Policy Exclusions And City Ordinances

Everman insurance lawyers need to be know this 2015, Texas Supreme Court opinion. It is styled, Jaw The Point, L.L.C. v. Lexington Insurance Company.
This insurance dispute involves losses the insured incurred as a result of city ordinances triggered by damage to an apartment complex during Hurricane Ike. The insurance policy covers the costs of complying with city ordinances, but only if the policy covers the property damage that triggers the enforcement of the ordinances. Here, the property damage that triggered the ordinances resulted from both wind, which the policy covers, and flooding, which the policy expressly excludes. The policy’s anti-concurrent-causation clause excludes coverage “for loss or damage caused directly or indirectly by” flooding, “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” Because the evidence conclusively establishes that flood damage triggered the enforcement of the city ordinances and thus “directly or indirectly” caused the insured’s losses, the Court concluded the policy excludes coverage for such losses regardless of the fact that wind damage “contribute[d] concurrently or in any sequence to the loss.” Because the Court agreed with the court of appeals that the policy did not cover the insured’s losses and thus the insured cannot recover for the insurer’s bad faith failure to effectuate a prompt and fair settlement of the claim the case was affirmed.
In July 2007, JAW purchased an apartment complex in Galveston for approximately $5.7 million.Fourteen months later, Hurricane Ike struck the Island and caused substantial damage to The Pointe apartments. Lexington provided the primary coverage.
Shortly after the hurricane struck, JAW submitted a sworn proof of loss to Lexington requesting an advance of $300,000 to help cover its ongoing business income losses. JAW initially planned to repair The Pointe apartments, but its plans changed when one of its partners attended a meeting at which a City of Galveston official explained that city ordinances required that all apartment complexes that were “substantially damaged”-meaning they sustained damage equal to or exceeding 50% of their market value-must be brought into compliance with current code requirements, which included raising the structures to a base flood elevation. JAW concluded that it could not raise The Pointe without demolishing and rebuilding the complex. After the meeting, JAW sent an email to the city’s planning office, explaining that JAW intended to apply for a permit to repair The Pointe apartments but the damage estimates were “far in excess” of 50% of the complex’s market value. JAW requested that the city confirm whether it would deny the permit for repairs and instead require JAW to elevate the apartments.
Two months after the hurricane, JAW submitted a permit application to the city and included a third-party consultant’s estimate that it would cost $6,256,887 to repair all of the damage The Pointe had sustained. The estimate made no effort to distinguish between damage caused by wind and damage caused by flooding. The following day, Lexington’s claims examiner noted in JAW’s claim file that JAW’s losses could reach The Pointe’s total insured value of $8 million if the city required JAW to demolish and rebuild the apartments. The day after that, Lexington paid JAW the $300,000 JAW had requested as an advance against its business income losses.
In December 2008, Lexington’s adjuster, Cunningham Lindsey, provided Lexington with a report confirming the magnitude of the damage at The Pointe and indicated that JAW would have to demolish and rebuild the complex to elevate the structure. That same month, the city sent a letter to JAW stating that the city had conducted a “substantial damage” determination and concluded that the total damage “equals or exceeds 50 percent of the market value” of $2,247,924, which the city calculated by using the most recent appraised value and adding five percent. According to the city, because JAW’s permit application accurately indicated that The Pointe was “substantially damaged,” city ordinances required JAW to elevate the apartments three additional feet. In concluding that The Pointe was “substantially damaged,” the city did not segregate the wind damage from the flood damage.
JAW informed Cunningham Lindsey of the city’s determination, and Lexington’s examiner received a copy of the city’s letter in January 2009. Confirming that it was impossible to elevate the existing structures, JAW hired an architect and a contractor and began the demolition process. In February 2009, JAW submitted a formal claim to Cunningham Lindsey, requesting coverage for all demolition costs, construction costs, architectural and permitting fees, and other expenses that JAW had incurred and would incur to demolish and rebuild the apartments.
In April 2009, Lexington’s building consultant submitted a report to Lexington estimating that The Pointe had sustained wind damage totaling approximately $1,278,000 and flood damage of approximately $3.5 million. On May 5, 2009, after JAW’s adjuster agreed with these estimates, JAW submitted a sworn proof of loss to Lexington, requesting payment of $817,940.94, which represented the $1,278,000 in wind damage less an applicable deductible. Lexington promptly paid this claim, but did not pay the additional amounts JAW had claimed as costs incurred to demolish and rebuild The Pointe pursuant to the city’s ordinances. According to JAW, Lexington never formally denied JAW’s claims for these ordinance-compliance losses. Instead, in July 2009, Cunningham Lindsey informed JAW’s adjuster by telephone that Lexington had determined the policy did not cover the losses JAW incurred to comply with the city ordinances because “all the damages were caused by flood.”
JAW sued Lexington, Cunningham Lindsey, and others on July 19, 2009, asserting claims for breach of the insurance contract and violations of the Texas Insurance Code and the Texas Deceptive Trade Practices Act (DTPA). Despite the lawsuit, Lexington and Cunningham Lindsey continued working on JAW’s claim. In September 2009, Lexington notified JAW by letter that it would not pay JAW for flood damage or for its costs to comply with the city ordinances.
After settling and dismissing all of its claims against Cunningham Lindsey, JAW continued to pursue its claims against Lexington. In March 2011, Lexington filed two motions for partial summary judgment, one seeking dismissal of JAW’s breach of contract claim on the ground that Lexington had exhausted the policy limits, and the other seeking dismissal of any claims based on flood damage on the ground that the policy expressly excluded coverage for such damage. JAW did not oppose these motions, and the trial court granted them, leaving only JAW’s statutory claims for trial. On those claims, the jury returned a verdict in JAW’s favor, finding that Lexington had engaged in “unfair or deceptive acts or practices in the business of insurance” by failing to (a) “attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim when the insurer’s liability had become reasonably clear”;  (b) provide a reasonable explanation for its coverage denial;  and (c) affirm or deny coverage within a reasonable time, and that Lexington had engaged in this conduct “knowingly.” The jury found that Lexington’s conduct caused JAW to incur actual damages and expenses of $1,230,000 and awarded additional statutory damages of $2.5 million. Based on the jury’s verdict, the trial court entered a judgment awarding these damages plus $170,000 in attorney’s fees.
As stated in the first paragraph, this was all lost on appeal for the reason stated.