Court: District Court, N.D. Texas; March 24, 2016; Federal District Court
David C. Godbey, United States District Judge, ruled on motions from Zurich American Insurance Company for summary judgment, Centex Corporation for summary judgment, and Zurich's request to file a surreply. The court granted summary judgment for Zurich, determining that Centex breached its insurance policy. The case arises from Centex's settlement of a lawsuit related to defective construction of the Element Project, developed by Centex subsidiaries. The Element Owner's Association (EOA) initially sued the Centex Subsidiaries in California state court, which was later removed to federal court and resulted in the naming of local subcontractors as defendants.
Three insurance policies are pertinent: the Lexington Wrap Policy issued by Lexington, which has a $500,000 self-insured retention and a $5 million liability limit; the ISOP Wrap Policy, which is excess to the Lexington policy with a $5 million limit; and the Zurich Policy, providing $6 million coverage per occurrence with a $1 million deductible. Centex and its subsidiaries incurred significant costs during the litigation, including pre-suit repairs and defense costs, with Lexington eventually assuming defense responsibilities. Two settlements were reached—the EOA/Subcontractor Settlement Agreement, where Lexington and ISOP paid $8,982,378, and the EOA/Centex Settlement Agreement, where Zurich contributed up to $3.1 million, totaling a settlement value of $11.5 million.
The dispute centers on Zurich's claim for reimbursement of the $1 million deductible, which Zurich argues is owed by Centex due to exceeding the $10.5 million coverage limit. Centex contends that prior payments made by itself and other insurers fulfilled the deductible requirement. Currently, Centex has paid only $172.57 towards the deductible, prompting Zurich to sue for the remaining amount, claiming breach of contract. Both parties have filed cross-motions for summary judgment to support their positions.
Zurich has been granted leave to file a surreply in response to Centex's cross-motion for summary judgment, as the court found that Centex introduced a new legal theory based on the allocated loss adjustment expenses (ALAE) provision in its reply. This new claim allows Zurich to respond, while its other claims reiterate arguments previously made. The court then addressed the cross-motions for summary judgment regarding a breach of contract claim, which requires proof of a valid contract, performance by the plaintiff, breach by the defendant, and resulting damages. Zurich contends that no material facts dispute these elements and asserts entitlement to judgment as a matter of law. Centex disputes this, arguing Zurich has not proven a breach or damages. However, the court found that Centex failed to meet its $1 million deductible, constituting a breach of its agreement with Zurich, resulting in damages of $999,827.43 for Zurich. The court also outlines the standard for summary judgment, emphasizing that it will be granted if there's no genuine dispute of material fact, and clarifying the burden of proof for both the moving and nonmoving parties. Conclusory allegations and unsubstantiated claims do not meet the nonmovant's burden, which only shifts to them after the movant establishes a lack of genuine issues for trial.
Texas law governs the interpretation of insurance policies as a matter of law, focusing on the parties' true intentions as expressed in the contract. Courts assess ambiguity in contract language, determining that ambiguity exists only if the language allows for multiple reasonable interpretations, with any ambiguity resolved in favor of the insured.
Under the Zurich Policy, a $1 million deductible applies, as detailed in the Deductible Endorsement, which mandates that the first Named Insured must reimburse Zurich for amounts paid on behalf of all Named Insureds. Payments are only considered in the context of the deductible once the total exceeds $10.5 million, with the deductible range extending to $11.5 million. Payments made by Centex, Lexington, or ISOP below this threshold do not fulfill the deductible.
Centex contends that these payments satisfy the deductible requirement, citing Texas law that allows third parties to fulfill a deductible obligation. This argument references the case of Continental Casualty Co. v. North American Capacity Insurance Co., where payments by other insurers satisfied the self-insured retention (SIR) requirement because the policy did not explicitly require the insured to make payments directly. The court found that the involvement of multiple insurers in covering the insured's defense met the SIR, thereby obligating the other insurer to provide a defense. However, the straightforward nature of this case, involving a single policy year and coverage layer, supports Zurich’s right to reimbursement from Centex for amounts paid within the established deductible range.
Continental Casualty is distinguished from this case, as Zurich's interest lies in the payment of its deductible regardless of the payer. If Lexington or ISOP had covered the amounts between $10.5 million and $11.5 million, or if Centex had insured its deductible, the lawsuit would likely not exist. Zurich seeks reimbursement from Centex for the deductible amounts it paid in that range because no party has paid the deductible. The distinction between a deductible and a self-insured retention (SIR) is critical; under the Zurich Policy, Centex's obligation to reimburse arises after Zurich pays the deductible, contrasting with an SIR where the insurer's liability begins only after the insured meets its retention amount.
Centex argues that SIR and deductible distinctions are irrelevant, citing other jurisdictions, but those cases did not involve similar insurance structures or require excess insurers to credit payments toward a deductible. The Court finds these arguments unpersuasive and asserts that anti-stacking and apportionment rules do not apply here. The Zurich Policy allows for reimbursement to be reduced by payments from Centex or other entities on Centex's behalf, as long as such payments relate to the deductible. However, payments outside the risk covered by Zurich do not affect the deductible. Overall, the deductible under the Zurich Policy reflects Centex's post-coverage responsibility for losses exceeding its SIR and the limits set by Lexington and ISOP.
Centex claims to have incurred $582,899.09 in pre-suit repairs and defense costs, while Lexington and ISOP contributed $10,069,259 towards the defense and settlement of the Element Litigation. However, only $152,158.09 of these amounts could be considered under the risk covered by Zurich, which is below the $1 million deductible. The Zurich Policy's deductible specifically excludes defense costs and attorney's fees, as stated in the Deductible Endorsement, which defines ALAE (allocated loss adjustment expense) to include these costs. Consequently, Centex is solely responsible for defense expenses. The court ruled that Centex had not cited any policy provision supporting its claim that defense costs counted towards the deductible. After excluding these costs, the contributions were recalculated: Lexington and ISOP provided $8,982,378 for the settlement, and Centex Homes contributed $97,787.01 for pre-suit repairs, with Centex contributing nothing. Since Zurich's excess coverage only activates after $10.5 million, these contributions do not fall under Zurich's risk. The court concluded that Centex did not meet its $1 million deductible, resulting in damages of $999,827.43 to Zurich. The court granted summary judgment in favor of Zurich and denied Centex's motion for summary judgment, affirming that Zurich is entitled to judgment as a matter of law. The court also noted that Centex's statement during settlement negotiations about funding the deductible was inconsistent with its current interpretation, emphasizing the contract's terms over Centex's assertions.
