Watson v. Allstate Texas Lloyd's ( 2007 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
March 29, 2007
FOR THE FIFTH CIRCUIT
_____________________ Charles R. Fulbruge III
Clerk
No. 05-20592
_____________________
ARCHIE WATSON and
CYNTHIA WATSON
Plaintiffs-Appellants,
versus
ALLSTATE TEXAS LLOYD’S
Defendant-Appellee.
----------------------
Appeal from the United States District Court
for the Southern District of Texas
(4:03-CV-5805)
----------------------
Before GARWOOD, WIENER, and PRADO, Circuit Judges.
PER CURIAM*:
Plaintiffs-Appellants Archie and Cynthia Watson (“the
Watsons”) sued Appellee Allstate Texas Lloyds Insurance Company
(“Allstate”) for breach of contract and other claims arising from
Allstate’s denial of coverage for two claims made by the Watsons
under their property insurance policy (“the Policy”). Both parties
eventually moved for summary judgment. The district court granted
Allstate’s motion and denied the Watsons’, who timely filed their
notice of appeal.
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
I. FACTS & PROCEEDINGS
A house belonging to the Watsons is at the center of this
insurance dispute. They occupied it until July 1999, then used it
as rental property. Their first tenant, Antwanette Weaver,
occupied the house until June 2000. Weaver testified in her
deposition that, during her occupancy, water leaked through the
ceiling tiles during hard rains. She also testified that she
complained about these leaks to Mr. Watson on more than one
occasion. Mr. Watson testified that he investigated Weaver’s
reports but never found a leak or anything to indicate a leaking
roof.
The Watsons did notice roof damage following Tropical Storm
Allison, however, and they filed a claim for that in June 2001.
Allstate investigated the Watsons’ post-hurricane claim and paid
them for (1) water damage to the interior of the house resulting
from the leaking roof and (2) the cost of emergency mitigation
repairs that Watson claimed to have made to the roof. Allstate’s
inspector denied the Watsons’ claim for roof damage, however, after
determining that the damage had been caused by a “non-covered
Peril.” In a letter denying the claim, Allstate referenced two
excluded perils, namely “(1) wear and tear, deterioration or loss
caused by any quality in property that causes it to damage or
destroy itself.” and “(2) rust, rot, mold, or other fungi.”
2
Allstate’s final denial letter was dated October 9, 2001. The
Watsons made no further repairs to the roof.
In August 2002, Mr. Watson discovered a leaking pipe behind a
bathroom wall and reported that damage to Allstate. Allstate sent
an adjuster and eventually paid the Watsons for the damage caused
by that leak. While Allstate’s adjuster was in the house
inspecting that claim, part of a hallway ceiling collapsed. The
adjuster went into the attic and determined that the roof was again
leaking. The roof damage claim was reopened at the Watsons’
request. Allstate again denied the Watsons’ roof damage claim
after determining that any worsening of the roof’s condition was
attributable to the Watsons’ failure to repair the roof following
Allstate’s denial of their 2001 roof damage claim.
In November 2002, Mr. Watson reported various instances of
mold damage in the house. After its adjuster inspected the
property, Allstate retained a mold assessment company, Hometest, to
survey the damage and locate possible moisture sources. Hometest
identified several possible causes for the mold damage in the
house, including (1) an active roof leak, (2) a plumbing leak under
the slab, (3) condensation from voids in the air conditioning
ductwork, (4) an active plumbing leak in a bathroom wall, and (5)
a previously repaired plumbing leak in the kitchen.
Allstate then retained a leak detection and plumbing service
company to identify and assess the extent of any under-slab
plumbing leaks. The company detected four such leaks. Allstate
3
paid the Watsons to repair the leaking pipes under the slab, but
withheld any payment for water and mold damage pending the findings
of an engineering firm retained to determine more definitively the
causes of that damage. The engineering firm determined that all of
the mold and water damage to the house resulted from (1) in-wall
plumbing leaks, (2) roof leaks, or (3) condensation resulting from
the lack of a properly functioning moisture barrier under the slab.
The firm excluded the under-slab plumbing leaks (as distinguished
from condensation) as a cause of the interior damage.
Allstate notified the Watsons that their claim for mold and
water damage purported to result from the under-slab leaks had been
denied, because (1) the engineering report had ruled out the
subsurface leaks as a cause, and (2) none of the other potential
causes was a covered peril under the Policy. Allstate again
referred to the Policy’s exclusion for damages caused by “(1) wear
and tear, deterioration or loss caused by any quality in property,
(2) rust, rot, mold, or other fungi [or] dampness of atmosphere,
extremes of temperature.” The Watsons turned off water service to
the property, but made no repairs.
In October 2003, the Watsons filed suit in state court, and
Allstate removed the case to the district court. Allstate filed a
motion for summary judgment, and the Watsons countered with their
own motion for partial summary judgment in response to which
Allstate filed a cross-motion for summary judgment. In resolving
these motions, the district court decided that summary judgment in
4
favor of Allstate was warranted because (1) the Watsons failed to
provide Allstate the contractually required “prompt notice” of the
roof damage, (2)their action to recover for damage caused by roof
leaks was time-barred, (3) they could not sustain their legal
burden of showing that the Policy covered any of the mold or water
damage that they claimed was caused by the under-slab plumbing
leaks, and (4) dismissal of the Watsons’ breach of contract claim
effectively disposed of their non-contractual claims as well.
II. ANALYSIS
A. Standard of Review
We review the district court's grant of summary judgment de
novo, and will affirm if, viewing the evidence in the light most
favorable to the Watsons, the record reflects that no genuine issue
of material fact exists and Allstate is entitled to judgment as a
matter of law.1 Summary judgment is appropriate if a party who
bears the burden of proof “fails to make a showing sufficient to
establish the existence of an element essential to that party's
case.”2 For a defendant to obtain summary judgment on an
affirmative defense, it must establish each of the defense's
1
Fiess v. State Farm Lloyds, 392 F.3d 802, 807 (5th Cir.
2004).
2
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
5
essential elements beyond genuine dispute.3 Summary judgment
evidence must “rise to a level exceeding mere speculation.”4
B. Discussion
1. Mold Damage vs. Water Damage
Allstate suggests that the Texas Supreme Court’s recent
opinion in Fiess v. State Farm Lloyds5 “is dispositive of the
claims asserted by the Watsons in the [instant] suit.” In Fiess,
the Texas Supreme Court answered the following question certified
to it by this court:
Does the ensuing loss provision contained in Section
I-Exclusions, part 1(f) of the Homeowners Form B (HO-B)
insurance policy as prescribed by the Texas Department of
Insurance effective July 8, 1992 (Revised January 1,
1996), when read in conjunction with the remainder of the
policy, provide coverage for mold contamination caused by
water damage that is otherwise covered under the policy?6
The Texas Supreme Court ruled that the ensuing loss provision of
that form policy does not provide coverage for mold contamination
resulting from water damage otherwise covered under the policy.
In this appeal, the Watsons concede that if we should remand
their case to the district court, they will not be able to recover
the costs of remediating the mold contamination that resulted from
3
Bank of Louisiana v. Aetna U.S. Healthcare Inc., 468 F.3d
237, 241 (5th Cir. 2006).
4
Fiess, 392 F.3d at 808 (citation omitted).
5
202 S.W.3d 744 (Tex. 2006).
6
Fiess, 392 F.3d at 811-12.
6
water damage caused by the roof or plumbing leaks at issue in this
case. They maintain, however, that they would still be entitled to
recover for the water damage itself. To this extent, the Watsons
are correct.
Allstate characterizes all of the physical damage at issue in
this case as “mold damages,” and the record does reflect that mold
remediation comprises a significant, if not the predominant,
portion of the repair costs that the Watsons face. It is beyond
dispute, however, that Allstate denied coverage for both the mold
and the water damage associated with the roof and under-slab leaks.
For this reason, the Texas Supreme Court’s decision in Fiess would
affect only the quantum of the Watsons’ recovery in the district
court if they are successful on appeal, and does not dispose of
their action entirely as Allstate contends.
2. Breach of Contract
a. Generally
In diversity cases such as this one, we apply state law rules
of contractual construction. Therefore, Texas's rules of contract
interpretation control.7 Insurance policies are contracts and, as
such, are controlled by rules that are applicable to contracts
generally.8 In Texas, the elements of a breach of contract claim
7
See Hamilton v. Segue Software Inc., 232 F.3d 473, 477
(5th Cir. 2000); Erie R. Co. v. Tompkins, 304 U.S. 64 (1938).
8
Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex.
1987); Amica Mut. Ins. Co. v. Moak, 55 F.3d 1093, 1095 (5th Cir.
7
are: (1) the existence of a valid contract; (2) performance or
tendered performance by one party; (3) nonperformance of the
contract by the other party; and (4) damages incurred as a result.9
If one party to a contract commits a material breach, the other
party may be discharged or excused from any obligation to perform.10
“In determining the materiality of a breach, courts will consider,
among other things, the extent to which the nonbreaching party will
be deprived of the benefit that it could have reasonably
anticipated from full performance.”11
b. The Roof Damage Claim(s)
The district court determined that the Watsons’ breach of
contract action, as it relates to Allstate’s denial of the Watsons’
June 2001 and August 2002 claims for roof damage, warranted
dismissal on two grounds, viz., the Watsons failure to (1) provide
Allstate “prompt notice” of their roof damage, and (2) file suit
within the contractual limitations period. In granting Allstate’s
cross-motion for summary judgment, the district court devoted most
of its discussion to the question of prompt notice and only briefly
addressed limitations. The parties fully briefed the limitations
1995).
9
Acceptance Ins. Co. v. Lifecare Corp., 89 S.W.3d 773, 782
(Tex. App.—Corpus Christi 2002, no pet.).
10
Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex.
1994).
11
Id. at 693.
8
issue in their summary judgment pleadings, but the district court
only noted conclusionally that “[the Watsons] cannot argue here
that [their roof claim] was wrongfully denied because, pursuant to
[their] policy, any action brought against [Allstate] must be
brought within two years and one day after the action accrues.”
The court then observed in a footnote that “[the Watsons] wind/hail
claim was denied on October 9, 2001 and [they] brought this case on
December 23, 2003.”
We review the district court’s grant of summary judgment de
novo, and may rest our ruling “on any basis raised below and
supported by the record.”12 The record makes clear that the
Watsons’ breach of contract action, as it relates to their roof
damage claim, is time-barred.
The Policy contained the following limitations provision:
No suit or action can be brought unless the policy
provisions have been complied with. Action brought
against us must be started within two years and one day
after the cause of action accrues.13
Texas courts routinely enforce such provisions in insurance
policies.14 It is well-settled that “[l]imitations begin to run on
12
Grenier v. Medical Engineering Corp., 243 F.3d 200, 207
(5th Cir. 2001).
13
Emphasis added.
14
See, e.g, Mangine v. State Farm Lloyds, 73 S.W.3d 467,
470-71 (Tex. App.—Dallas 2002, pet. denied); Kuzniar v. State
Farm Lloyds, 52 S.W.3d 759, 760 (Tex. App.—San Antonio 2001, pet.
denied); Pena v. State Farm Lloyds, 980 S.W.2d 949, 953 (Tex.
App.—Corpus Christi 1998, no pet.).
9
an insurance policy when the loss is denied.”15 In this case,
Allstate sent two denial letters to the Watsons, one on July 12,
2001 and another on October 9, 2001. Thus, the running of the
contractual limitations period was triggered no later than October
9, 2001. As the instant suit was filed in state court on October
29, 2003, the Watsons’ breach of contract claim, based on
Allstate’s denial of their initial roof damage claim, is obviously
time-barred.
In their response to Allstate’s cross-motion for summary
judgment,16 however, the Watsons insisted that their action could
not be time-barred, because it did not accrue until Allstate denied
the Watsons’ second roof claim in February 2003. The Watsons’
contention is founded on their erroneous belief that their second
roof claim was a new claim, and not an attempt to reinstate their
original roof damage claim. That conclusion, in turn, is based on
the fallacious contention that Allstate denied the first roof
damage claim because it found no damage. Not so: The record makes
clear that, in July 2001, Allstate did in fact find roof damage; it
merely denied coverage when it determined that this damage resulted
from other than covered perils. The record also makes clear that
15
Pena, 980 S.W.2d at 953.
16
The Watsons fail to brief the limitations issue on
appeal, but as the district court’s treatment of the issue was so
brief, we will not treat their limitations argument as waived,
but instead address the contentions they made in their summary
judgment pleadings.
10
the Watsons made no repairs to their roof after their first claim
was denied, despite reports from tenants that leaks continued.
Finally, the record makes clear that Allstate denied the Watsons’
2002 roof damage claim because it determined that the damage was
caused by the Watsons’ failure either to (1) repair the roof or (2)
timely notify Allstate of any putative new damage after their first
claim was denied in 2001.
In sum, Allstate determined in 2001 that the Watsons’ roof
damage and its leaks were caused by conditions for which the Policy
provided no coverage. The Watsons’ damaged roof went unrepaired
and continued to worsen until the ceiling partially collapsed in
2002. No other cause intervened that would provide the Watsons’
coverage under the Policy. Consequently, instead of having opened
a “new” claim in August 2002, the Watsons simply reinstated their
previously denied roof damage claim, which Allstate again denied.
Such a reinstatement does not re-start the limitations period for
a breach of contract action.17 As the Watsons’ breach of contract
17
See Pena, 980 S.W.2d 949 (Tex. App. 1998); Pace v.
Travelers Lloyds of Texas Ins. Co., 162 S.W.3d 632 (Tex.
App.—Houston 2005, no pet.). In Pena, the court held that “claims
for additional payments may begin the statute of limitations
running anew.” 980 S.W.2d at 954. The limitations period was only
reset, however, by the insurer’s reconsideration of and partial
payment for the earlier denied claim. Id. Even though Allstate
honored its contractual duty to investigate the Watsons’ second
roof claim, the instant case more closely resembles Pace, in
which the court held that a policy’s limitation period is not
reset when “there is no evidence that [a denial decision] was
ever expressly or impliedly withdrawn or changed, such as by
making payment or otherwise taking action inconsistent with that
decision.”
11
action based on Allstate’s denial of their roof damage claim was
filed after the contractual limitations period had expired, it is
time-barred.
c. Claim for Under-Slab Leaks
The district court also granted Allstate’s motion for summary
judgment on the Watsons’ breach of contract action based on
Allstate’s denial of coverage for damage assertedly caused by
under-slab plumbing leaks. The court concluded that, based on the
pertinent summary judgment evidence, the Watsons could not show
that the damage was of a kind covered by the Policy.
Under Texas law, an insured has the burden of showing that
damage to its property is covered by an insurance policy.18 If the
insured bears his burden, the insurer has the burden of
establishing that the cause of the damage is excluded under the
policy.19 And, if the insurer is successful, the insured again has
the burden of showing that (1) the exclusion was improper or (2) an
exception to the exclusion applies.20
i. Proof of Covered Loss
The Watsons correctly note that, because their property policy
was an “all perils” policy, they met their initial burden in this
18
Fiess v. State Farm Lloyds, 392 F.3d 802, 807 (5th Cir.
2004).
19
Id.
20
Id.
12
case simply by showing that their property suffered physical
damage. The Policy specifies that coverage exists for “all risks
of physical loss to the property . . . unless the loss is excluded
in General Exclusions.”
ii. Proof of Applicable Exclusion
In denying the Watsons’ mold and water damage claim, Allstate
referenced the Policy’s general exclusion for loss caused by:
(1) Wear and tear, deterioration or loss by
any quality in property,
(2) Rust, rot, mold or other fungi, or
(3) Dampness of atmosphere, extremes of
temperature.
Allstate contends that the applicability of this exclusion is
conclusively established by the report of the engineering firm that
it retained to determine the causes of the damage to the Watsons’
property. In that report, the engineers determined that the water
and mold damage were likely “the result of long-term conditions,
such as past roof leaks, lack of a properly functioning moisture
barrier beneath the slab . . . surface water intrusion, and poor
air conditioning operation/maintenance.” Notably, damage from any
of these likely causes is not covered under the Policy. The
engineers also concluded that “current below-slab sanitary leaks
can be excluded as a source of moisture causing damage to the
subject wood floor.”
13
iii. Genuine Fact Issue
The district court determined that, as the Watsons neither
undermined the veracity or the quality of the engineering report
nor produced an expert opinion of their own, there was no genuine
fact issue as to whether Allstate properly denied coverage. The
Watsons contend nonetheless that, in making this determination, the
district court improperly disregarded the conclusions reached by
Hometest, the mold assessment company that initially inspected the
property for Allstate. Hometest had speculated that under-slab
leaks caused some of the damage in the house. The Watsons insist
that Hometest’s report creates a fact issue sufficient to defeat
Allstate’s summary judgment motion.
The district court acknowledged that facially Hometest’s
report appears to state that the under-slab plumbing leaks damaged
particular rooms in the Watsons’ house; but the court ultimately
determined, based on testimony from the report’s author, Ernest
Pankonien, that “the intent of the [Hometest] report was to
recommend to [Allstate] that they hire an expert to determine the
cause of the damage.” Specifically, the district court highlighted
Pankonien’s testimony that,based on the [] limited visual
inspection and the sampling that was conducted [by
Hometest], individuals and/or qualified firms with more
experience and qualifications in structural and leak and
cause origin determination analysis should be retained in
order to more fully delineate what caused the mold and
what needs to be done to correct the sources of moisture
intrusion.
14
The district court concluded that, in light of this testimony, the
Hometest report did not contradict the conclusion reached by the
engineering firm that the under-slab leaks did not cause interior
damage. Consequently, the court found the summary judgment record
devoid of any evidence creating a genuine fact issue as to the
applicability of the Policy’s exclusion of coverage for the damage
allegedly caused by the under-slab leaks.
We recognize that “the grant of a motion for summary judgment
is often inappropriate where the evidence bearing on crucial issues
of fact is in the form of expert opinion testimony.”21
Nevertheless, when a party opposing summary judgment fails to
present evidence sufficient to make an issue of an expert's
conclusions —— such as contrary opinion evidence or evidence
tending to undermine the expert’s credibility or qualifications ——
and when “the trier of fact would not be at liberty to disregard
arbitrarily the unequivocal, uncontradicted, and unimpeached
testimony of an expert witness,” expert testimony may form the
basis of summary judgment.22
We agree with the district court that Pankonien’s testimony
makes clear that the Hometest report did not purport to establish
with any certainty the actual causes of the water and mold damage
21
See Webster v Offshore Food Service, Inc., 434 F.2d 1191,
1193 (5th Cir. 1970).
22
Id. at 1193-94.
15
to the Watsons’ property. Consequently, that report cannot be
viewed as contradicting the conclusions of the engineering firm.
Moreover, the trier of fact in this case would not be “at liberty
to disregard arbitrarily” the report of a licensed structural
engineering firm specializing in detecting the causes of water and
mold damage. Of course, had Pankonien defended his report’s
findings more vigorously, this case could have presented the kind
of “battle of the experts” that typically renders summary judgment
presumptively inappropriate.
In light of Pankonien’s testimony, however, no such “battle”
took place in this case. The district court was presented with
only (1) the Watsons’ speculation —— not implausible but
unsupported —— that the under-slab leaks caused interior mold and
water damage, and (2) a specific expert opinion excluding the
subsurface leaks as a cause of that damage. We are satisfied that
the court did not err in concluding that, under these
circumstances, no genuine issue of material fact existed as to
whether the Watsons’ damage is excluded from coverage.
3. Non-contractual Claims
In addition to breach of contract, the Watsons also sued
Allstate for (1) breach of duty of good faith and fair dealing, (2)
violation of the Texas Insurance Code, and (3) violation of the
16
Texas Deceptive Trade Practices Act. In rejecting all three, the
district court reasoned that, because each of these non-contractual
claims relies on a finding that the insurer has acted in bad faith,
they fail. The Watsons are unable to show bad faith on the part of
Allstate without making the predicate showing that it breached the
insurance contract, and this the Watsons were unable to accomplish.
Not only is the district court’s reasoning on this issue sound,23
but in addition, the Watsons have waived any challenge to this
aspect of the district court’s ruling by their failure to raise the
issue on appeal.24
III. CONCLUSION
For the foregoing reasons, the district court’s grant of
Allstate’s motion and cross-motion for summary judgment on all of
the Watsons’ claims, and the court’s denial of the Watsons’ summary
judgment motion, are, in all respects,
AFFIRMED.
23
See Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341
(Tex. 1995)(“As a general rule there can be no claim for bad
faith when an insurer has promptly denied a claim that is in fact
not covered.”); Liberty Nat. Fire Ins. Co. v. Akin, 927 S.W.2d
627, 629 (Tex. 1996)(“[I]n most circumstances, an insured may not
prevail on a bad faith claim without first showing that the
insurer breached the contract.”).
24
See Fed. R. App. P. 28(a)(9)(A); Robinson v. Guarantee
Trust Life Ins. Co., 389 F.3d 475, 481 n. 3 (5th Cir. 2004)
(“Failure adequately to brief an issue on appeal constitutes
waiver of that argument.”).
17
18