Lexington Insurance Company v. Jaw the Pointe, Inc. ( 2013 )

Reversed and Rendered and Memorandum Opinion filed August 1, 2013.
In The
Fourteenth Court of Appeals
NO. 14-11-00881-CV
LEXINGTON INSURANCE COMPANY, Appellant
V.
JAW THE POINTE, LLC, Appellee
On Appeal from the 56th District Court
Galveston County, Texas
Trial Court Cause No. 09-CV-1238
MEMORANDUM OPINION
In this insurance dispute, Lexington Insurance Company (“Lexington”)
challenges a judgment in favor of JAW The Pointe, LLC (“The Pointe”).
Lexington asks this court to reverse the trial court’s judgment on grounds that (1)
Lexington cannot be liable for statutory bad faith because it did not breach the
insurance policy; (2) the evidence is legally and factually insufficient to support
the jury’s liability findings; (3) Lexington is entitled to a settlement credit that
exceeds the amount of the judgment; (4) there is legally and factually insufficient
evidence to support the actual damages awarded to The Pointe; (5) the trial court
erred by awarding The Pointe additional damages based on a jury finding of
knowing conduct; and (6) The Pointe is not entitled to attorney’s fees because
Lexington is not liable for statutory bad faith. Because we conclude there is no
coverage under the policy at issue, we reverse the trial court’s judgment and render
judgment in favor of Lexington.
Factual Background
Emery Jakab and several partners formed JAW The Pointe, LLC and then
purchased an apartment complex in July 2007 for approximately $5.7 million. The
apartment complex consisted of 13 two-story buildings and was located next to the
seawall in Galveston.
The Pointe purchased insurance from Lexington and other insurance
companies under a group program that provided coverage to hundreds of unrelated
apartment complexes in multiple states. The named insured under the Lexington
policy is Nations Asset Management LP (CAT), an entity comprising
approximately 300 apartment complexes including The Pointe’s Galveston
property. The apartment complexes constituting Nations Asset Management were
brought together by an insurance broker, Southwest Risk, and a retail agent,
Commercial Insurance Solutions, which acted on behalf of The Pointe and the
other apartment complexes.
The Lexington policy was one of several layers that collectively provided
insurance coverage up to $100 million for the Nations Asset Management
properties. Lexington’s was the primary policy and provided $25 million in
coverage per occurrence under the group program. Max Specialty Insurance
Company was the first excess layer, providing $15 million in coverage above
Lexington’s $25 million. The next layer was Essex Insurance Company, which
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provided $10 million in coverage above the $40 million provided by Lexington
and Max Specialty. Several additional layers of insurance also were in place up to
$100 million in coverage. According to trial testimony, The Pointe’s ownership
recognized that there might not be sufficient coverage under the group program if a
hurricane or some other catastrophic event occurred.
Hurricane Ike hit Galveston on September 13, 2008, causing damage to The
Pointe’s apartment complex and about 135 other apartment complexes
encompassed by the Nations Asset Management insurance program. The Pointe
hired a public insurance adjusting firm, Adjusters International, to assist The
Pointe during the insurance claims settlement process. Adjusters International
assigned Hal Arnold to be The Pointe’s public adjuster.
Insurance broker Southwest Risk, on behalf of the insured Nations Asset
Management, chose Cunningham Lindsey to serve as Lexington’s adjuster;
Lexington approved this choice. Cunningham Lindsey was paid by Lexington and
reported to Iolanda Mestre-Gonzalez, whom Lexington had assigned to be the
claims examiner for claims made by The Pointe and other apartment complexes
constituting Nations Asset Management. Cunningham Lindsey was not authorized
to make coverage decisions or make payments; this authority was reserved to
Lexington. Cunningham Lindsey appointed Paul Odom and John Jay as adjusters
to work on The Pointe’s claim. Lexington also hired a building consultant, Unified
Buildings Services, to prepare damages estimates.
The Pointe initially intended to repair the apartment complex; its plans
changed when Jakab attended a meeting with planning officials from the City of
Galveston and members of the Galveston County Apartment Association on
October 13, 2008. City officials explained that apartment owners would be
required to demolish and rebuild to comply with current code requirements if the
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City determined that an apartment complex’s damages exceeded 50 percent of the
complex’s market value.
The Pointe contacted the City’s Planning Office by e-mail on October 28,
2008, advising the City that (1) it would submit a building permit application to
repair its apartment complex; and (2) the damage estimates were “far in excess of
the 50% of the appraisal district’s valuation of improvements plus 5%.” The
Pointe asked the City to confirm that it would deny The Pointe’s permit application
to repair and require that the apartment complex be rebuilt to current code
requirements, which included raising the buildings to 11 feet. Emery Jakab, who
testified at trial on behalf of The Pointe, could not recall receiving a response to
this request from the City.
The Pointe submitted a building permit application on November 12, 2008,
to repair the apartment complex. The permit application stated that the repair
would cost $6,256,887. The Pointe supported this figure with an estimate it
obtained from Camp Construction Services.
Mestre-Gonzalez reviewed The Pointe’s claim file and made her first entry
on November 13, 2008. She noted that The Pointe’s loss could reach $8 million
based on The Pointe’s total insured value if the City required The Pointe to
demolish and rebuild the apartment complex in compliance with code
requirements. Mestre-Gonzalez believed at the time that $8 million would be the
maximum The Pointe could recover because she erroneously assumed that loss
from flood was covered under the Lexington policy. The Pointe submitted a sworn
proof of loss to Lexington on November 14, 2008, requesting a $300,000 advance
or partial payment toward business income loss, and Lexington paid the amount
requested.
The City sent The Pointe a letter on December 19, 2008, informing The
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Pointe that it had inspected the apartment complex and determined that the
complex was “substantially damaged” by Hurricane Ike. The City further stated
that “[a] substantially damaged structure is one that has damage that equals or
exceeds 50 percent of the market value of the structure. According to the City
approved property value formula, the market value of [The Pointe’s apartment
complex is] $2,247,924.00 (current appraised value plus 5%).” The City informed
The Pointe that to “ensure that your future flood risk is reduced, your structure
must be brought into compliance with local flood damage reduction regulations.
Please contact the City of Galveston Building Division to discuss options for
bringing the structure into compliance and to obtain applicable permits to begin
work.” The Pointe informed Cunningham Lindsey of the City’s letter through Hal
Arnold on December 22, 2008. Mestre-Gonzalez received the City’s letter in
January 2009.
The Pointe concluded it had to demolish and rebuild the apartment complex
because it could not elevate the existing buildings to 11 feet as required by City
building regulations; it hired architect Michael Gaertner and general contractor
Davis Brothers Construction to start the rebuilding process. The Pointe’s public
adjuster, Arnold, informed Cunningham Lindsey by letter on February 27, 2009,
that The Pointe incurred $600,000 in demolition and other costs and “is making a
formal claim for the ordinance or law coverage afforded under the policy.” The
Pointe also incurred expenses toward the rebuilding of the apartment complex,
including expenses for architectural and permitting fees.
The Lexington policy contains two endorsements under which an insured
can recover in certain circumstances for demolition and rebuilding costs resulting
from an insured’s obligation to comply with ordinances. The first endorsement is
titled “Ordinance or Law Coverage,” and the second is titled “Demolition and
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Increased Cost of Construction.” The parties refer to the former as the
“Ordinance” endorsement and the latter as the “DICC” endorsement.
Lexington received an estimate in April 2009 from its building consultant,
Unified Buildings Services, regarding damages to The Pointe’s apartment
complex. The estimate for damage from wind was $1,278,000; the estimate for
damage from flood was $3.5 million. Arnold and Unified Buildings Services
agreed that the damage from wind amounted to $1,278,000. The Pointe signed and
submitted to Lexington a sworn statement of proof of loss on May 5, 2009,
requesting payment for the “whole loss and damage” of $1,278,001.33 minus the
applicable deductible of $460,060.39 for a total of $817,940.94. The Pointe
received a check from Lexington for the requested amount shortly after submitting
the proof of loss.
The Pointe claimed that it did not receive a formal letter from Lexington
denying the remainder of its insurance claim or providing an explanation of
Lexington’s coverage determinations regarding the two policy endorsements.
Instead, The Pointe claimed that Cunningham Lindsey adjuster Odom informed
Arnold during a telephone conversation on July 15, 2009, that Lexington had
determined that The Pointe’s claim was not covered under the Ordinance
endorsement because Lexington believed “all the damages were caused by flood.”
Procedural Background
The Pointe sued Lexington, Cunningham Lindsey, Odom, and Jay on July
19, 2009, alleging claims for (1) breach of contract, violations of the Texas
Insurance Code, violations of the Texas Deceptive Trade Practices Act, and bad
faith against Lexington; and (2) violations of the Texas Insurance Code and
violations of the Texas Deceptive Trade Practices Act against Cunningham
Lindsey, Odom, and Jay.
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Cunningham Lindsey and Lexington continued to work on The Pointe’s
claim after The Pointe filed suit. Lexington sent a letter to The Pointe in
September 2009; according to Mestre-Gonzalez, “[t]he letter said flood wasn’t
covered. It explained why law and ordinance wasn’t covered. And it gave a brief
synopsis of what had happened to that point.” Lexington also continued paying
claims that other property owners of the Nations Asset Management group had
submitted to Lexington. Lexington informed The Pointe by letter that the $25
million primary policy had been exhausted in January 2010. Lexington also
informed The Pointe that Max Specialty Insurance Company was the next layer of
insurance and provided The Pointe with Max Specialty’s contact information.
The Pointe filed its second amended petition on March 19, 2010, alleging
that its apartment complex sustained extensive damage caused by wind and water
and seeking damages for (1) breach of contract, violations of the Texas Insurance
Code, violations of the Texas Deceptive Trade Practices Act, and bad faith from
Lexington, Max Specialty Insurance Company, and Essex Insurance Company;
and (2) violations of the Texas Insurance Code and violations of the Texas
Deceptive Trade Practices Act from Cunningham Lindsey, Odom, and Jay.
The Pointe filed a motion to dismiss its claims against Max Specialty
Insurance Company with prejudice on February 18, 2011, alleging that the parties
had resolved their dispute; the trial court granted the motion on February 28, 2011.
On March 9, 2011, The Pointe filed a motion for partial nonsuit with prejudice,
asking the trial court to dismiss its claims against Cunningham Lindsey, Jay, and
Odom; the trial court granted the motion on March 14, 2011. The Pointe also filed
a motion to dismiss its claims against Essex Insurance Company with prejudice on
March 11, 2011, alleging that the parties had resolved their dispute; the trial court
granted the motion on March 15, 2011.
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Lexington filed a motion for partial summary judgment on March 14, 2011,
arguing that The Pointe’s breach of contract claim must fail because Lexington
discharged its obligations to The Pointe when it paid out the full policy limit. On
the same day, Lexington filed a separate motion for partial summary judgment
arguing that The Pointe’s claim for flood coverage should be dismissed because
flood coverage is unambiguously excluded under the insurance policy. The trial
court granted both summary judgment motions on April 5, 2011.
A jury trial was held from April 18, 2011 to April 28, 2011. The case was
submitted to the jury to determine various Insurance Code violations asserted by
The Pointe. The jury returned a verdict in The Pointe’s favor and made several
factual findings. In Question No. 1, the jury found that Lexington had engaged in
“unfair or deceptive acts or practices in the business of insurance that w[ere] a
producing cause of damages to” The Pointe by: failing to “attempt in good faith to
effectuate a prompt, fair, and equitable settlement of a claim when the insurer’s
liability had become reasonably clear;” failing to promptly provide a reasonable
explanation for the denial of a claim; and failing to affirm or deny coverage within
a reasonable time. The jury answered “No” when asked whether Lexington
refused to pay claims without conducting a reasonable investigation of the claim,
or whether it compelled The Pointe to file a lawsuit to recover “amounts due under
their policy by offering substantially less than the amounts” received.
Based on Lexington’s conduct found in Question No. 1, the jury awarded
The Pointe damages in Question No. 2 for repair or replacement of The Pointe’s
property covered under the Ordinance and DICC endorsements in the amount of
$1,200,000, and for reasonable and necessary expenses, other than attorneys’ fees,
in the amount of $30,000. In Question No. 3, the jury determined that Lexington
knowingly engaged in the actionable conduct and awarded The Pointe $2,500,000
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in additional damages in Question No. 4. In response to Question No. 5, asking
whether Lexington received all items, statements, and forms reasonably requested
and required by Lexington to secure final payment of loss, the jury answered “No.”
Finally, the jury awarded The Pointe $170,000 in attorney’s fees in Question No. 7.
The Pointe did not challenge the jury’s findings post-verdict and filed a
motion to enter judgment on May 25, 2011. Lexington filed a motion to disregard
certain jury findings and requested a take nothing judgment on June 1, 2011. The
trial court signed a judgment based on the jury verdict on July 7, 2011. Lexington
filed its motion for new trial on August 5, 2011, asking the trial court to set aside
the jury’s answers, vacate its judgment, and order a new trial. On the same day,
Lexington also filed a motion for judgment notwithstanding the verdict or,
alternatively, a motion to modify the judgment. The motion for new trial was
overruled by operation of law, and the motion to disregard was denied by
implication. See Chilkewitz v. Hyson, 22 S.W.3d 825, 828 (Tex. 1999); Tex. R.
App. P. 33.1(a)(2)(A). Lexington filed a timely appeal on October 4, 2011.
Analysis
I. Insurance Code Violations
In its first issue, Lexington argues that the evidence is legally insufficient to
support the jury’s findings of liability for Insurance Code violations. Lexington
contends that: (1) it paid out the full limits of its policy; (2) The Pointe failed to
submit a sworn proof of loss to support its claim under the policy’s endorsements;
(3) The Pointe’s alleged loss was not a covered loss under the policy’s
endorsements; and (4) The Pointe did not demolish or rebuild its property before
the policy limits were exhausted, which was a requirement to trigger coverage
under the policy endorsements.
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As a general rule, Texas does not recognize a claim for bad faith when an
insurer denies a claim that is not covered under the insurance policy. Republic Ins.
Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995). And, generally speaking, extra-
contractual claims do not survive when the issue of coverage is resolved in the
insurer’s favor. State Farm Lloyds v. Page, 315 S.W.3d 525, 532 (Tex. 2010); see
Stoker, 903 S.W.2d at 341. The Texas Supreme Court has not excluded “the
possibility that an insurer’s denial of a claim it was not obliged to pay might
nevertheless be in bad faith if its conduct was extreme and produced damages
unrelated to and independent of the policy claim.” Progressive Cnty. Mut. Ins. Co.
v. Boyd, 177 S.W.3d 919, 922 (Tex. 2005); Am. Motorists Ins. Co. v. Fodge, 63
S.W.3d 801, 804 (Tex. 2002).
In light of this precept, we begin our analysis by addressing whether The
Pointe’s unpaid loss was covered under the insurance policy because this
determination is dispositive of Lexington’s first issue and impacts the remaining
issues in this case.
A. Coverage Overview
In determining whether Hurricane Ike-related damage to The Pointe’s
apartment complex is a covered loss under the policy’s Ordinance or DICC
endorsements, it is helpful to begin with a review of the general policy language
and its interplay with the specific policy endorsements at issue.
Insurance policies are contracts, and we construe them using ordinary rules
of contract interpretation. Tanner v. Nationwide Mut. Fire Ins. Co., 289 S.W.3d
828, 831 (Tex. 2009). We give policy language its plain, ordinary meaning unless
something else in the policy shows the parties intended a different, technical
meaning. Id. When construing the policy’s language, we must give effect to all
contractual provisions so that none will be rendered meaningless. Kelley–
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Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex. 1998); see
Chrysler Ins. Co. v. Greenspoint Dodge of Houston, Inc., 297 S.W.3d 248, 253
(Tex. 2009).
The Lexington policy contains several declarations on its first page. These
include the named insured; the policy period; insurance limits; a “Description of
Property Covered” that includes “real and personal property, business interruption,
extra expense, debris removal,” and DICC; and a reference to “Forms Attached”
that affect coverage.
The policy’s “Building and Personal Property Coverage Form” provides
under section “A. Coverage” that Lexington “will pay for direct physical loss of or
damage to Covered Property at the premises described in the Declarations caused
by or resulting from any Covered Cause of Loss.” Section A.3 titled “Covered
Causes of Loss” and section B. titled “Exclusions” instruct the reader to “See
applicable Causes of Loss Form as shown in the Declarations.”
In turn, the attached “Causes of Loss – Special Form”1 provides as follows:
CAUSES OF LOSS – SPECIAL FORM
A. COVERED CAUSES OF LOSS
When Special is shown in the Declarations, Covered Causes of Loss
means RISKS OF DIRECT PHYSICAL LOSS unless the loss is:
1. Excluded under Section B., Exclusions; or
2. Limited in Section C., Limitations;
that follow.
B. EXCLUSIONS
1
We reject The Pointe’s contention that the Causes of Loss-Special Form is not part of
the Lexington policy because the “Declarations for this policy does not list ‘Special.’” The
Declarations page states “Forms Attached: See attached forms schedule.” The forms in turn
include the “Causes of Loss-Special Form;” therefore, the Declarations page captures the Causes
of Loss-Special Forms.
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1. We will not pay for loss or damage caused directly or indirectly by
any of the following. Such loss or damage is excluded regardless
of any other causes or event that contributes concurrently or in
any sequences to the loss.
a. Ordinance or Law
The enforcement of any ordinance or law:
1) Regulating the construction, use or repair of any property; or
2) Requiring the tearing down of any property, including the
cost of removing debris.
* * *
g. Water
1) Flood . . . .
(emphasis added). The highlighted concurrent causation language means that a
loss is excluded from coverage when it results from a combination of covered and
uncovered causes of loss. See ARM Props. Mgmt. Group v. RSUI Indem. Co., 400
Fed. App’x 938, 941 (5th Cir. 2010); see also Am. Mfrs. Mut. Ins. Co. v. Schaefer,
124 S.W.3d 154, 160 (Tex. 2003) (“[A]n exclusion’s purpose is to remove from
coverage an item that would otherwise have been included. . . . Absence of an
exclusion cannot confer coverage.”) (citation omitted).
The policy also contains separate endorsements for “Ordinance or Law
Coverage” and “Demolition and Increased Cost of Construction.” The “Ordinance
or Law Coverage” endorsement effectively removes the Ordinance exclusion under
Section B. of the Causes of Loss Form. The Ordinance endorsement specifically
states that it “modifies insurance provided under the . . . Building and Personal
Property Coverage Form.” As discussed more fully below, the Ordinance
endorsement removes the exclusion for “loss or damage caused by enforcement of
any ordinance of law” under certain circumstances. There is no such endorsement
for flood; therefore, loss from flood still is excluded from coverage under Section
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B. of the Causes of Loss Form. Unsegregated loss from a combination of wind and
flood also is excluded.
B. Coverage Under the Ordinance and DICC Endorsements
With this overview in mind, we next apply the policy language in light of the
jury charge as submitted to determine whether The Pointe’s loss is covered under
the Lexington policy.
The jury found in response to Question No. 1 that Lexington engaged in
“deceptive acts or practices in the business of insurance that was a producing cause
of damages” to The Pointe. In response to Question No. 2, the jury awarded
“Policy benefits for repair or replacement of [The Pointe]’s property due to
damage to the property covered under the Demolition and Increased Cost of
Construction endorsement or Law and Ordinance endorsement to [Lexington]’s
policy.”
An insured is not entitled to recover under an insurance policy unless it
proves its damages are covered by the policy. Emp’rs Cas. Co. v. Block, 744
S.W.2d 940, 944 (Tex. 1988), overruled in part on other grounds by State Farm
Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). When covered and
uncovered causes of loss combine to create a loss, the insured is entitled to recover
only that portion of the damage caused solely by the covered cause of loss.
Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 198
(Tex. App.—Houston [14th Dist.] 2003, pet. denied). The insured bears the
burden to establish coverage. All Saints Catholic Church v. United Nat’l Ins. Co.,
257 S.W.3d 800, 803 (Tex. App.—Dallas 2008, no pet.). The insured must present
some evidence from which the jury can allocate the damage attributable to the
covered cause of loss. Comsys Info. Tech. Servs., 130 S.W.3d at 198. The insured
13
must segregate the loss caused by the covered cause of loss from the loss caused by
the uncovered cause of loss; the failure to segregate covered and uncovered causes
of loss is fatal to recovery. See Travelers Indem. Co. v. McKillip, 469 S.W.2d 160,
163 (Tex. 1971); Comsys Info. Tech. Servs., 130 S.W.3d at 198; Wallis v. United
Servs. Auto. Ass’n, 2 S.W.3d 300, 303 (Tex. App.—San Antonio 1999, pet.
denied).
Lexington argues that The Pointe’s loss is not covered under the policy’s
Ordinance or DICC endorsements because (1) the policy provides coverage for
loss caused by wind; and (2) damage to The Pointe’s apartment complex was
caused in whole or in part by flood, which is not a covered loss under the policy.
According to Lexington, the City’s December 2008 determination that The
Pointe’s apartment complex was “substantially damaged” – and had to be
demolished and rebuilt according to City ordinance requirements – does not
establish coverage because the City did not segregate between covered wind
damage and excluded flood damage in making this determination. The Pointe’s
November 2008 permit application to the City, which preceded the City’s
December determination, also did not segregate between covered wind damage and
excluded flood damage. Lexington contends that the policy’s concurrent cause of
loss clause contained in the Causes of Loss-Special Form provides that Lexington
“will not pay for loss or damage caused directly or indirectly” by flood. Lexington
further argues: “[I]t is undisputed that the City’s damages estimate included
damages caused by a combination of wind and flood” so that “any loss resulting
from the City’s requirement that The Pointe be rebuilt in compliance with city
codes is not covered” under the policy.
The Pointe responds that the “parties agree that the City determined the
ordinance had been triggered and rebuilding was the only way to comply with the
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code.” The Pointe argues that the “simple question is whether there is some
evidence supporting the conclusion that the covered cause of loss – i.e. the
hurricane wind and rain damage – was sufficient by itself to cause the losses
covered under the DICC and [Ordinance] endorsements.” According to The
Pointe, evidence in this case “shows that the wind damage from the hurricane was,
by itself, sufficient to trigger the ordinances that ultimately created coverage for
DICC and [Ordinance]” so that this case does not present a concurrent causation
problem.
In that regard, The Pointe argues that the wind damage alone exceeded 50%
of the City’s market value assessment for the apartments, which was sufficient to
trigger the City’s December 2008 substantial damage determination and in turn
trigger the enforcement of the ordinance. The Pointe emphasizes that (1)
Lexington’s building consultant, Unified Buildings Services, submitted a damage
estimate that calculated damage to The Pointe apartments from wind alone at
$1,278,000; and (2) the City’s market value assessment for the apartments was
$2,400,000.
We disagree with The Pointe’s arguments. As explained below, when the
Ordinance and DICC endorsements are read together with the Building and
Personal Property Coverage Form, demolition and rebuilding costs are covered
only if the enforcement is caused by or results from a Covered Cause of Loss.
Here, the record does not contain legally sufficient evidence of this causal link.
We first address the Ordinance endorsement, which provides as follows:
A. If a Covered Cause of Loss occurs to covered Building property,
we will pay:
1. For loss or damage caused by enforcement of any ordinance
or law that:
a. Requires the demolition of parts of the same Property
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not damaged by a Covered Cause of Loss;
b. Regulates the construction or repair of buildings, or
establishes zoning or land use requirements at the
described premises; and
c. is in force at the time of loss.
2. The increased cost to repair, rebuild or construct the property
caused by enforcement of building, zoning or land use
ordinance or law. If the property is repaired or rebuilt, it must
be intended for similar occupancy as the current property,
unless otherwise required by zoning or land use ordinance law.
3. The cost to demolish and clear the site of undamaged parts of
the property caused by enforcement of the building, zoning or
land use ordinance or law.
This endorsement must be read in conjunction with the “Building and Personal
Property Coverage Form,” which states: “We will pay for direct physical loss of or
damage to Covered Property . . . caused by or resulting from any Covered Cause of
Loss.” The endorsement must also be read in conjunction with the concurrent
causation clause, which states that “loss or damage caused directly or indirectly”
by flood “is excluded regardless of any other cause or event that contributes
concurrently or in any sequence to the loss.”
When read together, these terms provide that Lexington will pay for
demolition and increased rebuilding costs that were caused by ordinance
enforcement resulting from any “Covered Cause of Loss.” Given the concurrent
causation clause, demolition and increased rebuilding costs caused by ordinance
enforcement resulting from an unsegregated combination of wind and flood
damage are not covered. When ordinance enforcement results from a “Covered
Cause of Loss,” the policy also covers the costs of demolishing and rebuilding
portions of the property not damaged by that cause.
Contrary to The Pointe’s contention, there must first be some evidence that
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(1) a “Covered Cause of Loss” occurred, and (2) the cost to demolish and rebuild
The Pointe’s apartment complex was caused by ordinance enforcement that
resulted from this “Covered Cause of Loss.” Here, the record does not contain
such evidence.
The Pointe submitted a building permit application to the City on November
12, 2008, for the repair of the damage to the apartment complex. The permit
application stated that the repair would cost $6,256,887; it did not contain any
allocation for damages caused by wind, flood, or a combination of wind and flood.
The City sent The Pointe a letter on December 19, 2008, in which it stated
that it determined The Pointe’s apartment complex had been “substantially
damaged,” meaning that the apartment complex’s damage equaled or exceeded 50
percent of the complex’s $2,247,924.00 market value. The City informed The
Pointe that the complex “must be brought into compliance with local flood damage
reduction regulations.”
The City did not state whether its December 2008 substantial damage
conclusion and resulting ordinance enforcement was based on a determination that
the apartment damage was caused by wind alone, which is a “Covered Cause of
Loss;” by an unsegregated combination of wind and flood, which is excluded; or
by flood alone, which is excluded. The Pointe’s November 2008 permit
application, which preceded the City’s December 2008 letter, was based on an
unsegregated combination of wind and flood damage. Nothing in the City’s
December 2008 letter establishes that the City’s enforcement of its ordinance
requiring demolition and rebuilding of The Pointe’s apartment complex was
caused by or the result of a “Covered Cause of Loss.”
As evidence of segregation of damage caused by wind versus damage
caused by flood, The Pointe relies on the April 2009 estimate of Lexington’s
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building consultant, Unified Buildings Services. But there is no evidence that the
City based its December 2008 substantial damage determination on that estimate.
The key issue is the actual basis for the City’s December 2008 substantial damage
determination triggering enforcement of the City ordinance. The Pointe cannot
identify any evidence that the City made its substantial damage determination
based on wind damage alone — as opposed to flood damage or a combination of
wind and flood damage, both of which are excluded causes of loss. Enforcement of
the City ordinance predicated in part on an excluded cause of loss is excluded by
the policy’s concurrent causation language in the Exclusion section of the “Causes
of Loss – Special Form.”
The parties have not pointed to any evidence that could support a finding
that the City’s December 2008 substantial damage determination and resulting
enforcement of a City ordinance was based on a Covered Cause of Loss. In turn,
there is no evidence that the cost to demolish and the increased cost to rebuild was
caused by enforcement of an ordinance or law that was triggered by a Covered
Cause of Loss. Thus, there can be no coverage for The Pointe’s loss under the
Ordinance or Law endorsement.
We next address whether The Pointe’s loss is covered under the DICC
endorsement. The DICC endorsement is similar in nature to the Ordinance
endorsement and provides as follows:
If at the time of any physical loss or damage insured against by this
Policy there is in force any law or ordinance regulating the
construction, repair, replacement or use of buildings or structures then
this Policy shall cover as a result of enforcement of such law or
ordinance as a direct result of such loss or damage:
a) the additional loss sustained in demolishing any physically
undamaged portion of the buildings or structures;
b) the cost incurred in actually rebuilding both the physically
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damaged and demolished portions of such buildings or
structures with materials and in a manner to satisfy such law or
ordinance.
The total liability hereunder shall not exceed the actual expenditure
incurred in demolishing the physically undamaged portion of the
building(s) or structure(s) involved plus the lesser of the following:
a) the actual expenditure incurred, not including the cost of
land, in rebuilding on another site, or
b) the cost of rebuilding on the same site.
This Policy shall not be liable for any cost of demolition or increased
cost of reconstruction, repair, debris removal or loss of use
necessitated by the enforcement of any law or ordinance regulating
any form of contamination including but not limited to pollution.
Payment made hereunder shall be subject to the Sublimit of Liability,
if any, specified elsewhere in this Policy.
(emphasis added). As written and read in conjunction with the applicable
exclusion for any loss caused directly or indirectly by flood, the DICC
endorsement provides that the policy covers cost incurred in rebuilding and
additional loss sustained in demolishing as a result of enforcement of a law or
ordinance as a direct result of any physical loss or damage “insured against by this
policy.” The scope of physical loss or damage “insured against by this policy” is
established by the “Covered Causes of Loss.” Under the “Covered Causes of
Loss,” the policy does not insure against any physical loss or damage caused
directly or indirectly by flood “regardless of any other cause or event that
contributes concurrently or in any sequence to the loss.”
Accordingly, for The Pointe’s loss to be covered under the DICC
endorsement, there has to be at least some evidence of additional loss sustained in
demolishing and cost incurred in rebuilding as a result of enforcement of a law or
ordinance based on damage caused by wind — a Covered Cause of Loss. The
Pointe presented no such evidence.
19
As discussed above, The City did not state the basis upon which it
determined in December 2008 that The Pointe’s apartment complex had been
“substantially damaged.” Nothing in the City’s letter shows that the City based its
substantial damage determination on a finding that the apartment damage was
caused by wind alone, which is a Covered Cause of Loss — rather than by flood or
a combination of wind and flood, which are excluded Causes of Loss. Thus, the
City’s letter does not constitute evidence that the substantial damage finding,
which in turn resulted in the enforcement of a City ordinance requiring demolition
and rebuilding of The Pointe’s apartment complex, was based on a Covered Cause
of Loss as required by the DICC endorsement.
The Pointe does not identify any evidence showing the City made its
substantial damage determination based on a Covered Cause of Loss. In turn, there
is no evidence that there was cost incurred in rebuilding or additional loss
sustained in demolishing as a result of enforcement of an ordinance as a direct
result of a Covered Cause of Loss. Thus, there can be no coverage for The
Pointe’s loss under the DICC endorsement.
We conclude that the Lexington policy does not provide coverage for The
Pointe’s loss under the Ordinance or Law and the DICC endorsements. Having
resolved coverage in Lexington’s favor, The Pointe’s Insurance Code claims
cannot survive. See Page, 315 S.W.3d at 532; Stoker, 903 S.W.2d at 341.
C. Extreme Conduct and Failure to Investigate
The Pointe argues that the supreme court “held open two possibilities where
a bad faith case could go forward even in the absence of a dispute about whether
the claim was covered: (1) where the insurer’s conduct was so ‘extreme’ that it
caused some injury other than the loss of the policy benefits; or (2) where the bad
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faith claim arises out of a duty to timely investigate the insureds’ claims.”
The Pointe does not contend on appeal that Lexington engaged in extreme
conduct, and there is no support in the record for such a contention. Rather, The
Pointe argues that it can bring a bad faith claim despite a lack of coverage because
Lexington failed to timely investigate its claim. We reject The Pointe’s argument
for two reasons.
First, the supreme court has stated on several occasions that it “did not
exclude the possibility that an insurer’s denial of a claim it was not obliged to pay
might nevertheless be in bad faith if its conduct was extreme and produced
damages unrelated to and independent of the policy claim.” Boyd, 177 S.W.3d
922; Fodge, 63 S.W.3d at 804. The supreme court has not stated that an insurer’s
failure to timely investigate an insured’s claim may constitute an actionable bad
faith claim. See Boyd, 177 S.W.3d at 922; Fodge, 63 S.W.3d at 804.
Second, in response to Question 1.A., asking whether Lexington refused to
pay claims without conducting a reasonable investigation of the claim, the jury
answered “No.” The Pointe never challenged this jury finding in the trial court or
on appeal. The Pointe is therefore bound by the jury’s finding. See OXY USA, Inc.
v. Cook, 127 S.W.3d 16, 21 (Tex. App.—Tyler 2003, pet. denied); Lawson v.
Lawson, 828 S.W.2d 158, 160 (Tex. App.—Texarkana 1992, writ denied).
Accordingly, The Pointe cannot rely on a failure to timely investigate argument to
support its bad faith claim in the absence of coverage.
Because there is no coverage for The Pointe’s loss under the Ordinance and
DICC endorsements of the Lexington policy, and The Pointe has not asserted or
shown extreme conduct by Lexington in this case, The Pointe has no viable bad
faith claim. We conclude that the issue of coverage is resolved in Lexington’s
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favor, that The Pointe’s statutory bad faith claim does not survive, and that
Lexington cannot be liable for statutory bad faith in this case.
D. Bad Faith Damages
The jury awarded The Pointe damages for (1) “Policy benefits for repair or
replacement of [The Pointe]’s property due to damage to the property covered
under [DICC] endorsement or [Ordinance or Law] endorsement to Lexington’s
policy” in the amount of $1,200,000; and (2) reasonable and necessary expenses,
other than attorney’s fees, in the amount of $30,000. The jury also awarded The
Pointe additional damages in the amount of $2,500,000 because it found Lexington
knowingly engaged in unfair or deceptive acts or practices.
Having concluded that Lexington cannot be liable for bad faith because there
is not coverage for The Pointe’s loss under the policy, and that Lexington did not
engage in extreme conduct, no basis supports the jury’s damage awards. See
Chrysler Ins. Co., 297 S.W.3d at 254; Boyd, 177 S.W.3d at 922. The Pointe is
therefore not entitled to recover actual damages or additional damages the jury
awarded.
We sustain Lexington’s first issue.2
II. Attorney’s Fees
Lexington argues in its sixth issue that The Pointe is not entitled to
attorney’s fees because Lexington is not liable for statutory bad faith. The Pointe
responds that the Texas Insurance Code in section 541.152 allows “recovery of
reasonable attorneys’ fees where the jury finds a violation of the statute.”
2
In light of our disposition, we need not address Lexington’s second, third, fourth, and
fifth issues.
22
Section 541.152 provides that “A plaintiff who prevails in an action under
this subchapter may obtain . . . reasonable and necessary attorney’s fees.” Tex.
Ins. Code Ann. § 541.152(a) (Vernon Supp. 2012). Because The Pointe cannot
prevail on its bad faith claim, The Pointe also cannot recover attorney’s fees under
section 541.152. See id.; Guidry v. Envtl. Procedures, Inc., 388 S.W.3d 845, 862
(Tex. App.—Houston [14th Dist.] 2012, pet. filed).
We sustain Lexington’s sixth issue.
Conclusion
Having sustained Lexington’s first and sixth issues, we reverse the trial
court’s judgment and render a take nothing judgment against The Pointe.
/s/ William J. Boyce
Justice
Panel consists of Justices Boyce, McCally and Busby.
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