Texas Supreme Court Rejects Pro Rata Allocation

Confirms "All Sums" Based on American Physicians Insurance Exchange v. Garcia

Lennar Corporation v. Markel American Insurance Company, No. 11-0394 (Tex. August 23, 2013) arose from a dispute over insurance coverage for damage to homes caused by an exterior insulation and finish system (EIFS). Lennar Corporation, a homebuilder, and its subsidiaries built some 800 homes using EIFS, but stopped using it in 1998. Following an exposé on NBC's Dateline in 1999, Lennar was inundated with homeowner complaints. Lennar investigated the complaints and decided to address them by contacting all its homeowners to remove the EIFS and replace it with conventional stucco.

Lennar notified its insurers early on that it would seek indemnification for the costs of replacing the EIFS. Its insurers refused to participate in Lennar's proactive efforts, preferring instead to wait and respond to homeowners as claims were made. All insurers denied coverage, and after litigation and settlement, only Markel remained. Markel had issued a $25 million commercial umbrella policy effective from June 1, 1999 to Oct. 19, 2000 to Lennar. Markel denied coverage for numerous reasons, including:

Lennar failed to comply with a policy condition prohibiting Lennar from entering into settlements or assuming any obligation without Markel's consent, which Markel had withheld. Similarly, the policy's "Loss Establishment Provision" prohibited Lennar from determining loss unilaterally. Lennar's costs to remove and replace the EIFS as a preventative measure were not incurred "because of property damage." Markel was responsible only for damages occurring during its policy period The Texas Supreme Court found that unless Markel established that it suffered prejudice from a settlement to which it did not agree, the "voluntary payments" condition did not bar coverage. The court held further that the policy's "Loss Establishment Provision" operated identically with the condition and thus also required a showing of prejudice. "Absent prejudice to Markel," the court stated, "Lennar's settlements with homeowners establish both its legal liability for the property damages and the basis for determining the amount of loss."

Next the court discussed whether the policy covered the total amount of damages found by the jury. The policy obligated Markel to pay "the total amount" of Lennar's loss "because of" property damage that "occurred during the policy period," including "continuous or repeated...