Federal Appellate Court Rules Again on Slab Damage Claim

In 1998, the Texas Supreme Court addressed the question of whether the standard Texas homeowners’ policy covered damage to a home’s foundation resulting from a plumbing leak. The court decided that the standard policy did cover such damage. In that case, the homeowner had purchased insurance on the home and on the contents of the home.

A similar issue was recently presented to the Fifth Circuit Court of Appeals. The court was asked to decide whether foundation damage caused by a plumbing leak was covered when the homeowner had purchased coverage for the home, but had not purchased coverage for contents.

Dennis and Connie Gehl owned a house in San Antonio that was used as rental property. The Gehls had purchased a policy from State Farm Fire and Casualty Co., written using a standard Texas Dwelling Policy Form 3.

In May 1996, the Gehls notified State Farm of damage to the foundation caused by a plumbing leak. State Farm denied the claim. The Gehls sued claiming breach of contract, negligence, violation of the Texas Insurance Code and the Texas Deceptive Trade Practices Act. The trial court ruled in favor of State Farm. The Gehls appealed to the Fifth Circuit Court of Appeals.

The policy was divided into two sections. The first section, known as Coverage A, provided insurance coverage only for the house. The other section, known as Coverage B, provided coverage for the personal property located in the house. The Gehls had purchased Coverage A, but had not purchased Coverage B.

In describing the extent of Coverage A, the policy stated “We insure against all risks of physical loss to the property described in Coverage A (Dwelling) unless the loss is excluded in General Exclusions.”

Coverage B stated, “We insure for direct physical loss to the property described in Coverage B (Personal Property) caused by a peril listed below unless the loss is excluded in General Exclusions.” Among the covered perils was the following regarding “accidental discharge”:

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.

This accidental discharge provision in Coverage B also included the following “exclusion repealer” clause which stated: Exclusions 1.a. through 1.i. under General Exclusions do not apply to loss caused by this peril.

The relevant exclusion was exclusion 1.i., which stated, “We do not cover loss under Coverage A (Dwelling) caused by settling, cracking, bulging, shrinkage or expansion of foundations, walls, floors, ceiling, roof structures, walks, drives, curbs, fences, retaining walls or swimming pools.”

After reviewing the policy, the court noted that the Texas Supreme Court had determined foundation damage caused by a plumbing leak was covered by the standard homeowners’ policy when the homeowner had purchased both Coverage A and Coverage B. State Farm argued that the Gehls’ case was different because the Gehls did not purchase Coverage B.

The court reviewed the history of the issue, noting that the Supreme Court had determined the standard homeowners’ policy was ambiguous. The Supreme Court stated that the policy could reasonably be interpreted to include or exclude coverage for foundation damage resulting from a plumbing leak. Therefore, under general principles of contract construction, the policy should be interpreted in favor of the insured. In addition, “the [Texas Supreme] court reviewed the background surrounding the promulgation of the insurance form and determined that although the exclusion repealer section is listed under ‘Coverage B,’ the repealer nonetheless applies to ‘Coverage A.'”

Therefore, although the Gehls’ policy was written using the TDP-3 and although the Gehls had only purchased Coverage A, their coverage included the accidental discharge provision. Also, since the exclusion for foundation damage did not apply to losses covered by the accidental discharge provision, damage to a home’s foundation resulting from a plumbing leak was covered by Coverage A.

Bright is the Section Chief, Agency Counsel Section, Legal and Compliance Division at the Texas Department of Insurance. This article appeared in the October issue of Texas Insurance News.

Topics Texas Legislation Homeowners Property