John and Katherine Keenan v. Wausau Lloyds Insurance Company--Appeal from 131st Judicial District Court of Bexar County

No. 04-98-00087-CV
John KEENAN and Katharine Keenan,
Appellants
v.
WAUSAU LLOYDS INSURANCE COMPANY,
Appellee
From the 131st Judicial District Court, Bexar County, Texas
Trial Court No. 96-CI-06309
Honorable David Peeples, Judge Presiding

Opinion by: Catherine Stone, Justice

Sitting: Alma L. L pez, Justice

Catherine Stone, Justice

Sarah B. Duncan, Justice

Delivered and Filed: September 23, 1998

REVERSED AND REMANDED

This insurance dispute presents the question of whether the Texas Standard Homeowner's Policy-- Form B covers a claim for payment of costs to access a defectively constructed plumbing system. The trial court determined that such a claim was not covered by the policy, and granted summary judgment in favor of Wausau Insurance Company on John and Katherine Keenan's contractual and extra-contractual claims stemming from Wausau's denial of such coverage. We answer the question affirmatively, and accordingly, we reverse the summary judgment and remand the case to the trial court for further proceedings consistent with this opinion.

Factual and Procedural Background

Shortly after the Keenans purchased their current home in 1993, they began to experience overflow problems with a bathroom toilet located near their kitchen. The Keenans self-diagnosed the first overflow as a simple toilet paper clog. A plumbing company attributed a second and third overflow to blockage in their plumbing lines. A fourth overflow occurred on June 12, 1995, causing damage to the surrounding carpet, vinyl flooring, an electrical outlet, and art paper which had been stored in the bathroom closet. The Keenans filed a claim with Wausau, their homeowner's insurance carrier, for the property damage and for payment of the costs associated with accessing the plumbing lines.

Wausau investigated the claim by hiring a plumbing company and an engineer to ascertain the cause of the overflow. Arthur Koenig, the engineer conducting the inspection, determined that the overflows were due to a construction defect, namely the sewer lines had inadequate gravity slope for proper drainage. Koenig opined that the condition was created when the sewer lines were laid during the construction phase of the home. He concluded there was no physical loss to the any of the plumbing/sewer lines, and there was no foundation movement stress as a result of the leakage. Based on its investigation, Wausau paid for the loss of the property, but denied payment for the costs associated with accessing the defectively constructed plumbing lines, concluding that the construction defect was not a covered loss under the policy and, therefore, it had no duty to pay to access the lines.

Litigation ensued with the Keenans initially suing the previous homeowners and the original builder. Wausau intervened in the lawsuit before the Keenans added Wausau as a defendant due to its refusal to pay for the access costs. In addition to asserting a breach of contract claim against Wausau, the Keenans sought damages for bad faith/statutory ("extra-contractual") claims. The Keenans' claims against Wausau were severed from the Keenans' claims pending against the previous homeowners and the builder.

The Keenans moved for summary judgment on the coverage issue, arguing that the policy unambiguously provides coverage for their claim in paragraph B-9, Section I - "Perils Insured Against." Wausau responded to the Keenans' motion by filing a competing partial summary judgment motion on this sole issue. Wausau countered with six grounds for judgment in its favor: (1) the policy language clearly requires a physical loss to the plumbing lines before Wausau's duty to pay access costs arises; (2) the construction defect constitutes an inherent vice excluded from policy coverage; (3) a construction defect is not covered under the reasonable repairs provision; (4) Wausau has no obligation to pay for initial faulty workmanship; (5) requiring Wausau to pay for repair or replacement of the pre-existing faulty condition would place the Keenans in a better condition than they were when they procured their homeowner's policy; and (6) the loss for which the Keenans seek recovery, repair of the defective plumbing lines, occurred outside the applicable policy period.

The trial court initially ruled in favor of the Keenans, but following a second summary judgment motion filed by Wausau, revisiting the coverage issue and addressing the Keenans' extra-contractual claims, to which the Keenans responded by relying on their original partial summary judgment motion, the trial court vacated its original order. In its second order, the trial court denied the Keenans' motion for partial summary judgment, and granted summary judgment in favor of Wausau on all but one claim asserted by the Keenans. The surviving cause of action, a claim under the DTPA for unfair marketing practices, was later dropped, thereby rendering the summary judgment final and appealable.

The Insurance Policy

Form B provides coverage for losses sustained both to the dwelling and personal property. The dwelling, under Coverage A, is insured against losses from all risks, subject to enumerated exclusions. Personal property, under Coverage B, is insured only against twelve identified hazards, again subject to certain exclusions. The pertinent part of the policy reads:

Section I - Perils Insured Against

COVERAGE A (Dwelling):

We insure against all risks of physical loss to the property described in Section I Property Coverage, Coverage A (Dwelling) unless the loss is excluded in Section I Exclusions.

COVERAGE B (Personal Property):

We insure against physical loss to the property described in Section I Property Coverage, Coverage B (Personal Property) caused by a peril listed below, unless the loss is excluded in Section I Exclusions.

* * * *

9. Accidental Discharge, Leakage or Overflow of Water or Steam from within a plumbing, heating or air conditioning system or household appliance.

A loss resulting from this peril includes the cost of tearing out and replacing any part of the building necessary to repair or replace the system or appliance. But this does not include loss to the system or appliance from which the water or steam escaped.

(emphasis added).

We construe an insurance contract like any other contract, seeking the parties' intent from the terms as written. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994). If a contract is free from ambiguity, we enforce the terms of the agreement as written. Glover v. National Ins. Underwriters, 545 S.W.2d 755, 761 (Tex. 1977). Where a contract can be given a definite legal meaning or interpretation, it is not ambiguous and the court will construe the agreement as a matter of law. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). Merely because the parties present differing interpretations of an agreement does not give rise to an ambiguity. Forbau, 876 S.W.2d at 134. The agreement must be reasonably susceptible to more than one interpretation for it to be considered ambiguous. See Coker, 650 S.W.2d at 393.

Wausau's primary arguments in support of its position that coverage for the Keenans' claim for access costs does not exist can be distilled into two primary contentions: First, the access provision of Section I, paragraph B-9 is not triggered unless there is a physical loss to the plumbing line to which the insured seeks access. Wausau contends that it is undisputed that the Keenans' plumbing lines are structurally sound; thus, Wausau is not obligated to pay for access to lines that were simply defectively placed. See North American Ship Building, Inc. v. Southern Marine & Aviation Underwriting, Inc., 930 S.W.2d 829, 833-34 (Tex. App.--Houston [1st Dist.] 1996, no writ). Wausau contends that finding coverage for such a claim would make it an insurer for the contractor. See id. Second, relying upon Sharp v. State Farm Fire & Casualty Ins. Co., 115 F.3d 1258 (5th Cir. 1997), Wausau claims that the access provision stated under Coverage B unambiguously applies solely to the loss of personal property. We reject these arguments.

I. Physical Loss

Applying the rules of contract construction, we find that the policy unambiguously provides coverage for the Keenans' claim of access costs. Wausau's first contention that the plumbing system must sustain a physical loss before it is responsible for access costs finds no support in the plain terms of the policy. The access provision's triggering event is simply "a loss to covered property" caused by "discharge, leakage or overflow of water or steam from within a plumbing, heating, or air conditioning system or household appliance." Here, the bathroom overflow caused damage to surrounding carpet, vinyl flooring, an electrical outlet, and art paper which had been stored in the bathroom closet, all items covered under the policy. Under the plain terms of the policy, once covered property is damaged by steam or water from one of the listed sources, the insured is covered for the cost of accessing the problem, without regard to the nature of the problem, which could include defective construction. Thus, because the Keenans' policy clearly provides coverage for access costs regardless of "fault," it cannot be said that the Keenans have been put in a better position by this interpretation. They paid for such protection. Wausau's reliance on North American Shipbuilding, Inc. v. Southern Marine & Aviation Underwriting, Inc., 930 S.W.2d 829 (Tex. App.--Houston [1st Dist.] 1996, no writ) does not change this conclusion.

Wausau cites North American Shipbuilding for the proposition that losses due to "faulty workmanship" are categorically excluded from coverage under a Form B policy. We disagree with Wausau's suggested interpretation of North American Shipbuilding and, in fact, we find that North American Shipbuilding argues in favor of coverage in the instant case. In North American Shipbuilding, North American procured an "all risks" insurance policy after it contracted to build a ship. North American Shipbuilding, 930 S.W.2d at 831. While testing its ship, North American determined that certain welds were defectively constructed, and filed a claim seeking replacement costs of the welds. Id. North American's claim was denied and it sued for breach of contract; summary judgment was granted in favor of the insurer. Id. at 831-32. The First Court affirmed, distinguishing between a claim based solely on the cost of repairing faulty workmanship and a claim involving an accident or loss caused by the faulty workmanship. The court noted that under the terms of North American's policy, a claim based on the latter, but not the former scenario, was covered. See id. at 832-84. The instant case, by analogy, falls within the latter-stated scenario.

Wausau also contends that finding access coverage for this type of claim which involves an initial construction defect rather than a physical loss to the plumbing line turns the homeowner's policy into a warranty policy for the contractor. Drawing a distinction between a construction defect verses a physical loss, Wausau suggests that coverage for the access costs does not exist in the instant case because the producing cause of the overflows can be traced to someone's negligence. This contention labors under the false assumption that a physical loss, a loss covered according to Wausau, could not be caused by human error. The use of substandard building materials, an error in judgment as much as miscalculating the gravitational slope grade of pipes, could create a physical loss to the plumbing lines. Because human error could be at the heart of a physical loss, Wausau's phantom distinction between construction defect/physical loss cannot serve as a basis upon which to deny coverage.

It appears Wausau's misunderstanding driving its "faulty workmanship" argument is also tied to its belief that the "loss" for which the Keenans seek reimbursement is the defectively placed plumbing lines. This is evidenced by Wausau's argument that the Keenans' loss did not occur within the applicable policy period. This argument is without merit. The Keenans' policy was in force from March 24, 1995 to March 24, 1996. Clearly, the loss of property caused by the June 12, 1995 overflow formed the basis of the Keenans' claim, not the plumbing lines themselves. The access costs represent an incidental portion of the Keenans' covered loss.

II. Reliance on Sharp

Wausau's reliance on Sharp v. State Farm Fire & Casualty Ins. Co., 115 F.3d 1258 (5th Cir. 1997), in its second argument does not alter our conclusion that coverage for the Keenans' claim exists. In its second summary judgment motion, Wausau cited Sharp in support of its argument that the access provision, by virtue of its placement under Coverage B, was limited to losses involving personal property.

The Sharps, holders of a Form B homeowner's policy, filed a claim with State Farm for foundation, structural, and cosmetic damage caused by a plumbing leak. Sharp, 115 F.3d at 1260. State Farm denied coverage on the basis that foundation damage is specifically excluded under the terms of the policy under 1 (h) of Section I - Exclusions. Id. The Sharps filed suit in state court which was removed by State Farm to federal court on diversity jurisdiction. Id. State Farm successfully moved for summary judgment on the issue of coverage and the Sharps appealed. Id. The Fifth Circuit affirmed, holding that the foundation damage was excluded under exclusion 1(h), and that the exclusion repeal provision stated under Coverage B (Personal Property)(1) applied only to Coverage B. Id. at 1262-63. Specifically, the court stated:

The Exclusions section indicates that all of the exclusions apply to both Coverage A [Dwelling] and Coverage B [Personal Property]. Consequently, in order to invalidate any exclusion from a particular type of peril, the policy must so state within the language of the "Coverage," either A or B, to which the exclusion is to be made inapplicable. That is exactly what this policy accomplishes: Exclusion "h" is made inapplicable to the "accidental discharge" peril under Coverage B (Personal Property), but not under Coverage A (Dwelling).

Id. at 1263. The court continued:

[U]nder the plain terms of the policy, the Sharps' claim is for structural and cosmetic damage to their house only, and therefore falls under Coverage A (Dwelling), and not under Coverage B (Personal Property). Coverage B, in its entirety, is simply inapplicable to the Sharps' claim.

Id.

The precedential value of Sharp has been blunted by the Texas Supreme Court's recent decision Balandran v. Safeco Ins. Co. of America, 41 Tex. Sup. C.J. 1153 (Tex. July 3, 1998). Balandran, a case involving the identical issue presented in Sharp, came to the Texas Supreme Court on a certified question from the Fifth Circuit following the Texas Commissioner of Insurance's pointed disagreement with the Sharp decision. In Balandran, the Supreme Court rejected the dwelling/personal property loss dichotomy articulated in Sharp, determined that the exclusion repeal provision contained an ambiguity, and following well-settled rules of contract construction, resolved the ambiguity in favor of the insureds, holding that the policy provides coverage. See Balandran, 41 Tex. Sup. C. J. at 1155-56. While the instant dispute does not concern the exclusions provision at issue in both Sharp and Balandran, we find the Supreme Court's interpretation of Section I in Balandran instructive to the resolution of our case.

As noted, one of Wausau's chief arguments against coverage is that the "access costs" provision appears only under Coverage B, and therefore, it is applicable only for losses of personal property. An analogous argument regarding the structure of the policy was rejected by the Supreme Court in Balandran. See id. at 1155. We likewise reject such an argument. The access provision, like the exclusion repeal provision as observed by the Supreme Court, appears under Coverage B "simply because it is the only place in the policy that the 'accidental discharge' risk is specifically described." Id. at 1155. The dwelling is insured against all losses, while personal property is only insured against specifically identified perils. The plain language of the access provision, despite its placement under Coverage B, indicates that it is applicable to both dwelling and personal property losses: "a loss resulting from this peril includes the cost of tearing out and replacing any part of the building necessary to repair or replace the system or appliance." The term "loss" is not qualified or otherwise limited solely to personal property; thus, under a plain reading of the policy, the Keenans' claim for access costs is covered.(2) Even if we dissected Section I as loss of personal property verses dwelling loss as was done in Sharp, the Keenans' claim is covered because art supplies were damaged in the June 12th overflow.

We conclude, therefore, that based on the plain language of the policy, the Keenans are entitled to payment for the costs associated with accessing their defective plumbing system. In light of this holding, we reverse the summary judgment and remand the case to the trial court for further proceedings consistent with this opinion. See CU Lloyd's of Texas v. Feldman, 41 Tex. Sup. Ct. J. 1364, 1365 (August 27, 1998) (per curiam) (when no declaratory relief sought and no evidence of damages submitted or considered, court of appeals cannot render judgment on liability alone).

CATHERINE STONE

JUSTICE

PUBLISH

1. The exclusion repeal provision stated under Coverage B provides:

Exclusions 1.a through 1.h under Section I Exclusions do not apply to loss caused by this peril.

* * *

Exclusion (h) states:

We do not cover loss under Coverage A (Dwelling) caused by settling, cracking, bulging, shrinkage, or expansion of foundations, walls, floors, ceilings, roof structures, walks, drives, curbs, fences, retaining walls or swimming pools.

2. In response to Wausau's "physical loss" argument, the Keenans have consistently maintained both at summary judgment and on appeal that the policy language is purposefully broad in reference to the "loss" that triggers access coverage. We agree with the Keenans' assertion that in order for coverage not to exist in the instant case, the policy must be worded to include limiting conditions upon the triggering event. Two unpublished Ohio cases illustrate this point. These cases are cited for their demonstrative rather than precedential value. In Direct Carpet Mills Outlet of Columbus, Inc. v. Amalgamated Realty Co., No. 87AP-101, 1988 WL 84405 (Ohio Ct. App. 1988), a similar access provision is expressly limited in the following way:

Water Damage: Loss by water damage shall mean damage caused by the accidental discharge or leakage of water or steam from within a plumbing, heating or air conditioning system or domestic appliance only when such discharge or leakage is the direct result of the breaking or cracking of any pipes, fittings, part, or fixtures forming a part of such system or appliance, including the cost of tearing out and replacing any part of the buildings covered required to effect repairs to the system or appliance from which the water or steam escapes. . . .

Direct Carpet Mills Outlet of Columbus, Inc., 1988 WL 84405 at *5 (emphasis added). In Darling v. South Point Water Co., No. 1490, 1981 WL 2949 (Ohio Ct. App. 1981), an access provision for water damage is restricted as follows:

Accidental Discharge, Leakage or Overflow of Water or Steam from within a plumbing, heating or air conditioning system or domestic appliance, including necessary tearing out and replacing of any part of the building covered . . . [and] the cost of repairing or replacing the system of appliance or parts thereof unless the loss is caused by bursting, bulging or freezing as provided above.

Darling, 1981 WL 2949 at *2 (emphasis added).

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