AUSTIN – Apartment owners who won a $3.73 million jury verdict in an insurance dispute from Hurricane Ike won’t see a penny of it, the Supreme Court of Texas decided on April 24.
All nine Justices held that Galveston County District Judge Lonnie Cox should have rejected the jury’s verdict against Lexington Insurance.
The Justices affirmed appellate court judges who found that Lexington covered all of the damage that its policies obligated it to cover.
The partnership that brought the suit, JAW The Pointe, paid about $5.7 million for 13 two story buildings next to Galveston’s seawall in 2007.
For insurance, the partners combined with owners of about 300 other apartment complexes in many states to obtain $100 million in coverage per occurrence.
The group policy called for Lexington to cover the first $25 million.
The partners separately obtained flood insurance.
Hurricane Ike struck Galveston on Sept. 13, 2008, damaging The Pointe and dozens of other complexes on the group policy.
In October, city officials told apartment owners they would have to demolish and rebuild if damage exceeded 50 percent of market value.
In November, Lexington advanced $300,000 to The Pointe for loss of business. In December, the city declared that damage exceeded 50 percent of market value.
The partners hired an architect, began demolition, and submitted a claim to Lexington for all costs, fees, and other expenses.
In 2009, a consultant for Lexington estimated $1.278 million in wind damage and $3.5 million in flood damage.
Lexington paid the partners $818,000 for wind damage minus a deductible, but did not pay other costs for demolishing and rebuilding The Pointe.
The partners sued Lexington and other defendants, alleging breach of contract and violations of the state’s insurance code and its deceptive trade practices act.
The partners relied on policy language covering loss caused by enforcement of an ordinance or law.
Lexington then provided formal notice that it would not pay for flood damage or for the cost of complying with city ordinances.
In 2010, Lexington notified them that it had exhausted its $25 million limit.
As trial approached, the other defendants settled for about $5,700,000.
The partners had also received about $3,200,000 from their flood insurer and $500,000 from an excess insurer in the group program.
Those amounts, plus Lexington’s payments for business loss and wind damage, lifted the partnership’s recovery above $10 million.
In 2011, prior to trial, Cox dismissed the breach of contract claim on the grounds that Lexington exhausted its policy limit.
He also ruled that the policy did not cover floods.
Trial proceeded solely on statutory claims, and jurors found that Lexington engaged in unfair or deceptive acts or practices.
They found that Lexington did not attempt to settle the claim in good faith, did not provide a reasonable explanation for denying coverage, and did not deny it within a reasonable time.
They awarded $1.23 million in actual damages, plus $2.5 million in statutory damages for knowingly violating statutes.
Cox added $170,000 in legal fees.
Lexington moved for a new trial, and Cox denied it.
The Fourteenth Court of Appeals in Houston reversed Cox, finding that both wind and flood caused the damage that triggered the ordinance.
“An insured is not entitled to recover under an insurance policy unless it proves its damages are covered by the policy,” Justice William Boyce wrote.
“When covered and uncovered causes of loss combine to create a loss, the insured is entitled to recover only that portion of the damage caused solely by the covered cause of loss,” he wrote.
“The insured must segregate the loss caused by the covered cause of loss from the loss caused by the uncovered cause of loss; the failure to segregate covered and uncovered causes of loss is fatal to recovery,” he wrote.
The Supreme Court agreed, finding the city based its decision on a combination of wind and flood.
Justice Jeffrey Boyd wrote, “The clause included in Lexington’s policy provides that Lexington will not pay for any loss resulting directly or indirectly from an excluded peril, regardless of whether a covered peril contributes concurrently or in any sequence to the loss.”
He wrote, “Under this language, if the covered wind damage and the excluded flood damage contributed to cause the enforcement of the city ordinances, then the policy excludes coverage.”
Marc Gravely of San Antonio represented Lexington.
Michael Choyke of Houston represented the partnership.