Phillips v. United Services Auto. Ass'n

Citations: 146 S.W.3d 629; 2004 Tenn. App. LEXIS 183; 2004 WL 578604Docket: E2003-00850-COA-R3-CV

Court: Court of Appeals of Tennessee; March 24, 2004; Tennessee; State Appellate Court

Original Court Document: View Document

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Charles C. Phillips, Jr. initiated a lawsuit against United Services Automobile Association (USAA) after the company denied coverage for water damage to his home, which he attributed to water seepage resulting from the faulty design or negligent installation of synthetic stucco (EIFS). Phillips later amended his complaint to seek class certification for other USAA insureds with similar issues. Following a bench trial, the court found that Phillips’ homeowners policy covered the water damage and conditionally certified a class of plaintiffs. USAA appealed the decision regarding coverage. In 1999, an inspection revealed water damage behind the EIFS, but USAA denied the claim, stating that rot damage was not covered under the policy. An adjuster inspected the home but failed to conduct necessary testing. After the denial, Phillips removed the EIFS and presented evidence of extensive damage at trial, supported by expert testimony and photographs. The appellate court affirmed the trial court's ruling on coverage and class certification, remanding the case for further proceedings.

The court concluded that the plaintiff proved the existence of water damage, which was covered by the insurance policy, and that the policy's exclusion for 'wet rot' did not negate coverage for water damage, as the court viewed water damage and rot as distinct perils. USAA is appealing this judgment. In this non-jury case, the appellate review is de novo, but the trial court's factual findings are presumed correct unless the evidence suggests otherwise. The definitions section of the homeowner's insurance policy clarifies that "occurrence" includes accidents leading to bodily injury or property damage. Coverage for reasonable repairs is provided for damages from applicable perils. However, the policy excludes coverage for losses caused by long-term water leakage, mold, or rot, and specific types of water damage like floods or sewer backups. Nevertheless, any ensuing loss not otherwise excluded is covered, and the policy also excludes losses resulting from weather conditions, acts by persons or organizations, or faulty construction practices, provided such losses are not otherwise excluded.

USAA's appeal centers on whether the trial court erred by determining that the plaintiff's insurance policy covers damage to the residence caused by water penetration through EIFS (Exterior Insulation and Finish System). In insurance contract interpretation, the same rules apply as for other contracts, adhering to their plain meaning unless fraud or mistake is present. Any ambiguities in the policy must be interpreted in favor of the insured. The plaintiff's policy broadly covers "direct physical loss" to the dwelling, which includes water damage, but contains specific exclusions. Notable exceptions to coverage include damage from "constant or repeated seepage or leakage" and "smog, rust, or other corrosion," as well as a defined category of water damage that encompasses flood, sump pump or sewer back-ups, and damage from below ground. The policy further excludes coverage for "faulty, negligent, inadequate or defective" workmanship, yet allows for coverage of losses resulting from such workmanship unless otherwise excluded. USAA contends that the damage linked to the EIFS is excluded under these provisions, while the plaintiff argues that he seeks coverage for the water damage resulting from the workmanship, which he asserts is covered by the policy.

Determination of coverage for the plaintiff’s water damage hinges on the policy's terms. The policy only specifies exceptions for constant seepage or leakage of water, implying that other types of water damage are covered. The plaintiff's damage from water penetrating the EIFS is not expressly excluded under the policy, leading to the conclusion that it is covered.

USAA claims that coverage is negated by wet rot, which is listed as an exception. However, the policy delineates water damage and wet rot as separate perils. Although 'rot' is not defined, it is typically a consequence of water damage. The court cites precedent stating that an insurer cannot offer coverage for an event and then negate it with vague language. Thus, wet rot resulting from covered water damage does not fall under the exclusions.

The court emphasizes that if rot were intended to be excluded, it would have been explicitly stated in the Exclusions section. USAA's internal memo indicates that mold remediation is covered in areas affected by water damage, highlighting inconsistency in their stance regarding coverage for rot versus mold. The court resolves this ambiguity in favor of the insured, affirming coverage for the water damage related to the EIFS installation.

USAA asserts that the plaintiff’s water damage is excluded from coverage based on precedent from other jurisdictions, yet these cases are distinguishable from the current matter. In Aetna Cas. Sur. Co. v. Yates, the court denied coverage for rot caused by moisture, determining it did not result from direct water intrusion. Conversely, the plaintiff's damage resulted from direct water intrusion, which is covered under the policy. Similarly, in 80 Broad St. Co. v. United States Fire Ins. Co., damage arose from construction flaws and moisture seepage, leading to exclusions for wear and tear. In Merrimack Mut. Fire Ins. Co. v. McCaffree, rot and mold from a poorly installed shower stall were excluded, as their cause was not water damage. Park v. Hanover Ins. Co. involved foundation damage from water underground, also excluded under similar policy language. Each case involved causes of damage not applicable to the plaintiff's claim. 

USAA also references cases like Fiess v. State Farm Lloyds and Schloss v. Cincinnati Ins. Co., where mold and rot were excluded under their respective policies. However, these cases involved exclusions that followed the same peril, unlike the current case where the ensuing loss language pertains to workmanship, while the claim is for direct water damage. The trial court noted these are distinct perils, highlighting the inapplicability of USAA's cited cases to the present situation.

USAA references two North Carolina Court of Appeals cases, Smith v. State Farm Fire & Cas. Co. and Alwart v. State Farm Fire & Cas. Co., both involving exclusions related to workmanship and ensuing loss provisions. In Smith, the court ruled that the plaintiffs' attempt to recover for ensuing losses, rather than directly for defective workmanship, was ineffective, resulting in the claim being excluded under their policy. In Alwart, the plaintiffs' claim for damage due to faulty workmanship was denied since their policy specifically excluded bulging or shrinking of walls. In contrast, the current case involves a claim for water damage resulting from the negligent installation of Exterior Insulation and Finish System (EIFS), which is considered a separate peril covered by the policy. The court concluded that this claim is not excluded under the policy's language. Additionally, any ambiguity in policy interpretation must favor the insured. The trial court's judgment is affirmed, and the case is remanded for further proceedings, with costs on appeal charged to USAA.