Summary
construing a commercial property insurance policy earth-movement exclusion to be limited to movement due to natural causes according to the principle of ejusdem generis
Summary of this case from Hankins v. Md. Cas. Company/Zurich Am. Ins. Co.Opinion
Civil Action No. SA-98-CA-0644 OG.
June 17, 1999.
MEMORANDUM AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
TO: Honorable Orlando Garcia United States District Judge
Before the Court are Plaintiff's motion for summary judgment and supplemental motion for summary judgment and Defendant's motion for partial summary judgment. I have jurisdiction to enter this Memorandum and Recommendation under 28 U.S.C. § 636(b) and the District Court's Order referring all pretrial matters in this proceeding to me for disposition by order or to aid in their disposition by recommendation where my authority as a Magistrate Judge is statutorily constrained.
Docket Entry No. 6.
Docket Entry No. 44.
Docket Entry No. 17.
Factual Summary
This case involves a coverage dispute under a commercial property insurance policy. Plaintiff, the Insurance Company of the State of Pennsylvania ("ICSOP"), seeks a declaratory judgment that it is not contractually or extra-contractually liable to the Defendant, ALT Affordable Housing Services, Inc. ("ALT"), for damage to the insured property resulting from foundation movement.
In 1995 ICSOP issued an insurance policy to ALT for an apartment complex located in San Antonio, Texas. The policy was effective from August 31, 1995 to August 31, 1996. ALT filed a claim in July of 1996 to repair structural and cosmetic damage caused by leaking pipes under the foundation. ICSOP denied the claim because it believed foundation movement and the resulting structural damage were clearly excluded under the policy, regardless of the cause. ALT subsequently hired a private engineering company to examine the damage and continued to pursue its claim with ICSOP.
Docket Entry No. 6, Appendix, Exhibit I.
Id.
Docket Entry No. 1, ¶ 5; Docket Entry No. 4, ¶ 5. It is unclear exactly when ALT began to suspect that the foundation movement was caused by a plumbing leak. The engineering report submitted by ALT states that the plumbing test was conducted on November 21, 1997, more than one year after the initial claim was submitted. Docket Entry No. 6, Exhibit 2, p. 6.
Docket Entry No. 1, ¶¶ 7-9.
Docket Entry No. 6, Appendix, Exhibits 2-3.
Procedural Background
ICSOP filed a complaint for declaratory judgment in federal court on July 20, 1998 asking this Court to declare as a matter of law that ICSOP is not contractually or extra-contractually liable for ALT's claims. Specifically, ICSOP asks the Court to declare that it is not liable for coverage for damage to the buildings allegedly caused by foundation movement resulting from a leaking pipe; costs to access and repair the leaking plumbing; and damages to the parking lot. ALT counterclaimed for breach of contract, violations of the Texas Insurance Code, violation of the Texas Deceptive Trade Practices Act (DTPA), and violation of common law duties ( i.e., good faith and fair dealing, fraud and misrepresentation)."Both parties filed motions for summary judgment on the issue of coverage, asking the Court to declare as a matter of law that coverage under the contract does, or does not, exist for foundation damage caused by a plumbing leak. ICSOP's motion further asks the Court to declare as a matter of law that it cannot be held liable for extra-contractual damages since there is no underlying coverage under the policy.
See Docket Entries No. 6, 17.
Following the filing of the cross motions for summary judgment, ICSOP requested the Court sever and abate ALT's extra-contractual counterclaims, many of which were dependent on the underlying issue of coverage. The Court granted the motion, and stayed discovery relating solely to ALT's extra-contractual claims pending the Court's ruling on the cross motions for summary judgment.
Docket Entry No. 28.
Docket Entry No. 30, Order dated December 29, 1998.
Because I believe potential coverage exists under the policy and there is a genuine issue of material fact, I recommend all three motions for summary judgment be denied and that the parties be permitted to complete the necessary discovery to prepare this matter for trial.
Summary Judgment Standard
A party is entitled to summary judgment upon motion if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, show there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Mere allegations of a factual dispute between the parties will not defeat an otherwise proper motion for summary judgment; the requirement is there be no genuine issue of material fact. A fact is material if it might affect the outcome of the lawsuit under the governing law. A dispute about a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Therefore, summary judgment is proper if, under governing laws, there is only one reasonable conclusion as to the verdict; if reasonable finders of fact could resolve a factual issue in favor of either party, summary judgment should not be granted.
Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett , 477 U.S. 317, 322 (1986); Banc One Capital Partners Corp. v. Kneipper , 67 F.3d 1187, 1198 (5th Cir. 1995); Neff v. American Dairy Oueen Corp., 58 F.3d 1063, 1065 (5th Cir. 1995), cert. denied, 516 U.S. 1045 (1996).
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).
Anderson v. Liberty Lobby, Inc., 477 U.S. at 248; Thomas v. LTV Corp., 39 F.3d 611, 616 (5th Cir. 1994).
Anderson v. Liberty Lobby, Inc., 477 U.S. at 248; Wise v. E.I. DuPont De Nemours Co., 58 F.3d 193, 195(5th Cir. 1995); MacMillian v. United States 46 F.3d 377, 380-81 (5th Cir. 1995).
Anderson v. Liberty Lobby, Inc., 477 U.S. at 249; Kunin v. Feofanov, 69 F.3d 59, 61 (5th Cir. 1995); Banc One Capital Partners Corp. v. Kneipper, 67 F.3d at 1198.
A party seeking summary judgment bears the initial responsibility of informing the Court of the basis for its motion and identifying those portions of the record which it believes demonstrate the absence of a genuine issue of material fact. However, Rule 56 does not require the moving party support its motion with evidentiary materials negating the opponent's claim. Regardless of whether the moving party accompanies its summary judgment motion with affidavits, the motion must be granted if the evidence before the Court demonstrates the standard for entry of summary judgment, as set forth in Rule 56(c), is satisfied. Thus, when a motion for summary judgment is made and supported as provided in Rule 56, the nonmoving party may not rest upon the mere allegations or denials in his pleading. Rather, the nonmoving party's response must set forth facts showing there is a genuine issue for trial. If the nonmovant does not so respond, the Court must enter summary judgment against him.
Celotex Corp. v. Catrett, 477 U.S. at 323; Wise v. E.I. DuPont Nemours Co., 58 F.3d at 195; Burfield v. Brown, Moore, Flint, Inc., 51 F.3d 583, 588 (5th Cir. 1995).
Edwards v. Aguillard, 482 U.S. 578, 595 n. 16 (1987); Celotex Corp. v. Catrett, 477 U.S. at 323.
Id .
Fed.R.Civ.P. 56(e); Anderson v. Liberty Lobby, Inc., 477 U.S. at 250; State of Texas v. Thompson, 70 F.3d 390, 393 (5th Cir. 1995).
Celotex Corp. v. Catrett, 477 U.S. at 324; Neff v. American Dairy Oueen Corp., 58 F.3d at 1065; Engstrom v. First Nat'l Bank, 47 F.3d 1459, 1462 (5th Cir. 1995), cert. denied, 516 U.S. 818 (1995).
Lujan v. National Wildlife Federation, 497 U.S. 871, 884 (1990); Celotex Corp. v. Catrett, 477 U.S. at 323.
Discussion
1. Potential CoverageCross motions for summary judgment have been filed on the issue of coverage. Cross motions require the Court to consider each party's motion separately. Each movant has the burden of presenting evidence to support its motion. In the instant case there is a fact issue regarding causation because the parties do not agree that the plumbing leak was in fact the cause of the foundation damage. However, the parties have asked the Court to detennine if potential liability exists for foundation damage caused by a plumbing leak. Therefore, rather than addressing the evidence produced on the issue of causation, the Court must first examine the language of the contract.
Dutmer v. City of San Antonio, Tex., 937 F. Supp. 587, 589-90 (W.D. Tex. 1996) (citing Barhold v. Rodriguez., 863 F.2d 233, 236 (2d Cir. 1988)).
Id .
ICSOP has produced evidence that ALT prohibited ICSOP's engineer from entering the property and conducting an investigation. Docket Entry No. 20, Exhibit D, Affidavit of Robert E. Long. Because the insurance contract imposes upon ALT the duty to allow ICSOP to inspect the property and take samples for testing and analysis, the Court can not find that there is no question of fact as to the cause of the foundation damage despite ICSOP having produced no evidence on causation. See Docket Entry No. 6, Exhibit 1, Building and Personal Property Coverage Form § E(3)(a)(6) for a listing of the duties of the insured.
In determining if coverage potentially exists under the contract, the Court is guided by several basic rules of contract construction:
First, insurance contracts are subject to the same rules of construction as other contracts. Our primary goal, therefore, is to give effect to the written expression of the parties' intent. We must read all parts of the contract together, striving to give meaning to every sentence, clause, and word to avoid rendering any portion inoperative. . . . If, after applying these rules, a contract is subject to two or more reasonable interpretations, it is ambiguous. Where an ambiguity involves an exclusionary provision of an insurance policy, we `must adopt the construction. . . urged by the insured as long as that construction is not unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties' intent.'
Balandran v. Safeco Ins. Co. of America, 972 S.W.2d 738, 740-41 (Tex. 1998) (citations omitted).
The insurance policy at issue covers all "direct physical loss of or damage to Covered Property. . . caused by or resulting from any Covered Cause of Loss." Therefore, for coverage to exist under the policy, both the lost or damaged property and the cause of the damage or loss must both be designated as "covered." If either the property or the cause of damage or loss is specifically excluded, then the claim is not covered.
Docket Entry No. 6, Exhibit I, Building and Personal Property Coverage Form, § A.
The insurance contract specifically excludes from coverage some forms of damage resulting in foundation movement. Any damage caused by earth movement, whether in the form of sinking, rising, or shifting, is specifically excluded in exclusion B(1)(b) This earth movement clause may be construed as pertaining only to movement caused by natural causes according to the legal principle of ejusdem generis. Furthermore, the policy excludes damage resulting from water occurring naturally within the ground exerting pressure on the foundation. Thus, the policy excludes damage caused by foundation movement resulting from purely natural causes. ALT, however, alleges that the foundation movement was caused by an artificial source, an underground sewer line leak.
Causes of Loss — Special Form § B(1) reads:
We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any other sequence to the loss. . . . (b) Earth Movement (1) Any earth movement (other than sinkhole collapse), such as an earthquake, landslide, mine subsidence or earth sinking, rising, or shifting (emphasis added).
Where specific and particular enumerations of persons and things. . . are followed by general words, the general words are not to be construed in their widest meaning or extent but are to be treated as limited and applying only to persons or things of the same kind or class as those expressly mentioned." Barnett v. Aetna Lire Ins. Co., 723 S.W.2d 663, 666 (Tex. 1987) (quoting Stanford v. Butler, 181 S.W.2d 269, 272 (Tex. 1944)).
Causes of Loss — Special Form § B(1) reads:
We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any other sequence to the loss. . . . (g) Water (4) Water under the ground surface pressing on, or flowing or seeping through: (a) Foundations, walls, floors or paved surfaces; (b) Basements, whether paved or not; (c) Doors, windows or other openings.
The court in Adrian Assocs., v. Nat'l Surety Corp., 638 S.W.2d 138 (Tex.App.-Dallas 1982, writ ref'd n.r.e.), approved by, 650 S.W.2d 67 (Tex. 1983), held that a similar insurance exclusion limited `waters' to waters of a natural origin when the source was not specified.
ALT argues that the policy provides coverage for foundation and structural damage resulting from a plumbing leak. ALT's basis for arguing coverage exists is premised upon the last sentence in exclusion 2(d):
The source of the coverage confusion results from the parties' elimination of exclusion B(2)(f), which would have clearly excluded damage due to "continuous or repeated see page of water." That exclusion read: "We will not pay for loss or damage caused by or resulting from any of the following: Continuous or repeated seepage or leakage of water that occurs over a period of 14 days or more." Docket Entry No. 6. Exhibit 1, Causes of Loss — Special Form § B(2)(f). This exclusion is eliminated from the contract in the endorsement captioned "Texas Changes." "Exclusion B .2.f., which pertains to continuous or repeated seepage or leakage of water that occurs over a period of 14 days or more, is deleted. However, all other exclusions pertaining to loss or damage by water continue to apply." Docket Entry No. 6. Exhibit 1, Texas Changes, § D(2).
2. We will not pay for loss or damage caused by or resulting from any of the following:. . . (d)(1) Wear and tear; (2) Rust, corrosion, fungus, decay, deterioration, hidden or latent defect or any quality in property that causes to damage or destroy itself; (3) Smog; (4) Settling, cracking, shrinking, bulging or expansion of pavements, foundations, walls, floors, roofs, ceilings, curbs, fences, retaining walls or swimming pools;. . . But if loss or damage by the "specified causes of loss" or building glass breakage results, we will pay for that resulting loss or damage. (emphasis added)
F. Definitions "Specified Causes of Loss" means the following: . . . water damage. 3. Water damage means accidental discharge or leakage of water or steam as the direct result of the breaking or cracking of any part of a system or appliance containing water or steam.
Docket Entry No. 6. Exhibit I, Causes of Loss — Special Form § B(2)(d), § F; Texas Changes, § D.
While this exclusion holds that damages caused by or resulting from either "wear and tear" or "settling, cracking, shrinking or expansion" are both specifically excluded from coverage, it is unclear if damage resulting from a leaking pipe would be excluded if that damage is also an excluded form of damage. Asked differently, is resulting water damage limited to damage that is otherwise not excluded in the policy?
ALT argues that if a plumbing leak caused by one of the excluded causes of loss or damage in § 2(d)( e.g., wear and tear, decay, deterioration, or some latent defect) results in a water leak, then the last sentence of § 2(d) clearly states that ICSOP will pay for the resulting damage caused by that plumbing leak. ALT claims that this language is clear and therefore all damage resulting from the excluded peril is covered. In sum, ALT argues that because the pipe leaked due to a reason excepted from the list of exclusions, all resulting damage is covered, notwithstanding the fact that damage due to "settling, cracking, shrinking or expansion" is also specifically excluded. ICSOP, without addressing the language in the exclusion on its face, argues that coverage for foundation damage resulting from a subterranean plumbing leak is not supported by Texas case law.
ICSOP relies primarily on four Texas intermediate appellate court decisions addressing insurance contract exclusions and claims by homeowners for foundation damage caused by water. See, Park v. Hanover Ins. Co., 443 S.W.2d 940 (Tex.Civ.App.-Amarillo 1969, no writ); Bentley v. Nat'l Standard Ins. Co., 507 S.W.2d 652 (Tex.Civ.App. — Waco 1974, writ ref'd n.r.e); Lambros v. Standard Fire Ins. Co., 530 S.W.2d 138 (Tex.Civ.App.-San Antonio 1975, writ ref d); General Ins. Co. of America v. Hallmark, 575 S.W.2d 134 (Tex.Civ.App — Eastland 1978, writ ref'd n.r.e.). The Court notes that the courts in Hallmark and Park the two cases most on point, dismissed the insureds' interpretations of the exclusions without finding ambiguity. The courts in these cases, all more than twenty years old, did not apply the often cited rule of contract construction in Texas law that exclusionary clauses are to be construed strictly against the insurer. See, State Farm Fire Ins. Cas. Co. v. Reed, 873 S.W.2d 698, 699, 701 (Tex. 1993); Balandran v. Safeco Ins. Co. of America, 972 S.W.2d 738, 741 (Tex. 1998); National Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991).
In deciphering the policy, Texas law states that contracts are to be give their plain meaning and the Court need not construe the contract unless it is deemed ambiguous. A contract is ambiguous when it is susceptible to more than one reasonable meaning. ALT claim s that its interpretation gives the language its plain meaning and should control. ALT further alleges that ICSOP's reading of the exclusion adds or infers words that are not written and thus that interpretation should not govern. ICSOP reads the provision as listing types of damage excluded in all cases, and that subsequent water damage would be excluded if it results in damage in the form of "settling, cracking, shrinking, or expansion." It is not evident on the contract's face which is the correct interpretation. However, the interpretation ICSOP urges becomes clear only if the phrase "unless otherwise excluded" is added or inferred to the end of the phrase "we will pay for that resulting damage."
Upshaw v. Trinity Companies, 842 S.W.2d 631, 633 (Tex. 1992); Barnett v. Aetna Life Ins. Co., 723 s.w.2d 663, 665 (Tex. 1987).
Upshaw v. Trinity Companies, 842 5.W.2d 631, 633 (Tex. 1992).
If expressed in clear and unambiguous language, the court cannot resort to various rules of construction. Puckett v. United States Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984).
See, Praeger v. Wilson, 721 S.W.2d 597, 601 (Tex.App. — Fort Worth 1986, writ ref'd n.r.e.).
The Court has not found any Texas case interpreting an identical insurance clause. The Fifth Circuit in Burditt v. West American Insurance Co. examined another exclusionary clause excepting water damage caused by excluded perils and found that coverage existed for foundation damage caused by a leaking pipe. The Court held that because the exclusionary clause was ambiguous, the insured had only to "demonstrate a reasonable interpretation of the clause favoring coverage" to prevail. Additionally, the Court found that the insurance company's argument would have rendered the exclusion's exception for water damage largely meaningless since it would have eliminated many common forms of water damage from the exception. Likewise, ICSOP's interpretation here would also limit the water damage exception, since rust, fungus, and decay would also not be covered as resulting damage, even though they are forms of damage normally associated with water.
Burditt v. West Amer. Ins. Co., 86 F.3d 475 (5th Cir. 1996).
Id . at 477.
Id .
The federal district court in the Eastern District of Virginia, in the only case discovered addressing the same policy language, held that coverage would exist in a factually similar situation when a leaking subterranean water pipe caused the cracking and settling of the insured's shopping center building. The court found that if the leaking pipe had caused the damage to the foundation, the insured's loss did not fall within the scope of the exclusion and was therefore covered.
Sentinel Assocs. v. Am. Mfrs. Mut. Ins. Co., 804 F. Supp. 815, 820 (E.D. Va. 1992), aff'd, 30 F.3d 130 (4th Cir. 1994). The Court in Sentinel rejected the insurance companies' argument that water damage to the foundation was not within the scope of the "water damage" excepted in the last sentence of the exclusionary clause. Id . at 820, n. 3. The Court found that no limitation was made on the scope of "water damage" and therefore damage to the foundation was included. Id .
Id . at 820.
Texas law requires that an ambiguity in an exclusionary clause be construed as urged by the insureds, "as long as that construction is not unreasonable [and] even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties' intent." Both parties have presented reasonable interpretations of the language in exclusion 2(d). Because ALT, the insured, has reasonably interpreted the contract exclusion, its interpretation must prevail as a matter of law.
Balandran v. Safeco Ins. Co. of America, 972 S.W.2d 738, 740-41 (Tex. 1998) (quoting National Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991)).
Accordingly, I recommend that the District Court find that potential coverage exists under this policy for damage resulting from a subterranean plumbing leak. However, since a question of fact remains on whether the leak was "the direct result of the breaking or cracking of any part of a system or appliance containing water or steam," I recommend both parties' motions for summary judgment on the issue of coverage be denied.
2. Additional Claims under the Policy A. Access Costs
ALT also has claimed damage for the costs to tunnel under the foundations of the apartment buildings to access the plumbing leaks. The contract states that "If loss or damage caused by or resulting from covered water or other liquid. . . damage loss occurs, we will also pay the cost to tear out and replace any part of the building or structure to repair the damage to the system or appliance from which the water or other substance escapes." ICSOP claims that these costs are not covered since: (1) there is no underlying coverage under the policy for the water damage; and (2) the contract specifically excludes from coverage underground pipes and the costs of "excavations, grading, backfilling or filling" from coverage. Coverage for the costs to access and repair the plumbing is wholly dependent upon whether the damage caused by the leaking plumbing is covered under the policy. While the contract does exclude underground pipes and the costs of excavations from coverage, the paragraph ALT relies on clearly states that these costs will be covered if the damage causes covered water damage. This later provision is more specific and controls since it does not state that any exceptions apply. If the District Court accepts my recommendation that the potential for coverage exists under the policy for damage resulting from a subterranean plumbing leak, these additional plumbing access and repair costs should also be covered.
Docket Entry No. 6, Exhibit I, Building and Personal Property Coverage Form, § A(2)(f),(m).
Causes of Loss, Special Form § E(2).
B. Parking Lot
ICSOP has also asked the Court to declare that there is no coverage under the policy for damage to the parking lot due to a plumbing leak. An insured has the burden of showing that an exclusion does not apply to their claim when an insurance company denies coverage based upon an exclusionary clause. ALT has not met this burden since it does not address this issue in its briefing. Furthermore, the policy specifically excludes paved surfaces from coverage, and the parking lot does not appear to affect any property covered by the policy. Therefore, I recommend that there is no coverage for damage to the parking lot, regardless of the cause.
Nant'l Fire Ins. Co. of Pittsburgh, Pa. v. Valero Energy Corp., 777 S.W.2d 501, 505 (Tex.App.-Corpus Christi 1989, writ denied).
3. Supplemental Motion for Summary Judgment
Texas law requires that insureds are not entitled to recover under an insurance policy unless they establish that the damage occurred or manifested itself during the relevant policy period.
Employers Casualty Co. v. Block, 744 S.W.2d 940, 944 (Tex. 1988),overruled in part on other grounds, State Farm Fire Casualty v. Gandy, 925 S.W.2d 696 (Tex. 1996).
ICSOP filed a supplemental motion for summary judgment on the issue of coverage since ALT had produced no evidence indicating that the loss occurred during the relevant policy period. In response to the Plaintiff's motion, ALT subsequently produced such evidence and created a question of fact. Because an issue of material fact now exists as to whether the damage occurred during the policy period, I recommend that summary judgment be denied on the Plaintiff's supplemental motion for summary judgment.
Docket Entry No. 44.
Docket Entry No. 45.
4. Extra-contractual Claims
An insurer who breaches the common law duty of good faith and fair dealing owed to an insured may be held liable for the tort of bad faith. The insurer's duty of good faith extends to the payment and processing of claims. To establish a breach of the duty, a plaintiff must demonstrate that the insurer had no reasonable basis for denying or delaying payment of a claim, and the insurer knew or should have known that fact. This standard requires a plaintiff show the insurance company denied coverage after liability became "reasonably clear." An insurer will not be held liable for breaching the duty if the company had a valid basis for denying a claim, even if the claim later proves to have been valid.
Aranda v. Ins. Co. of N. America, 748 S.W.2d 210, 212 (Tex. 1988) (citations omitted).
Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 50-51 (Tex. 1997) (quoting Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 18 (Tex. 1994)).
Universe Life Ins. Co. v. Giles, 950 S.W.2d at 55. Compare, TEX. INS. CODE ANN. art. 21.21 § 4(10)(a)(ii) (West. Supp. 1999) (listing as an unfair and deceptive act or practice the failure "to attempt in good faith to effectuate a prompt, fair and equitable settlement of a claim with respect to which the insurer's liability has become reasonably clear").
Lyons v. Millers Casualty Ins. Co. of Tex., 866 S.W.2d 597, 600 (Tex. 1993)("[I]f the insurer has denied what is later determined to be a valid claim under the contract of insurance, the insurer must respond in actual damages up to the policy limits. But as long as the insurer has a reasonable basis to deny or delay payment of the claim, even if that basis is eventually determined by the fact finder to be erroneous, the insurer is not liable for the tort of bad faith.").
The Texas Supreme Court has modified the common law standard of bad faith to mirror the statutory bad faith standard, requiring the plaintiff show the insurance company denied coverage after liability became "reasonably clear." Because the statutory and common law standards are now identical, Texas courts have held that when there is no merit to a bad faith claim asserting a wrongful denial of benefits, the statutory claims under § 21.21 of the Insurance Code and the DTPA are also eliminated. An insurer will not risk tort liability for denying a claim of coverage if the insurer had a reasonable basis for denial.
Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 55 (Tex. 1997). "[T]his solution unifies the common law and statutory standards for bad faith." Id .
Higginbotham v. State Farm Mut. Auto. Ins. Co., 103 F.3d 456, 460 (5th Cir. 1997) (citation omitted) ("Although these claims are individual causes of action which do not depend on each other for support, Texas courts have clearly ruled that these extra-contractual tort claims require the same predicate for recovery as bad faith causes of action in Texas."); State Farm Lloyds, Inc. v. Polasek, 847 S.W.2d 279, 282 n. 2 (Tex.App.-San Antonio 1992, writ denied))("Because the DTPA count involves the same theory as the bad faith count, we consider the had faith and DTPA claims together."); Douglas v. State Farm Lloyds, 37 F. Supp.2d 532, 544 (S.D. Tex. 1999)("A statutory violation is dependent upon a "determination pursuant to law that the insurer breached the duty of good faith and fair dealing."'); Ruch v. State Farm Fire Cas. Co., 1998 WL 892287, *3 (ND. Tex. Dec. 14, 1998) (No. Civ.A. 3:96 CV-2040D)("[A]n insured may not prevail on claims under article 21.21 of the Texas Insurance Code or the DTPA if the court concludes that the insured has no cause of action for breach of the duty of good faith and fair dealing."); Lawson v. Potomac Ins. Co. of Illinois, 1998 WL 641809 (N.D. Tex. Sept. 14, 1998) (No. Civ. 3:98-CV-0692H) ("According to Texas law, extra-contractual tort claims pursuant to the Texas Insurance Code and the DTPA require the same predicate for recovery as bad faith causes of action.").
Higginbotham v. State Farm Mut. Auto. Ins. Co., 103 P.3d 456, 460 (5th Cir. 1997).
ALT cross-claimed with several extra-contractual claims, including, breach of contract, violations of the Texas Insurance Code, violation of the Texas Deceptive Trade Practices Act (DTPA), and violation of common law duties ( i.e., good faith and fair dealing, fraud and misrepresentation).
Bad faith requires a showing that the insurance company had no reasonable basis for denying the claim. ICSOP's interpretation of the policy was reasonable, albeit not the prevailing interpretation. The policy does not cover foundation damage resulting from natural causes. ICSOP interpreted the policy as also excluding damage due to artificial causes, such as a subterranean plumbing leak. Because ICSOP had a reasonable basis for its denial, as a matter of law it cannot be held liable for breach of its duty of good faith. Therefore, I recommend that Plaintiff's motion for summary judgment on the extra-contractual claims grounded in bad faith be granted.
However, some of ALT's extra-contractual claims are not dependent upon coverage and involve ICSOP's conduct in the issuing of the policy and its handling of ALT's claim. Even if the District Court finds that ICSOP's interpretation of the coverage exclusion was reasonable, these claims survive the District Court's ruling on the motion for summary judgment on the issue of coverage.
5. Discovery
The facts concerning the actual cause of the foundation damage are in dispute. ICSOP has not yet had their engineer perform an inspection of the damaged property because ALT denied access. ICSOP has requested that if the Court finds that coverage potentially exists, the Court also order ALT to allow it reasonable access to inspect the property. Because I find that the potential for coverage exists, I recommend that ICSOP be permitted to access the property to complete its discovery before trial. ICSOP made this request to continue discovery prior to the Court's ruling on the motion for summary judgment. Therefore, I recommend ICSOP be permitted to complete discovery by performing an inspection of ALT's property.
Docket Entry No. 20, Exhibit D.
The three requirements which must be met before the Court can grant a continuance on discovery appear to have been met in the instant case: (1) ICSOP requested the extended discovery prior to the ruling on the motion for summary judgment; (2) ICSOP placed the Court on notice that further discovery pertaining to the motion for summary judgment was sought; (3) ICSOP has demonstrated to the Court how the requested discovery pertains to the pending motion. Exxon Corp. v. Crosby-Mississippi Resources Ltd., 40 F.3d 1474, 1487 (5th Cir. 1995).
Additionally, discovery on the extra-contractual claims was stayed pending resolution of this motion for summary judgment. An Order of Clarification was signed by this Court on January 7, 1999 stating that the Court would issue a new scheduling order as necessary once the dispositive motions addressing the contractual issues had been resolved. If the District Court accepts my recommendation that the potential for coverage exists, the parties must be given the opportunity to complete discovery on the surviving extra-contractual claims advanced by ALT.
Docket Entry No. 21.
Recommendation
Based upon the reasons listed above, I recommend that potential coverage exists for damage caused by a subterranean plumbing leak and that the motions for summary judgment be GRANTED in part and DENIED in part, such that:
1. Plaintiff's motion for summary judgment be GRANTED only with respect to any extracontractual claims dependent upon the bad faith denial of the claim;
2. Plaintiff's and Defendant's motions for summary judgment be DENIED on all other claims since a genuine issue of material fact exists on the issue of causation;
3. Plaintiff's supplemental motion for summary judgment be DENIED; and
4. The District Court order the parties to submit their recommendations as to how the scheduling order should be modified to accommodate additional discovery on the surviving extracontractual claims and ICSOP's inspection of the property.
Instructions For Service and Notice of Right To Appeal/Object
The United States District Clerk shall serve a copy of this Memorandum and Recommendation on all parties either (1) by certified mail, return receipt requested, or (2) by facsimile if authorization to do so is on file with the Clerk. Under 28 U.S.C. § 636(b)(1), and Rule 4(b) of the Local Rules for the Assignment of Duties to United States Magistrates (Appendix C to the Local Court Rules for the Western District of Texas), any party who desires to object to this report must file written objections to the Memorandum and Recommendation with the Clerk of this Court, and serve the Magistrate Judge and all parties, within ten (10) days after being served with a copy of this Memorandum and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. A party's failure to file written objections to the proposed factual findings, legal conclusions, and recommendations contained in this report shall bar the party from a de novo determination by the District Court. Additionally, any failure to file written objections to the proposed findings, conclusions, and recommendations contained in this report within ten (10) days after being served, shall bar the aggrieved party from appealing the factual findings and legal conclusions that are accepted by the District Court, except on grounds of plain error. SIGNED June 17, 1999.
United States v. Wilson, 864 F.2d 1219, 1221 (5th Cir. 1989),cert.denied, 492 U.S. 918 (1989).
Battle v. U.S. Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
Thomas v. Arn, 474 U.S. 140, 150-55 (1985); United States v. Raddatz, 447 U.S. 667, 673-76 (1980); 28 U.S.C. § 636(b)(1).
Douglass v. United Serv. Auto. Ass'n, 79 F.3d 1415 (5th Cir. 1996).