Lennar Corp., Et Al. V. Markel Am. Ins. Co., No. 11-0394 (Tex. Aug. 23, 2013): Texas Supreme Court Affirms 'All Sums' Allocation And Prejudice Requirement For 'Voluntary Payments' Under Texas Law

On August 23, 2013, in Lennar Corp., et al. v. Markel Am. Ins. Co., the Texas Supreme Court issued an opinion that confirms two important aspects of pro-policyholder insurance law, despite insurers' repeated attempts to reverse and/or limit them. In the 1990s, Lennar Corporation built hundreds of homes using an exterior insulation and finish system ("EIFS"), marketed as an attractive alternative to traditional stucco. However, when installed on wood-frame homes, EIFS traps water in walls, causing rot, mildew, mold and termite infestations. After being inundated with consumer complaints, Lennar investigated and decided to replace all EIFS it had installed on homes and repair any damage in the homes caused by EIFS. Lennar spent several million dollars in this program, which took several years to complete.

Lennar notified its insurers that had issued liability policies in effect during the time EIFS had been in place and damaged homes, that it would seek indemnification of the program's costs. None of the insurers consented to Lennar's proactive and comprehensive efforts to fix the EIFS problems. All of the insurers denied coverage and Lennar sued. All but one of the insurers, Markel American Insurance Company, eventually settled with Lennar. Lennar and Markel tried the coverage case before a jury, which found in Lennar's favor. The Texas Court of Appeals reversed the jury's verdict on the grounds that Lennar had not complied with the Markel policy's "voluntary payments" provisions, and that Lennar had not proved the amount of its loss "because of" property damage that "occurred during the policy period" as required by the policy.

The Texas Supreme Court reversed the Court of Appeals and reinstated the jury's verdict. Although the policy prohibited Lennar from voluntarily making any payment, assuming any obligation, or incurring any expense without Markel's consent, the Supreme Court noted that Texas law has long required an insurer to prove it was prejudiced by its insured's payment without the insurer's consent. The Supreme Court rejected Markel's argument that it had been prejudiced as a matter of law because Lennar had solicited claims and thus made repairs to homes it would not otherwise have made. Instead, the Supreme Court found that prejudice was a fact-issue the jury had resolved in Lennar's favor.

Markel argued that the policy's definition of "ultimate net loss" also precluded recovery, because it stated that such loss "may be...