Lessons Learned from Lennar Homes

Transcription

1 Lessons Learned from Lennar Homes J. James Cooper Gardere Wynne Sewell LLP 1000 Louisiana Street, Suite 3400 Houston, Texas Jamie R. Carsey Thompson, Coe, Cousins & Irons, LLP One Riverway, Suite 1400 Houston, Texas Robert M. (Randy) Roach, Jr. Roach & Newton, L.L.P. Heritage Plaza 1111 Bagby Street, Suite 2650 Houston, Texas (713) **Special thanks to Ruth Sarah Lee, of Gardere Wynne Sewell, LLP, for her work on this paper. The University of Texas School of Law 18th Annual Insurance Law Institute November 7, 2013 The material contained in the following paper reflects the views of the authors only, and does not necessarily reflect the policy or views of Gardere Wynne Sewell LLP, Thompson, Coe, Cousins & Irons, LLP, or Roach & Newton, LLP, or any of their respective clients.

2 TABLE OF CONTENTS Page I. INTRODUCTION...1 II. BACKGROUND...2 A. Facts Crumbling Houses Lennar s Choice...2 B. Procedural Posture Trial Court and First Appeal Second Appeal The Supreme Court of Texas...4 III. THE SUPREME COURT OPINION...4 A. The Requirement of Prejudice...4 B. Amount of Damages...5 C. Property Damage For Loss Within Policy Period...6 D. Legally Liable...7 E. Holding...7 F. Concurring Opinion...7 IV. SUMMARY OF SIGNIFICANT HOLDINGS...8 i

3 I. INTRODUCTION On August 23, 2013, the Supreme Court of Texas decided the twelve-year-long, thriceappealed dispute between Lennar Corporation and Markel American Insurance Company. Lennar Corp. v. Markel American Insurance Co., No , 2013 WL (Tex. Aug. 23, 2013) (attached to this paper), has been publicly described as an important affirmation of critical rules ; 1 a breakthrough on a very difficult issue ; 2 and even one of the most significant insurance decisions in the country in the last decade. 3 This paper will provide an overview of the case, its critical facts and principle issues, and a summary of significant holdings. The Supreme Court of Texas framed the issues presented on appeal as follows: 1) Not having consented to the homebuilder s remediation program, is the insurer nevertheless responsible for the costs if it suffered no prejudice as a result? 2) Is the insurer responsible for (i) costs incurred to determine property damage as well as to repair it, and (ii) costs to remediate damage that began before and continued after the policy period? These questions will provide a point of focus as we turn to the facts of the case. 1 John D. Shugrue, et al., Lennar Corp., et al. v. Markel Am. Ins. Co., No (Tex. Aug. 23, 2013): Texas Supreme Court Affirms 'All Sums' Allocation and Prejudice Requirement for 'Voluntary Payments' Under Texas Law, REED SMITH CLIENT ALERT (August 26, 2013), Am-Ins-Co-No Tex-Aug Texas-Supreme-Court-Affirms-All-Sums-Allocation-and-Prejudice- Requirement-for-Voluntary-Payments-Under-Texas-Law /. 2 Scott Turner, Texas Supreme Court: CGL Insurance Policy Covers Policyholder s Pre-Litigation Costs to Repair Its Defective Construction Work Despite Lack of Insurance Company Consent, INSURANCE COVERAGE LITIGATION FORUM (September 3, 2013). 3 Jamie Cooper, SPECIAL REPORT- Lennar Homes v. Markel, MARTIN, DISIERE, JEFFERSON & WISDOM, LLP (October 2, 2013), 1

4 II. BACKGROUND A. Facts 1. Crumbling Houses During the 1990s, Lennar Corporation acquired a home-building company named Village Builders. Subsequently, Village Builders built approximately 800 homes using a synthetic stucco siding called Exterior Insulation and Finish System ( EIFS ). The EIFS manufacturers advertised EIFS as a lightweight, low-maintenance exterior that also provided an easy insulating system for a home. [NBC Dateline]. Unfortunately, this barrier-type EIFS also suffered from a fatal flaw that prevented it from being the type of wonder material that it was touted to be: seemingly no matter how EIFS was installed, water would seep behind the exterior finish coat, become trapped, and deteriorate and rotting the underlying wood. The undisputed result is that water trapped behind the EIFS threatens the structural integrity of a home. In the spring of 1999, a television special appeared on NBC s Dateline, informing homeowners that EIFS could cause severe property damage. The Dateline report, ominously named Is Your Home Crumbling Around You? caused a stir in Houston-area homeowners, and consequently, Lennar began receiving phone calls from homeowners concerned about the issue. In the face of these phone calls, Lennar began educating employees about the shortcomings of EIFS in hopes of finding a solution. In the end, Lennar decided to inspect each EIFS-clad home that it had built. Lennar then proceeded to inspect each house, issue inspection reports, and recommend repairs. However, the repairs failed water intrusion and more extensive damage continued to threaten the houses. Lennar decided that in order to find all of the damage on EIFS-clad homes, it would have remove all of the EIFS Lennar s Choice Once it determined that it would need to remove all of the EIFS in order to find all of the EIFS-related damages, Lennar was faced with another choice either (1) accept legal responsibility as a homebuilder to repair defective homes that were endangering homeowners; or (2) wait to be sued by a homeowner only after significant damage became apparent, all the while knowing full well that each home was rapidly deteriorating from the inside out. Lennar chose the former. It asked insurers, including Markel, 5 to assist with an EIFS repair program. However, the insurers refused to participate in Lennar s proactive, comprehensive efforts, preferring instead to wait and respond to homeowner claims one by one. 6 Markel took 4 This conclusion was later supported by Lennar s trial expert. 5 Markel American Ins. Co. issued a $25 million commercial umbrella policy to Lennar incepting on June 1, 1999 and ending on October 19, ). 6 Lennar Corp. v. Markel American Insurance Co., No , 2013 WL , at *3 (Tex. Aug. 23, 2

5 the position that because there was not a pending claim or suit, it did not have obligation to defend or indemnify Lennar for its remediation program. After failing to gain the insurers cooperation, Lennar filed suit in February of The trial and appellate proceedings would span for many years to come. B. Procedural Posture 1. Trial Court and First Appeal When Lennar sued Markel for indemnity and breach of the policy, Markel responded with numerous policy defenses and counter-sued for fraud and rescission of the policy. A number of these policy defenses were at issue during the first appeal of the case, but the Fourteenth Court of Appeals largely rejected these defenses and remanded the case for trial. Lennar Corp. v. Great Am. Ins. Co., 200 S.W.2d 651, (Tex. App. Houston [14th Dist] 2006, pet. denied) (Lennar I). Following a three-week trial, the jury was asked to determine, for each of the homes repaired, the total amount that Lennar incurred in payment of property damage. This tracked the policy provision requiring Markel to indemnify Lennar for the total amount of damages for which the insured is legally liable in payment of... property damage.... The jury found that property damage exceeded $5 million dollars. After applying credits and adding attorneys fees, the district court signed a final judgment in excess of $6 million in favor of Lennar. 2. Second Appeal Markel appealed the judgment in the trial court. The court of appeals reversed the trial court and rendered a judgment that Lennar recover nothing. Markel Am. Ins. Co. v. Lennar Corp., 342 S.W.3d 704 (Tex.App. Houston [14th Dist.] 2011), rev d, 2013 WL (Tex. Aug. 23, 2013) (Lennar II). In doing so, the court of appeals addressed four issues that Markel had raised in its brief: 1) The court sustained Markel s argument that Lennar did not apportion between its covered losses and uncovered losses because Lennar did not divide costs between removing defective EIFS and searching for damage and other repair costs. 2) The court sustained Markel s argument that Lennar did not prove it was legally liable for the costs of repairing the property damage on the homes. 3) The court sustained Markel s argument that Lennar settled with a third party without obtaining Markel s consent, thereby failing to comply with the policy. According to the Court, the prejudice test was not applicable. 4) Finally, the court sustained Markel s argument that Lennar could not adjudicate its legal liability in the coverage action because an adjudication 3