period.
Again, the Court was not swayed. Upholding the jury’s favorable verdict, the Court noted that there was no dispute as to the existence of damages. The Court reasoned that “under no reasonable construction of the phrase can the cost of finding EIFS property damage in order to repair it not be considered to be ‘because of’ the damage.” Id.
As to the argument that the damages occurred outside the policy period, evidence at trial showed that damage from EIFS began within 12 months after the completion of construction. Because Lennar stopped using EIFS in 1998, and the policy at issue was continually in effect from 1999 until October 2000, the Court inferred that most of the damage began during the policy period. The Court concluded that since the policy covered damages from continuous exposure to the same harmful conditions, the policy included coverage for remediation of all damages, not only those that actually occurred within the policy period.
The Court’s ruling is important for several reasons. First, insurers often argue that they cannot be liable without a resolution through arbitration or litigation or through a settlement agreement to which they consented. Lennar, however, negotiated its plan informally and without consent. Contractors should not view the decision as a license to freely negotiate settlements without their insurers’ consent, as different circumstances could give rise to a finding of a material breach of the policy. But Contractors should recognize that consent may not be needed where the evidence shows the damages will only worsen with time. Perhaps most important for contractors is the award of costs for investigating and determining the scope of damages. These costs are significant when a widespread defect is at issue.
The decision is significant to contractors across the country that are faced with unhappy owners and stubborn carriers. Expect to see similar arguments from contractors nationwide when valid claims are imminent. Carriers should not presume that they can indefinitely delay a remediation plan by withholding consent, particularly if widespread issues exist. A contractor’s failure to obtain its carrier’s consent may no longer serve as a basis of prejudice in a future coverage dispute. ■
About The Author:
Patrick “Gene” Blanton and Christopher A. Scifres are construction attorneys in the Dallas office of Ford Nassen & Baldwin P.C. (www.fordnassen.com), which is nationally recognized in the industry and is one of the largest construction law firms in Texas. Mr. Blanton, who also oversees the firm’s E-discovery practices, can be reached at or 214.523.5118. Mr. Scifres can be reached at or 214.523.5128.
Modern Contractor Solutions, December 2013
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