Canterbury, Gooch, Surratt, Shapiro, Stein, Gaswirth & Jones

Texas Supreme Court Holding: An Insurer Must Pay to Locate and Repair Contractor-Insured’s Defective Work

In Lennar Corp. v. Markel American Insurance Co., 2013 WL 4492800 (Tex. 2013), the Texas Supreme Court held that an insurer must pay its insured’s pre-litigation costs to locate and repair its defective construction work, even where the insurer refused to consent to the repair program.

Lennar Corp., a homebuilder, was using an exterior insulation and finish system (“EIFS”) instead of conventional stucco exterior on the homes it was constructing. After the homes were built, Lennar discovered that the homes built with the EIFS were experiencing serious water damage that worsened over time. To address this problem, Lennar began the process of removing the EIFS and replaced it with conventional stucco. Lennar’s insurer refused to participate in the remediation program, instead preferring to wait until homeowner’s sued, and denied coverage of the cost to remediate the homes. Lennar then sued its insurer, seeking coverage. The insurance policy contained a provision that stated in part “it is a requirement of this policy that…no insured, except at their own cost, voluntarily make any payment, assume an obligation, or incur any expense…without [insurer’s] consent.”

The Texas Supreme Court held that (1) unless the insurer can show prejudice, the insurer is responsible for the costs incurred by the insured’s pre-litigation program of voluntary remediation of its defective construction, even if the insurer did not consent to the program; (2) the insurer must cover the costs incurred to determine and locate “property damage”, in addition to the costs to actually repair it; and (3) the insurer is responsible for the entirety of its insured’s damages for locating and repairing the property damage, even though only a portion of the damage occurred during the policy period.

Prior to this decision, contractors dealing with faulty construction faced a difficult choice: pay upfront to minimize damage from the defective work and risk losing insurance, or do nothing until litigation is over coverage is in place and potentially face insurer arguments that it didn’t do enough to mitigate the damage. This decision is particularly important because it allows the contractor-insured to settle a claim while construction is ongoing without litigation and without the insurer’s consent.