Texas Supreme Court Denies Policyholder’s Discovery Regarding Claims Handling

Matthew Morris | Proskauer | November 18, 2014

It is rare to see a state’s highest court address a discovery issue.  But the Supreme Court of Texas did just that recently in In re National Lloyds Insurance Co., holding that a policyholder’s demands for discovery about how her homeowner’s insurance carrier’s claims adjusters handled other insurance claims was an impermissible “fishing expedition.”  The decision is a sobering one for all policyholders, not just homeowners, that are insured under policies governed by Texas law and who believe that their insurers have not handled their claims in good faith.

After storms damaged Mary Erving’s home in Cedar Hill, Texas, she looked to her homeowner’s insurer, National Lloyds to help her rebuild.  National Lloyds sent two adjusters, Team One Adjusting, LLC and Ideal Adjusting, Inc., to inspect the Erving home, and National Lloyds ultimately paid the claims based on the adjusters’ assessments.  Convinced that National Lloyds had undervalued both claims, Erving sued, alleging that the insurance company had, among other things, breached the insurance policy, breached its duty of good faith and fair dealing, and violated Texas statutes prohibiting deceptive trade practices, unfair competition and deceptive practices in insurance and unfair claim settlement practices.

In discovery, Erving requested production of: all claims files from the previous six years involving three adjusters; all claims files in two counties involving Team One Adjusting and Ideal Adjusting; and, by interrogatory, identifying information associated with the requested claims files.  National Lloyds objected that the requests were overbroad, unduly burdensome, and not calculated to lead to the discovery of admissible evidence.  Erving moved to compel, and the trial court entered an order requiring production of a significantly narrowed set of documents.  Specifically, the court limited production to claims handled by Team One Adjusting and Ideal Adjusting related to properties in Cedar Hill and to the two storms that damaged Erving’s house.  National Lloyds sought relief from the court of appeals, which denied the petition.  National Lloyds then sought relief from the Texas Supreme Court, which agreed to take up the matter.

The high court began its analysis by reviewing the general rules of discovery in Texas, and noting that while those rules are “liberal,” they do not permit “[o]verbroad requests for irrelevant information.”  Of course, Erving had argued that her demands sought relevant information, because the documents would help prove whether the adjusters used consistent methods, spent an equivalent amount of time, and used the same pricing data.  She contended that the adjusters undervalued her claims by establishing a “baseline” and comparing her claims to it.

The court, however, could not see how National Lloyds’ handling of the claims of third parties was probative of its conduct regarding Erving’s claims.  It observed that every claim involves many variables, including when the claim is filed, what condition the property is in, and what damage it suffers.  Although the court was unwilling to say that evidence regarding other policyholders’ claims can never be relevant, it viewed Mary Erving’s request for the information she needed to prove her bad faith claim as a “fishing expedition.”

National Lloyd’s is notable because many high courts give lower courts a wide berth in discovery issues, especially when the lower courts have already substantially pared down the discovery demands in dispute.  Particularly troubling is the fact that unfair claims handling by insurers is often apparent only when those practices are examined through a wider lens that captures how similarly situated policyholders are treated differently—but that perspective isn’t available without access to an insurer’s claims files.  Counsel seeking to prove an insurer’s bad faith in handling claims, at least in Texas, will have to keep in mind that the threshold to obtain the kind of comparative evidence Erving sought is now apparently fairly high.

via Texas Supreme Court Denies Policyholder’s Discovery Regarding Claims Handling | Risk and Recovery: Legal Insights for the Insured.

Court Again Defines Extent of Contractor’s Insurance Coverage

Craig Martin | Construction Contractor Advisor | November 10, 2014

The ever changing landscape of insurance coverage for contractors continues to be clarified in Texas. The Fifth Circuit Court of Appeals applied Texas law in Crownover v. Mid-Continent Casualty Company, concluding that contractors do have insurance coverage to cover claims that a project was not constructed in a good and workmanlike manner.

In this case, the Crownovers hired a contractor to build a house. The contract contained a warranty-to-repair clause. Shortly after construction was completed, cracks began to appear in the walls and foundation, and there were problems with the heating and air conditioning system. The Crownovers demanded that the contractor repair the problems and the contractor refused. The Crownovers brought an arbitration proceeding against the contractor and prevailed, obtaining a judgment that the contractor must pay for repairs to the foundation and HVAC system. The contractor then filed for bankruptcy and the bankruptcy court allowed the Crownovers to pursue their claim against the contractor’s insurer.

The Crownovers sued the contractor’s insurer and the insurer took the position the comprehensive general liability (“CGL”) policy did not cover the Crownovers’ claim because any liability of the contractor was based on the contract with the Crownovers and thus the contractual-liability exclusion applied. The trial court agreed and the Crownovers appealed to the Fifth Circuit Court of Appeals.

The Fifth Circuit Court of Appeals initially decided the case in June, affirming the trial court’s decision. The Crownovers asked the court to look at the issue again, and the court reversed itself this past October.

In ruling in favor of the Crownovers, the court found that the contractual-liability exclusion applied only in those instances where the contractor assumed additional responsibilities beyond those found at common law. Because common law establishes a duty for contractors to repair work that was not carried out in a good and workmanlike manner, the contractual-liability exclusion did not apply.

Take Away: CGL policies may very well provide coverage for faulty work. But, each state’s laws will control how the insurance policy is interpreted and whether coverage will be found.

via Court Again Defines Extent of Contractor’s Insurance Coverage | Construction Contractor AdvisorConstruction Contractor Advisor.

New York Court Revisits Architect’s Duty Under Contract and Tort Principles

Traub Lieberman Straus & Shrewsberry LLP | November 4, 2014

Issues of privity and whether claims sound in breach of contract or negligence are common in construction defect cases involving architects and New York is no exception. Indeed, New York courts have long wrestled with architect liability and formulas for imposing or defeating liability. A recent, illustrative case is Board of Managers of the Greenbelt Condominium v. 361 Manhattan Avenue LLC, et. al., 2014 N.Y. Misc. LEXIS 3344 (Sup. Ct. N.Y. County 2014), which involved a five story expansion/conversion of an existing one story commercial building located in Brooklyn, New York. The architect was retained by the condominium sponsor which split the architect’s varying obligations among five (5) construction phases, from “Survey/Schematic Design” through “Construction Administration.”  In the Construction Administration phase, the architect agreed to “supervise” and “monitor” the construction to ensure “the accuracy, compliance and timeliness of the work.” The architect also agreed to “sign off” on the completed condominium building after the contractors had satisfied an architect-generated punch list.

Following substantial completion of the project and sale of most of the units, the condominium Board determined that “numerous defects” existed, including failure to seal steel wall panels and the underlying EIFS (exterior insulation finishing system) layer, and failure to properly and completely install flashing and capping in several locations. Leaking and consequent damage were alleged. The Board subsequently filed a suit against various contractors, engineers and the architect. The complaint alleged that “many shortcuts were taken during construction” which resulted in water being directed towards, instead of diverted from, interior portions of the structure.

The Board’s complaint asserted causes of action against the architect for professional malpractice and negligence. In support of these claims it was alleged that defendant architect breached its “duty of care owed to the condominium sponsor” by failing to ensure that the “work conformed to the architectural plans, specifications and drawings.” The architect moved to dismiss the complaint on various grounds, including that the claim sounding in breach of contract sought recovery for economic loss which, under controlling New York authority, required that architect be in privity with the party seeking damages. The architect also argued that the negligence cause of action required a showing of a duty of “reasonable care” owed to the party initiating the action, which did not exist. Plaintiff opposed the motion, declaring that the Board was a logical and legal “successor” to the sponsor. It should therefore be entitled to assume the duties and rights inherent in the sponsor.

Accepting all complaint allegations as true for purposes of a motion to dismiss, the Court granted the architect’s motion. The Court held that the allegations of negligence under the circumstances were based on construction defects and “as such, sound in breach of contract rather than tort.” This was so, even though plaintiff alleged ”breach of a duty of care,” a traditional tort liability concept. The Court dismissed the breach of contract claim as well, holding that a “successor in interest” argument should not be permitted to erode the firmly established privity requirement for an architect’s contract-based liability.

via New York Court Revisits Architect’s Duty Under Contract and Tort Principles | Traub Lieberman Straus & Shrewsberry LLP.

More “Texas Justice” For Policyholder On Contractual Liability Exclusion

Nathan Lander | Risk and Recovery: Legal Insights for the Insured | November 4, 2014

On October 29, the Fifth Circuit reversed itself for the second time this year in a case involving the interpretation of a contractual liability exclusion in a CGL policy.  This recent decision by the Fifth Circuit in Crownover v. Mid-Continent Casualty Co., coupled with decisions from the Texas Supreme Court and Fifth Circuit earlier this year in Ewing Constr. Co. v. Amerisure Ins. Co., is of major significance to the construction industry in Texas.  These decisions ensure that the valuable protection that contractors, builders, and their customers depend on from CGL policies is not swallowed up by an overly broad interpretation of a standard exclusion.

Many CGL policies exclude damages “for which the insured is obligated to pay by reason of the assumption of liability in a contract or agreement.”  This standard exclusion has a carve-out, however, for liability “[t]hat the insured would have in the absence of the contract or agreement.”

In most jurisdictions, courts have construed this exclusion as limiting coverage only when the insured has agreed to assume the liability of a third party.  This is also how the average policyholder would generally understand the exclusion.

Earlier this year, however, a pair of Texas federal courts interpreted the exclusion in a much different and broader manner.  In both Ewing and Crownover, the district court held that the exclusion applies anytime “an insured has entered into a contract and, by doing so, has assumed liability for its own performance under the contract.”  So if the contract promises that the contractor will perform work in a certain manner, and the contractor is sued for breaching that warranty, the claim is excluded.  The Fifth Circuit initially affirmed each of these decisions before agreeing in Ewing to certify the proper interpretation of the exclusion to the Texas Supreme Court.

If allowed to stand, these decisions would have been devastating to the construction industry in Texas.  In virtually all construction contracts, the builder or contractor agrees to perform its work in a good and workmanlike manner (or other similar promise).  Interpreting the contractual liability exclusion as barring coverage whenever such a promise is made would have left Texas builders and contractors with little coverage at all.

And the harm from the decisions would not have ended there.  Many contractors do not have the financial resources to pay for damages caused by construction mistakes.  They, and in turn the businesses and homeowners who utilize their services, rely on the availability of insurance to cover mistakes that are made.

Fortunately, the Texas Supreme Court said “not so fast” to the strained and commercially unreasonable interpretation of the exclusion reached by the federal courts.  It held that the exclusion can apply only when a policyholder assumes a liability “that exceeds the liability it would have under general law.”

Contractors are under a common law duty to perform their contracts with skill and care. Thus, the Texas Supreme Court concluded, “a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not ‘assume liability’ for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.”

After the Texas Supreme Court issued its decision in Ewing, the Fifth Circuit reversed its earlier decision in that case and held that the policyholder’s claim was not barred by the contractual liability exclusion.

Now, the Fifth Circuit has done the same in Crownover.  Reversing its earlier decision, the Court began by explaining that in Texas, as elsewhere, exclusions must be narrowly construed against the insurer.  The saying “everything is bigger in Texas” does not apply to exclusions.

Applying this well-settled rule for interpreting exclusions, and the Texas Supreme Court’s guidance in Ewing, the Fifth Circuit found the exclusion did not apply to claims against the insured in Crownover for breaching a “duty to repair” warranty in a construction contract.  Under the general law, the policyholder already had a duty to repair work that was not performed in a good and workmanlike manner.  Promising to do so in the contract, thus, did not in any way enlarge the insured’s liability.

Insurers that issue CGL policies to contractors promise to cover them for losses caused by mistakes made in the construction process.  These contractors depend on this liability protection, as do consumers who enlist their services in construction projects.  The fact that a contractor promises when hired to do a good job should not provide a get out of jail free card to its insurer if a construction mistake is later made.  Now that the Crownhover decision has been reversed, along with the Ewing decision, “Texas justice” has been restored on this issue.

via More “Texas Justice” For Policyholder On Contractual Liability Exclusion | Risk and Recovery: Legal Insights for the Insured.

Insurance Coverage after Foreclosure?

Shane Smith | Property Insurance Coverage Blog | November 9, 2014

In August, the U.S. Court of Appeals addressed whether a homeowners’ property insurance policy was rendered void after the insureds lost the home in foreclosure, yet continued to reside in the home and suffered a loss.1

Fred and Debbie Baptist purchased their property insurance policy in October 2006. In November 2008, they lost their home to foreclosure, however they did not notify their insurer and continued to occupy the home. On December 9, 2011, the bank which foreclosed on the home obtained a judgment evicting the insureds from the home. The insureds had to vacate the home by January 13, 2012, however the home was damaged by a fire on December 27 and 28, 2011. The insureds made a claim with their insurer for contents coverage for the December 2011 fire and during the insurer’s investigation it discovered that the insureds no longer owned the property. The insureds had renewed their policy twice (for the 2009-2010 and 2010-2011 policy periods) and sent checks for the premium to the insurer. It is also interesting to note that the fire claim was not the only loss the insureds suffered. They also filed post-foreclosure claims for wind and hail damage in April 2010, and for an unrelated fire in May 2010.

The insurer filed suit in the U.S. District Court for the Northern District of Mississippi, seeking a declaratory judgment that the policies it issued after the foreclosure were void because the insureds had no insurable interest in the property. The insurer also made a claim to recover payments it made on the insured’s claims in 2010 and 2011. On a summary judgment motion, the insurer argued that the insureds made a material misrepresentation by failing to inform the insurer of the foreclosure sale. The district court agreed and held that the insureds had no “insurable interest” in the property because they did not have a right to renew the policy after they lost ownership and the renewed policy was void ab initio. The Fifth Circuit Court of Appeals affirmed the district court’s judgment and stated:

Although the parties devote much of their briefing to whether the Baptists maintained an insurable interest in the property sufficient to sustain their policy’s effectiveness after the foreclosure, we need not address this issue to conclude that the district court’s judgment must be affirmed. Our de novo review [footnote omitted] satisfies us that the district court’s ultimate conclusion was correct because, even assuming arguendo that the Baptists maintained an insurable interest sufficient to sustain their policy—in their personal property, contemplated as “contents,” for example—their renewals of their policy constituted their affirmations to Nationwide of their initial application for insurance, material portions of which were no longer true. The Baptists’ application reflects that the home would be owner occupied, and includes both the Baptists’ declaration that the facts stated on the application are true and their request that Nationwide issue “the insurance and any renewals thereof in reliance thereon.” By renewing their homeowner’s policy when they no longer owned their home, the Baptists made a misstatement of material fact that entitled Nationwide to rescind the policy. [footnote omitted] Accordingly, the judgment of the district court is AFFIRMED. (Emphasis added).

1 Nationwide Mut. Ins. Co. v. Baptist, No. 13-60726, 2014 WL 3882888 (5th Cir. Aug. 7, 2014).

via Insurance Coverage after Foreclosure? : Property Insurance Coverage Law Blog.