Sczepanik v. State Farm Fire ( 2000 )

Revised May 15, 2000
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 99-50721
GERALD SCZEPANIK and JACQUELINE SCZEPANIK,
Plaintiffs-Appellants,
VERSUS
STATE FARM FIRE AND CASUALTY COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of Texas
April 27, 2000
Before KING, Chief Judge, and GARWOOD, and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:
Plaintiffs Gerald and Jacqueline Sczepanik appeal the district
court’s order granting summary judgment in favor of defendant State
Farm. The district court held that State Farm was entitled to
prevail as a matter of law because the homeowners policy issued by
State Farm to the Sczepaniks unambiguously excludes coverage with
respect to the Sczepaniks’ claim that a plumbing leak caused
foundation damage to their house. Having reviewed this narrow
issue of contract interpretation de novo, we conclude that the
controlling authorities from this Court and the Texas Supreme Court
mandate a result in favor of the Sczepaniks. We therefore vacate
the district court’s grant of summary judgment in favor of State
Farm and remand for further proceedings.
I.
The Sczepaniks filed this suit in state court after State Farm
refused to pay their claim for damage to the foundation of their
house, which the Sczepaniks claim was caused by water leaking from
a broken sewer line under the foundation of the house. The
Sczepaniks’ state court petition alleged breach of contract as well
as breach of the duty to promptly investigate and pay their claim.
State Farm removed the case to federal district court on the basis
of diversity jurisdiction. The disposition of this diversity
action is governed by Texas insurance law.
State Farm defends on the ground that the policy issued to the
Sczepaniks unambiguously excludes coverage for foundation damage,
and the district court granted summary judgment in favor of State
Farm on that ground. The Sczepaniks contend that the policy
exclusion relied upon by State Farm does not apply when the
foundation damage is caused by an accidental discharge of water,
such as the plumbing leak alleged here.
This is not the first time that this Court has been asked to
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consider whether the standard policy language promulgated for
homeowner policies by the Texas Insurance Commission includes or
excludes coverage for foundation damage caused by a plumbing leak.
In Sharp v. State Farm Fire & Cas. Ins. Co., 115 F.3d 1258 (5th
Cir. 1997), this Court held that substantively identical policy
provisions unambiguously exclude such coverage. Shortly there-
after, the Texas Insurance Commissioner (who writes the policies)
issued a bulletin “vigorously disagreeing with the Sharp decision.”
See Balandran v. Safeco Ins. Co., 972 S.W.2d 738, 739 (Tex. 1998)
(citing Tex. Dep’t of Ins. Bulletin B-0032-98 (Aug. 22, 1997)); see
also Douglas v. State Farm Lloyds, 37 F. Supp. 2d 532, 538-40 (S.D.
Tex. 1999) (discussing the Texas Insurance Commissioner’s reaction
to Sharp and quoting at length from Bulletin B-0032-98). The
following year, this Court was presented with the issue again in
Balandran v. Safeco Ins. Co., 129 F.3d 747 (5th Cir. 1997). In
light of the Texas Insurance Commissioner’s Bulletin and other
post-Sharp developments, the panel in that case certified the
recurrent coverage question to the Texas Supreme Court. See id. at
749. Eight months later, the Texas Supreme Court answered the
certified question with a published opinion. See Balandran, 972
S.W.2d 738. The Texas Supreme Court held that the relevant
provisions of the form policy were ambiguous on the coverage
question presented. See id. at 741. Moreover, both the insured’s
argument that the policy covered foundation damage caused by a
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plumbing leak and the insurer’s argument that the policy excluded
such coverage were considered to be reasonable interpretations of
the ambiguous policy language. See id. at 741-43. The Texas
Supreme Court then applied the Texas rule of law that ambiguity
involving an exclusionary provision of an insurance policy must be
resolved in favor of the insured’s construction provided the
construction is reasonable. See id. at 741, 743. Given its
determination that the Balandran’s construction was reasonable, the
Texas Supreme Court held that the form policy provision excluding
coverage for foundation damage does not apply when the loss is
caused by an accidental discharge of water such as a plumbing leak.
See id. at 743. This Court subsequently gave effect to the Texas
Supreme Court’s holding in Balandran v. Safeco Ins. Co., 148 F.3d
487 (5th Cir. 1998).
II.
The parties’ arguments on appeal either rehash the contract
construction issues litigated in the earlier cases for the purpose
of establishing coverage or rely upon immaterial factual
distinctions to argue that Balandran is inapplicable to the instant
dispute. We will begin by examining the structure and relevant
language of the policy issued to the Sczepaniks.
The Sczepaniks were issued Texas Dwelling Policy-Form 3 ("TDP
Form 3"). The first page of the policy includes the heading
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“COVERAGES.” The COVERAGES section sets forth details about the
covered locations or property under subheadings titled “COVERAGE A
(DWELLING),” and “COVERAGE B (PERSONAL PROPERTY).” On the
following page, the policy sets forth the heading “PERILS INSURED
AGAINST.” Under that heading, the policy contains the following
relevant language:
Coverage A (Dwelling). We insure against all risks of
physical loss to the property described in Coverage A
(Dwelling) unless the loss is excluded in General
Exclusions.
Coverage B (Personal Property). We insure for direct
physical loss to the property described in Coverage B
(Personal Property) caused by a peril listed below unless
the loss is excluded in General Exclusions.
Immediately following this language there appears a list of
enumerated perils, which includes the following:
9. Accidental Discharge, Leakage or Overflow of Water
or Steam from within a plumbing, heating or air
conditioning system or household appliance.
A loss resulting from this peril includes the cost
of tearing out and replacing any part of the
building necessary to repair or replace the system
or appliance. But this does not include loss to
the system or appliance from which the water or
steam escaped.
Exclusions 1.a. through 1.i. under General
Exclusions do not apply to loss caused by this
peril.
(emphasis added).
The third page of the policy sets forth a number of exclusions
under the heading “GENERAL EXCLUSIONS.” The general exclusions
provide, in relevant part:
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1. The following exclusions apply to loss to covered
property:
i. We do not cover loss under Coverage A
(Dwelling) caused by settling, cracking,
bulging, shrinkage or expansion of
foundations, walls, floors, ceiling, roof
structures, walks, drives, curbs, fences,
retaining walls or swimming pools.
We do cover ensuing loss caused by collapse of
building or any part of the building, water
damage or breakage of glass which is part of
the building if the loss would otherwise be
covered under this policy.
Piecing these provisions together, it is clear that exclusion
1.i generally excludes coverage for foundation and similar damage
to the dwelling. The final sentence in the definition of peril 9,
which is italicized for emphasis above, repeals or precludes the
application of exclusion 1.i. when the loss is caused by the
accidental discharge of water. For this reason, the italicized
sentence is commonly referred to as the “exclusion repeal
provision.” See, e.g., Balandran, 972 S.W.2d at 740. The basic
contract interpretation question presented in this and similar
cases is whether the underlined exclusion repeal provision, which
follows the definition of peril 9, repeals the application of the
foundation damage exclusion defined in exclusion 1.i with respect
to claims made under both Coverage A (for damage to the dwelling)
and Coverage B (for damage to personal property), or whether the
exclusion repeal provision repeals the application of the
foundation damage exclusion as to claims made under Coverage B
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alone.
III.
State Farm seizes upon the fact that the exclusion repeal
provision is textually located within the list of enumerated perils
that fall under the heading "Coverage B (Personal Property)."
Thus, viewed strictly as a matter of format or structure, the
exclusion repeal provision is placed within and could be construed
to apply only to claims for personal property damage under Coverage
B. If the exclusion repeal provision is presumed not to apply to
Coverage A, then the Sczepaniks’ Coverage A claim for foundation
damage to the dwelling is taken outside the coverage of the policy
by exclusion 1.i.
State Farm’s argument that the exclusion repeal provision
applies exclusively to Coverage B is indistinguishable from the
argument that was embraced in Sharp and then subsequently rejected
by the Texas Supreme Court in Balandran. In Sharp, we interpreted
identical policy language, and observed:
the Sharps’ policy clearly and unambiguously
divides dwelling losses and personal property
losses into two separate ‘coverages.’ It therefore
would appear to be nonsensical and a rejection of
the obvious structure of the policy, to reach into
text that applies solely to Coverage B (Personal
Property) to determine the extent of coverage
provided under Coverage A (Dwelling).
Sharp, 115 F.3d at 1262.
Less than one month after Sharp, the Texas Supreme Court
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issued a decision affirming a homeowner’s recovery for damages to
the foundation of the insured dwelling that were caused by a
plumbing leak without discussing this Court’s decision in Sharp.
See State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 446 (Tex. 1997)
(“The Nicolaus' homeowners policy, issued by State Farm Lloyds,
generally excludes losses caused by ‘inherent vice,’ or by
‘settling, cracking, bulging, shrinkage, or expansion of
foundations.’ Under an express exception, however, these
exclusions do not apply to losses caused by an ‘[a]ccidental
discharge, leakage or overflow of water’ from within a plumbing
system.”). One month later, the Texas Insurance Commissioner
issued Bulletin B-0032-98. The Commissioner’s bulletin denounced
Sharp as an incorrect interpretation of Texas law, advised insurers
that the decision was not binding on Texas courts, and warned
insurers that failure to pay claims for foundation damage to the
dwelling caused by an accidental discharge of water could subject
the insurer to liability or disciplinary proceedings under the
Texas Insurance Code. See Douglas, 37 F. Supp. 2d at 538-39 (citing
bulletin). When presented with the issue again, this Court
certified the coverage question, asking whether the standard policy
covered “damage to a dwelling caused by movement of its foundation
that was caused by an underground plumbing leak.” Balandran, 129
F.3d at 749. The Texas Supreme Court answered that the policy
should be construed to provide such coverage. Balandran, 972
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S.W.2d at 743.
The Sczepaniks’ arguments on appeal are either drawn from or
elaborate upon the reasoning used by the Texas Supreme Court in
Balandran to reject the interpretation given identical provisions
in this Court’s opinion in Sharp. In Balandran, the Texas Supreme
Court compared the comprehensive coverage for “all risks” or perils
in Coverage A with the limited coverage for enumerated perils in
Coverage B, implying that the broader coverage specified in
Coverage A necessarily included coverage for the subset of
enumerated perils specified in Coverage B. See Balandran, 972
S.W.2d at 740. The Texas Supreme Court further noted that the
exclusion repeal provision is not, by its plain terms, limited to
claims for personal property damage. Indeed, the provision states
merely that the foundation damage exclusion does “not apply to
loss” caused by a plumbing leak. See id. at 741. Finally, the
Texas Supreme Court set forth historical and logical reasons
explaining and justifying the placement of the exclusion repeal
provision adjacent to the specific peril to which it pertained.
See Balandran, 972 S.W.2d 741.
The Texas Supreme Court also relied heavily upon the rule of
contract construction that disfavors an interpretation that renders
part of the contract meaningless or inoperative. See id. at 741.
The Texas Supreme Court recognized that the insurer’s
interpretation -- that the exclusion repeal provision repeals the
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foundation damage exclusion as to personal property claims only --
would render that part of the exclusion repeal provision
meaningless. See id. This is so because the foundation damage
exclusion is textually limited to “loss under Coverage A
(Dwelling).” Moreover, the foundation damage exclusion does not
even potentially have any application to personal property
coverage. See id. at 741 (the foundation damage exclusion “can
never affect personal property losses”). As the Texas Supreme
Court pointed out in Balandran, the exclusion repeal provision
would be both meaningless and of no effect if it merely repealed
the application of an exclusion that was inapplicable in the first
place. See id. at 741. We are not at liberty to assess the
relative strength of the reasoning used in Sharp as compared to the
reasoning used in the Texas Supreme Court’s disposition in
Balandran. To the contrary, the Texas Supreme Court has construed
identical policy provisions to provide coverage for foundation
damage to the dwelling when caused by an accidental discharge of
water such as a plumbing leak. Our task when sitting in diversity
is simply to apply that law. See, e.g., Shanks v. Allied Signal,
Inc., 169 F.3d 988, 993 (5th Cir. 1999).
State Farm attempts to avoid Balandran and breathe new life
into the argument rejected in Sharp with a single factual
distinction. State Farm argues that we are not bound by the Texas
Supreme Court’s decision in Balandran because the policy at issue
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in both Sharp and Balandran was Texas Homeowners Policy-Form B, or
HO-B, while the Sczepaniks were issued Texas’ Dwelling Policy-Form
3, or TDP Form 3. According to State Farm, HO-B is intended for
use when the homeowner desires full coverage for both the dwelling
and personal property, while TDP Form 3 is intended for use when
the insured may want to select only certain types of coverage from
a policy which contains a description of all possible coverages.
State Farm argues that TDP Form 3 is in this respect rather like
the Texas Personal Auto Policy, which permits an insured to select
comprehensive protection, liability protection, or a combination of
both. State Farm concedes that the relevant policy provisions in
the two policies are substantively identical, but maintains that
the difference permitting an election is significant because the
Sczepaniks, who owned but did not reside at the insured property,
purchased only Coverage A. State Farm then makes the further
argument that, because the Sczepaniks did not purchase Coverage B,
the exclusion repeal provision “is not part of the Sczepaniks’
contract.” Stated differently, State Farm wants the Court to
judicially excise from the insurance agreement any portions that,
in State Farm’s judgment, apply strictly to Coverage B, which was
not purchased. The district court essentially adopted this
argument when granting summary judgment.
The problem with State Farm’s argument attempting to
distinguish Balandran is that it once again depends entirely upon
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the premise that the exclusion repeal provision is unambiguously
and exclusively part of Coverage B, and does not form any part of
the coverage extended under Coverage A for damage to the dwelling.
That exact proposition was rejected by the Texas Supreme Court in
Balandran. Moreover, we have not found any authority that would
permit this Court, sitting in diversity, to create a new contract
for the parties by simply deciding which textual provisions the
parties intended to apply to what coverages and then judicially
excising the remaining portions. That premise holds particularly
true when, as here, to do so would require that this Court reach a
decision about which provisions form part of which coverages that
is directly contrary to a recent decision interpreting identical
provisions from the state’s highest court. To conclude, State Farm
relies upon the Sczepaniks’ failure to purchase personal property
coverage as a basis for distinguishing the case from Balandran. We
conclude that that factual distinction is immaterial because the
Texas Supreme Court has already held that identical policy language
does not unambiguously limit the application of the exclusion
repeal provision to personal property coverage.
For the foregoing reasons, we vacate the district court’s
summary judgment in favor of State Farm and remand for further
proceedings consistent with this opinion. The parties’ briefing
suggests that there may be unresolved factual disputes concerning
the actual cause of the damage to the Sczepaniks’ house. We do
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not, in this appeal from summary judgment on the contract
interpretation issue, resolve whatever factual disputes may exist
between the parties on that issue. Rather, we limit our holding to
the issue presented, which is whether, assuming that the foundation
damage was caused by an accidental discharge of water such as a
plumbing leak, State Farm’s policy excludes coverage as a matter of
law. As set forth above, the decisions of the Texas Supreme Court
and this Court in Balandran require that we answer that question in
the negative.
CONCLUSION
The summary judgment in favor of State Farm is VACATED and the
cause REMANDED for further proceedings consistent with this
opinion.
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