Federal Court in Texas Grants Insurer’s Summary Judgment on Water Damage Exclusion

George B. Hall, Jr. | Phelps Dunbar LLP | June 17, 2015

A federal court in Texas granted summary judgment to an insurer based on a water damage exclusion that it did not owe coverage for damages resulting from the back-up of water or sewage from outside a plumbing system. Durrett v. Nationwide Property & Cas. Co., 2015 WL 1564783 (W.D. Tex. April 7, 2015).

A house had a waste water storage tank immediately adjacent to it. Inside the tank was a grinder pump and a check valve and quick-disconnect coupling inside the discharge line. The discharge line was an uphill pipe that reached to 100 feet inside the property line where there was a second check valve owned by the municipal utility district. The second check valve and the quick-disconnect coupling failed causing sewage to back up into the house until the broken check valve was replaced. The homeowners made a claim on their homeowners’ policy, but the insurer contended that the damage was excluded by the water damage exclusion except for a 5% policy limit additional coverage which it paid. The water damage exclusion excluded coverage for water or water-borne material which backs up through sewers or drains “from outside the dwelling’s plumbing system.”

The homeowners argued that the application of the exclusion turned on the location of the plumbing failure. They argued that since the dwelling’s plumbing system also failed, the exclusion did not apply. The court held that the policy only required that water or water-borne material come from outside the dwelling’s plumbing system, but that the plumbing failure could happen either inside or outside the dwelling. The court also rejected the homeowners’ argument that the loss was covered as a sudden and accidental discharge from a plumbing system which would be covered. The court stated that such a reading of the policy would effectively read the exclusion out of the policy as if it did not exist.

via Federal court in Texas grants insurer’s summary judgment on water damage exclusion – Lexology.

Texas Supreme Court Reinforces that Subcontractors May be Liable to Property Owners

Kat Statman and Eddie De Los Santos – The Dispute Resolver – September 16, 2014

On August 22, 2014, the Texas Supreme Court ruled that both the trial court and the court of appeals improperly dismissed a property owner’s claim for negligence against a subcontractor for improper plumbing installation in Chapman Custom Homes, Inc. v. Dallas Plumbing Company. The Court reiterated that a subcontractor has an implied duty to perform with both care and skill and that breach of this duty may result in liability to property owners. The Court’s ruling in this case makes it clear that a subcontractor may be directly liable to a property owner even when the property owner and subcontractor do not have a contractual relationship.

In Chapman, Chapman Custom Homes was hired as a general contractor to build a home in Frisco, Texas. Chapman hired Dallas Plumbing Company to install the plumbing in the new house. The plumbing was allegedly installed improperly, and leaks from the plumbing significantly damaged the structure. The property owner sued Dallas Plumbing alleging breach of contract, breach of warranty, and negligence.

The trial court granted summary judgment for Dallas Plumbing because the property owner did not have a contract with Dallas Plumbing. Additionally, the trial court found the property owner did not allege a violation of a duty owed to it by Dallas Plumbing, independent of the contract.

Looking to a case from 1947, the Texas Supreme Court reversed the decision of the court of appeals. The Court found that, even though Dallas Plumbing and the property owner did not have a contractual relationship, Dallas Plumbing still had a duty to perform the contract with both care and skill. Therefore, the property owner’s suit alleging that Dallas Plumbing had performed work negligently was sufficient to raise an implied duty by Dallas Plumbing to perform its work with care and skill.

The Court further rejected Dallas Plumbing’s argument that the property owner was barred from recovery under the economic loss rule. The economic loss rule states that a party may not recover damages for failure to perform under a contract when the only damages are losing what the party expected to receive under the terms of the contract. The Court specifically noted that, when the tort duty is independent of the contract itself, the economic loss rule will not preclude recovery. In this case, the Court found that Dallas Plumbing had an independent duty to perform with care and skill. Because this duty was independent of the contract between Dallas Plumbing and Chapman Custom Homes, the economic loss rule did not preclude recovery.

There are a number of cases that state a subcontractor cannot be sued by a property owner for defective work because the property owner does not have a contract with the subcontractor, only with the general contractor. This case makes it clear that, while a property owner may not have a contract suit against a subcontractor with whom they do not have a contract, they may have a negligence claim. Importantly, this potential liability is independent of any contract with the subcontractor.

This case also reinforces an independent legal duty that subcontractors have to property owners when they are conducting work. At all times, they must perform the work with both care and skill. Failing to perform a contract with both care and skill may result in liability to the property owner in addition to potential contract liability to the general contractor.

Finally, because this duty and potential liability is independent of the contract between the subcontractor and general contractor, a subcontractor will not be able to escape liability under the economic loss rule. If a subcontractor breaches its duty to perform with care and skill, it will be liable for all damages caused by the breach.

via The Dispute Resolver: Texas Supreme Court Reinforces that Subcontractors May be Liable to Property Owners.

Insurance Policy Tear-out Provision May Require Insurance Carrier To Pay For Costs To Repair Plumbing

Shaun Marker – November 12, 2013

First-party property insurance policies often contain tear-out provisions that provide coverage for situations where there is a leak in the pipes of the plumbing system, and to repair the plumbing system from which the water escaped, there is a need to tear-out building materials to access the pipes. What if the only repair that can be performed to the plumbing system requires all of the pipes in the residence to be replaced (even those beyond the portion with the leak)? The tear-out provision could then require the insurer to pay for the entire costs of tear-out to do the repair.

This is a topic in class-action litigation against State Farm. Guadiana v. State Farm Fire & Cas. Co., No. CIV 07–326 TUC FRZ (GEE) (U.S. D.C. Ariz Jan. 25, 2012). The policyholder, Guadiana’s home sustained water damage when the plumbing leaked. She discovered that her plumbing was constructed out of polybutylene pipes and was informed this type of system cannot be repaired piecemeal—it must be completely replaced.  Guadiana replaced all of the pipes. She submitted a claim to State Farm for the water damage and for the “tear-out” costs associated with tearing out and replacing that portion of the structure necessary to replace her entire plumbing system. State Farm took the position that her water damage was covered by the policy, but the tear-out provision did not cover the cost of accessing and replacing those pipes that were not leaking. Guadiana filed a class action lawsuit in Federal Court claiming that State Farm’s failure to pay her entire tear-out costs is a breach of contract and a breach of the duty of good faith.

The policy contains the following “tear-out” provision:

We do not insure for any loss … which consists of, or is directly and immediately caused by …

* * *

f. continuous or repeated seepage or leakage of water or steam from a:

(1) heating, air conditioning or automatic fire protective sprinkler system;

(2) household appliance; or

(3) plumbing system, including from, within or around any shower stall, shower bath, tub installation, or other plumbing fixture, including their walls, ceilings or floors;

which occurs over a period of time. If loss to covered property is caused by water or steam not otherwise excluded, we will cover the cost of tearing out and replacing any part of the building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which the water or steam escaped …

The Court noted that Guadiana suffered a covered loss when the pipes in her house leaked. This covered loss triggered the tear-out provision of the insurance policy where State Farm is obligated to pay the tear-out costs “necessary to repair the system or appliance.” The system is the plumbing system that caused the leak. The Court stated that if Guadiana can establish as a matter of fact that her plumbing system caused the covered loss and in order to repair that system it was necessary to replace all the pipes, State Farm is obligated to pay the tear-out costs necessary to replace all those pipes, even those not leaking.

State Farm maintains it is only required to pay the tear-out costs necessary to replace the particular pipes that burst. It argues a more expansive interpretation of the tear-out provision runs counter to those sections of the policy that exclude coverage for loss consisting of defective construction materials.

The Court held that State Farm’s construction does not jive with public policy. Guadiana intends to prove that the only way to repair her system was to replace all the existing polybutylene piping. There are situations where replacement is the appropriate, standard, or most cost-effective method for repairing a plumbing system. Under State Farm’s construction of the policy, tear-out costs would be paid if a plumbing system is repaired but would not be paid if the system is replaced, regardless of which method was most appropriate or cost-effective. State Farm’s construction would discourage replacement even if the resulting cost to both the homeowner and State Farm was less than it would be if the plumbing system were repaired. The Court noted that this policy construction could result in wasteful spending contrary to public policy.

Finally, the court concluded that State Farm’s construction does not facilitate the purpose of the insurance policy as a whole. The tear-out provision is designed to make the homeowner whole after an unforeseen loss. There is no reason why a homeowner with a system that can only be repaired by replacement would have any less desire or need to be reimbursed by their insurance carrier after suffering a covered loss.

This case discusses good news for policyholders in this part of the case. The outcome seems to be straight forward and seems to make sense, particularly if it is necessary to replace all the plumbing pipes to repair the system.

via Insurance Policy Tear-out Provision May Require Insurance Carrier To Pay For Costs To Repair Plumbing : Property Insurance Coverage Law Blog.