As a general rule, when an insured is tardy in providing notice of claim to an occurrence-based liability insurer, the insurer is not relieved of coverage, on such ground, unless it can demonstrate that it was prejudiced by such late notice. This is often-times a high hurdle for the insurer to meet. When an insured settles a claim, without the insurer’s consent, i.e., breaches the policy’s no voluntary payments clause, the insurer will likely argue that it need not prove prejudice to be relieved of any obligations under the policy. In other words, the insurer will likely argue that, here, prejudice is presumed because the insurer was denied any opportunity to defend the claim. The horse has left the barn. The toothpaste cannot be put back into the tube. Choose your cliché.
The Texas Supreme Court addressed a large dollar voluntary payments situation in Lennar Corp. v. Markel American Insurance Company, No. 11-0394, 413 S.W.3d 750 (Tex. Aug. 23, 2013) [enhanced version available to lexis.com subscribers]. At issue was about $6 million between damages, attorney’s fees and pre-judgment interest. The court, in an opinion written by Justice Hecht -- who has said some very pro-insurer things over the years -- held that the insurer must prove prejudice and a jury found that it did not. While there is no shortage of case law addressing coverage for voluntary payments, Lennar involved a unique situation -- there was no doubt that some of the settlements were with people that did not bring a claim against Lennar (and never would have). In other words, Lennar’s actions prejudiced Markel because, if Markel had been in charge, it would have handled the remediation program in a manner in which settlements would not have been made with people who would have never brought a claim. Sometimes there is no easier way to describe the facts of a case than setting out the court’s brief summary verbatim. This is one of those times. Here is how the Lennar court described the facts.
“Long used in commercial construction, EIFS was marketed in the early 1990s as an attractive alternative to conventional stucco in home construction. But installed on wood-frame walls typical of single-family homes, EIFS traps water inside, causing rot and structural damage, mildew and mold, and termite infestations. Damage is often undetectable from a visual inspection of the exterior of the home. Lennar Corporation and another homebuilder it bought built some 800 homes using EIFS, but stopped using it in 1998. After the problems with EIFS were exposed on the NBC television show Dateline in 1999, homeowner complaints poured in. Lennar investigated and learned that the problems associated with EIFS were frequent and substantial. Property damage typically began six to twelve months after EIFS was installed, progressed more or less, depending on the proximity of water due to rain and yard irrigation, and continued until the EIFS was removed. Lennar decided not merely to address complaints as it received them but to contact all its homeowners and offer to remove the EIFS and replace it with conventional stucco. Lennar began its remediation program in 1999 and finished in 2003. Almost all the homeowners accepted Lennar’s offer of remediation. A few were paid cash. Only three ever sued. All settled.
Early in the process, Lennar notified its insurers that it would seek indemnification for the costs. The insurers refused to participate in Lennar’s proactive, comprehensive efforts, preferring instead to wait and respond to homeowners’ claims one by one. All the insurers denied coverage, and in 2000, Lennar sued. The trial court granted summary judgments for the insurers, and the court of appeals affirmed for all but two: American Dynasty Surplus Lines Insurance Company, which had provided Lennar a $1 million primary commercial general liability policy with an annual $1 million self-insured retention, and Markel American Insurance Company, which had provided a $25 million commercial umbrella policy, in effect from June 1, 1999 through October 19, 2000. On remand, Lennar settled with American Dynasty, leaving only its claims against Markel for trial.”
Permit me to continue with the convenient verbatim fact summary. “At trial against Markel, Lennar offered evidence that the extent of water damage to a home could not be determined without removing all the EIFS, though when that was done, some homes turned out to have only limited damage, and some had none at all. Lennar offered evidence of its remediation costs for only 465 homes that had some water damage, but it included costs for removing and replacing all the EIFS on the homes, even if only part of a home was damaged.”
Putting aside several issues and procedure, the discussion here will focus on the voluntary payments aspect of the case that was addressed by the Texas Supreme Court. The Markel policy contained a provision precluding Lennar, except at its own cost, from voluntarily making any payment, assuming any obligation, or incurring any expense without Markel’s consent. Markel did not consent to Lennar’s settlements with the homeowners, but it conceded that, for the voluntary payments provision to apply, it must prove that it was prejudiced by the settlements.
Markel also argued that the policy contained another voluntary payments provision [Loss Establishment Provision] and this one, because it was contained in the policy’s insuring agreement, did not require that it prove prejudice. The provision obligated Markel to pay Lennar’s “ultimate net loss”—defined as the total amount of property damages for which Lennar is legally liable and stated that such loss may be established by adjudication, arbitration, or a compromise settlement to which Markel had previously agreed in writing.
The court rejected Markel’s argument that prejudice was not required for this second provision to apply: “Assuming Markel is right, that an insurer need not show prejudice from an insured’s failure to comply with a policy requirement that is ‘considered essential to coverage’, the Loss Establishment Provision does not qualify, certainly not for the reasons Markel argues. Its language is no clearer than Condition Es [the other voluntary payments provision cited above], and the purpose of the two provisions, precluding liability for the insured’s voluntary payments without the insurer’s consent, is exactly the same. The Loss Establishment Provision is no more central to the policy than Condition E, and the requirement that Markel show prejudice from Lennar’s non-compliance with either operates identically.”
So proof of prejudice was on the table. Markel argued at trial that “Lennar’s settlements were prejudicial, largely because Lennar offered remediation to homeowners with damaged houses who would never have sought redress had Lennar left them alone.” Indeed, Markel argued that the case involved prejudice and then some: “[P]rejudice is even more stark in this case, in which the insured actively solicited claims which might otherwise never have been brought and made payments which were not covered under the Policy.” In other words, the court saw Markel’s argument like this -- had Lennar stonewalled the homeowners, fewer repairs would have been made.
However, the court stated that this was a fact question, and not one of law, and the jury saw it differently, concluding that Lennar’s remediation program was a reasonable approach to a serious problem and that, had Lennar not proceeded as it did, the damages would have worsened and the remediation costs increased. Held – “The jury’s failure to find prejudice leaves but one conclusion: that Lennar’s loss as shown by the settlements is the amount Markel is obligated to pay under the policy.”
You could look at Lennar and conclude that the Texas Supreme Court’s decision, that proof of prejudice is required for an insurer to disclaim coverage for a voluntary payment, is not particularly noteworthy. That’s the law in other states too. You could also say that the decision is not noteworthy because it was based simply on one jury’s view of the case. Different jury. Different decision on the existence of prejudice. And you could say that the decision is not noteworthy because it involved unique facts – one where the situation would get worse if not addressed.
These are all valid points. However, Lennar is still a significant decision, as voluntary payments cases go, because, as Markel argued, the prejudice was more stark than in the usual case. Here the insured actively solicited claims which might otherwise never have been brought. Such a situation could be argued to support a finding of prejudice as a matter of law. But it was still considered to be a fact question for the jury – now enabling Lennar to make an argument, to a jury of lay people, that it should not be penalized for standing behind its product and nipping a problem in the bud. A company that will argue to a jury that it “did the right thing” is about a 10 point favorite against an insurance company pointing to a clause in an insurance policy. Further, even if the decision involved unique facts – one where the situation would get worse if not addressed -- these are not necessarily unique facts in the context of construction defect. There, moving quickly to resolve the problem can have a significant impact on the ultimate extent of damage. This is where Lennar is likely to have influence – for contractors that step-in to resolve problems quickly, despite, for whatever reason, no consent having been provided by the insurer, such as, because it is still investigating the claim.
But despite the Texas Supreme Court’s decision in Lennar, policyholders would be well-served to continue to involve their insurers in the claims and settlement process. Settling a case, and then letting your insurer know by listing it as a cc party, on the settlement check transmittal letter, is not the safest way for policyholders to go. Settling, and then hoping that your insurer cannot prove prejudice, is risky business. But notwithstanding the risks, some contractors may do so, to protect a business relationship. Lennar may prove useful for contractors in that situation.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy J. Maniloff is an attorney in the Philadelphia office of White and Williams, LLP. He concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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