The Texas Supreme Court handed down its most important insurance opinion of the term with its Aug. 23 decision in Lennar Corp. v. Markel American Insurance Co. This case involved a homebuilder’s claim over the cost to repair homes damaged because of exterior insulation finishing system (EIFS) siding installed on the homes. There were some 465 houses that sustained water damage as a result of the EIFS. All insurers except Markel had settled with Lennar.
A jury awarded over $5 million in damages to Lennar. The Fourteenth Court of Appeals in Houston reversed, holding that the trial court made a mistake in entering a judgment for Lennar because Lennar had violated the consent-to-settle clause and had failed to offer evidence of property damage within Markel’s policy period as indicated by the decision in
Don’s Building Supply Inc. v. OneBeacon Insurance Co., 267 S.W.3d 20 (Tex. 2008). The coverage trigger under the Markel policy required that the property damage take place during the policy period.
The Texas Supreme Court reversed the Fourteenth Court and held that the trial court was correct in its judgment. On the issue of the consent-to-settle clause in the policy, the Supreme Court held that, for the breach to be material, there must be a showing of prejudice. The court reasoned that only material breaches were actionable, and, if there was no prejudice, the breach was not material. The jury found there was no prejudice to Markel, and the Supreme Court found that the finding was supported by the evidence.
On the issue of proof of property damage during the policy period, the Supreme Court noted that the property damage occurred over a period of time and proof of the property damage during the Markel policy period would be difficult, if not impossible. The court said that since the injury was a continuing one, the case was governed by its earlier medical-malpractice insurance decision in
American Physicians Insurance Exchange v. Garcia (1994). Where there is a continuing injury, the limits of consecutive policies may not be stacked (added together), the insured may select the policy that provides the greatest relief, and that insurer may subrogate against the other insurers who provided coverage during the time the injury was occurring.
One issue not addressed in the opinion was whether the settlement by Lennar with all of the other insurers was prejudice, since the right of Markel to subrogate was eliminated.
The Lennar decision, as well as other lower court decisions, provides the following framework for dealing with continuing-injury cases:
1. In a continuing-injury case, there is no stacking of consecutive policies (policies with different policy periods).
2. Stacking is allowed for concurrent-coverage policies (policies with the same or overlapping policy periods).
3. The insured is allowed to pick the policy period that provides the greatest recovery.
4. The insurer(s) selected are liable for the loss up to their policy limits.
5. The exhaustion for the policy period selected is vertical rather than horizontal; when the limits of the policy selected are exhausted, the insured looks to excess insurers, rather than other policies at the same level.
6. The vertical exhaustion must be for the same policy period.
7. The insurers(s) then may seek subrogation from other insurers in their layers.
8. The insured must select the same policy period for both defense and indemnity.
The Lennar decision represents a trade-off.The insurers in a continuing-injury case only have one policy limit exposed as opposed to having the limits stacked. In return, the insured is relieved of the burden of showing the exact amount of property damage that occurred in each policy period.
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