Opinion ID: 3173157
Heading Depth: 2
Heading Rank: 1

Heading: Dwelling claim

Text: The first issue is whether the Ayoubs or Chubb bore the burden of proving depreciation to the dwelling. The policy’s “Verified Replacement Cost Endorsement” states: The district court interpreted the last sentence of Item 4(b) as a “precondition to coverage” which the Ayoubs had to prove. Under Texas law, an insured suing for breach of an insurance agreement bears the initial burden of proving that his loss results from a covered risk. See Guaranty Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998); Employers Cas. Co. v. Block, 744 S.W.2d 940, 944 (Tex. 1988) disapproved of for other reasons by State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). But if the insurance policy contains exclusions to coverage, it is the insurer’s burden to prove the exclusion applies. See Guaranty Nat’l, 143 F.3d at 193. 4 Case: 14-51301 Document: 00513359490 Page: 5 Date Filed: 01/28/2016 No. 14-51301 Similar rules govern an insured’s damages. The insured has the burden of proving the extent of his loss. See Block v. Employers Cas. Co., 723 S.W.2d 173, 178 (Tex. App.—San Antonio 1986), aff’d, 744 S.W.2d 940 (Tex. 1988); see also 12 Lee R. Russ & Thomas F. Segalla, COUCH ON INSURANCE § 175:92 (3d ed. 2005) (“In accord with general principles governing the law of damages, there can be no recovery for items where their existence and value are not proved. Consequently, the insured bears the burden of proof under a property insurance policy . . . .” (emphasis added)). And if the insurance policy defines how loss will be measured, the insured is “relegated” to that measure. Cf. Crisp v. Security Nat’l Ins. Co., 369 S.W.2d 326, 327–28 (Tex. 1963) (finding that certain policy language “does not establish a contractual measure of damages to which the insured must be relegated”); see also U.S. Fire Ins. Co. v. Stricklin, 556 S.W.2d 575, 581–82 (Tex. App.—Dallas 1977, writ ref’d n.r.e.) (finding that jury instruction explaining “actual cash value” was “misleading” because it did not obligate the jury to “follow the contractual measure of damages”). But a contractual limitation of liability—that is, a cap on what the insurer will have to pay out, independent of the value of the loss—falls upon the insurer to plead and prove. See Manhattan Fire & Marine Ins. Co. v. Melton, 329 S.W.2d 338, 339–45 (Tex. App.—Texarkana 1959, writ ref’d n.r.e.); see also Imperial Ins. Co. v. Nat’l Homes Acceptance Corp., 626 S.W.2d 327, 328–30 (Tex. App.—Tyler 1981, writ ref’d n.r.e.) (holding that trial court properly allowed insureds to recover repair costs despite policy language which limited insurer’s liability to “actual cash value of the property at the time of loss” in light of insurer’s failure to “raise the issue of the propriety of the measure of damages until it moved for an instructed verdict”). Underlying these rules is recognition that the value of a loss can be expressed a number of different ways. As relevant here, two possible measurements are market value and repair or replacement cost. 12 COUCH ON 5 Case: 14-51301 Document: 00513359490 Page: 6 Date Filed: 01/28/2016 No. 14-51301 INSURANCE § 175:24. Which particular measurement most faithfully compensates the insured for his actual loss—no more and no less—can be a “controversial question.” See id. § 175:5; see also Crisp, 369 S.W.2d at 328 (“Indemnity is the basis and foundation of insurance coverage not to exceed the amount of the policy, the objective being that the insured should neither reap economic gain nor incur a loss if adequately insured.”). A contractual measure of damages is one way of settling the controversy in advance. A limitation of liability can serve the same function, by indicating that the insurer will pay only the smallest of a number of different possible measurements. See, e.g., Imperial Ins., 626 S.W.2d at 329 (stating that liability “shall not exceed” (1) actual cash value with deduction for depreciation, (2) repair or replacement costs with material of like kind and quality, or (3) policy limit). This is not to say that the absence of a contractual measure of damages gives the insured absolute freedom to decide how to measure his loss. Texas law provides some default rules. In the case of a “partial loss under an insurance contract insuring a dwelling”—the loss at issue in this case—the “ordinary measure of damages . . . is the difference between the value of the property immediately before and immediately after the loss, but within the amount of the policy.” Imperial Ins. Co., 626 S.W.2d at 329–30; see also Custom Controls Co. v. Ranger Ins., 652 S.W.2d 449, 452 (Tex. App.—Houston [1st Dist.] 1983, no writ) (“[T]he common law measure of damages . . . is the market value immediately before and immediately after the loss.”). Whether the last sentence of Item 4(b) of the Verified Replacement Cost Endorsement sets forth a contractual measure of damages that overrides the default common law standard or a limitation of liability is not an easy question. No Texas court has addressed a policy provision that is substantially similar in its overall structure and language to this one. Chubb’s reading of the sentence as a measure of damage rather than a cap on coverage makes some 6 Case: 14-51301 Document: 00513359490 Page: 7 Date Filed: 01/28/2016 No. 14-51301 sense when the sentence is viewed in isolation: “If you have a covered partial loss to your dwelling or an other structure, and do not begin to repair, replace or rebuild the lost or damaged property within 180 days from the date of loss, we will only pay the reconstruction cost less depreciation.” The sentence is couched in terms of what Chubb will pay, rather than what Chubb’s payment cannot exceed (although this seems a distinction without a difference when the sentence contains only one measurement of loss). Also compelling, the Ayoubs purchased the endorsement for an additional premium, and it is explicitly titled “replacement cost.” This suggests that the endorsement offers a more valuable measure of damages, purchased by the Ayoubs for the express purpose of having recourse to it. See 12 COUCH ON INSURANCE § 176:56 (“[W]hile a standard policy compensating an insured for the actual cash value of damaged or destroyed property makes the insured responsible for bearing the cash difference necessary to replace old property with new property, replacement cost insurance allows recovery for the actual value of property at the time of loss, without deduction for deterioration, obsolescence, and similar depreciation of the property’s value.”). We are persuaded, however, that Chubb’s interpretation is not reasonable in light of the Verified Replacement Cost Endorsement as a whole. See RSUI Indemnity Co v. The Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015) (“If only one party’s construction [of the policy language] is reasonable, the policy is unambiguous and we will adopt that party’s construction.”). In reaching this conclusion, we heed the Texas Supreme Court’s admonition not to “isolat[e] from its surroundings or consider[] apart from other provisions a single phrase, sentence, or section of a contract.” State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995). The first sentence of the endorsement’s dwelling provision (Item 4(b)) begins with limitation language: “Our limit of liability for covered losses . . . .” 7 Case: 14-51301 Document: 00513359490 Page: 8 Date Filed: 01/28/2016 No. 14-51301 Such language is similar to policy language that has been construed by Texas courts as limitations of liability. Cf. Crisp, 369 S.W.2d at 328 (stating that “liability hereunder shall not exceed . . .” (emphasis added)); Imperial Ins. Co., 626 S.W.2d at 329 (same); Manhattan Fire, 329 S.W.2d at 340 (same). And Item 4(b) follows another section of the endorsement—Item 4(a), governing losses to personal property—that is undoubtedly a limitation provision under Texas case law. 2 Compare Section I – Conditions, Item 4(a) (“Our limit of liability and payment for covered losses to personal property . . . will not exceed the smallest of the following: (1) the actual cash value at the time of the loss determined with proper deduction for depreciation; (2) the cost to repair or replace the damaged property with material of like kind and quality, with proper deduction for depreciation; or (3) the specified limit of liability of the policy.”) with, e.g., Imperial Ins. Co., 626 S.W.2d at 329 (“[L]iability hereunder shall not exceed the actual cash value of the property at the time of loss, ascertained with proper deduction for depreciation; nor shall it exceed the amount it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction . . .; nor shall it exceed the interest of the insured, or the specific amounts shown under ‘Amount of Insurance.’”). Indeed, Chubb acknowledged at oral argument that Item 4(a) and all but the last sentence in Item 4(b) are limits of liability. In light of this, we are inclined to construe the final sentence of Item 4 consistently with its other parts. 2 Item 4(a) of the Verified Replacement Cost Endorsement is superseded by the Replacement of Personal Property endorsement, discussed in the next section. But it remains instructive for determining the purpose of the Verified Replacement Cost Endorsement as a whole. 8 Case: 14-51301 Document: 00513359490 Page: 9 Date Filed: 01/28/2016 No. 14-51301 Even if this were not our inclination, Chubb’s interpretation of the final sentence of Item 4(b) gives the Verified Replacement Cost Endorsement a perplexing structure. It would be unusual for policy language to first limit the insurance company’s overall liability and then set a contractual measure of damages controlling only a subset of potential covered losses (partial losses for which repairs were not timely commenced). 3 Odder still would be reading the final sentence in Item 4(b) as placing a burden on the insurer in its first clause, and a burden on the insured in the next clause (at least absent any express language setting forth the contrasting burdens). But that is what Chubb’s reading of the endorsement would require us to do. The “reconstruction cost less depreciation” language is only implicated if the policyholder does not “begin to repair, replace or rebuild the lost or damaged property within 180 days . . . .” Although it is undisputed for purposes of this appeal that the Ayoubs did not commence repairs within 180 days, that fact will be disputed in a number of cases. It makes no sense to put the onus on the insured to prove that they did not begin repairs on the dwelling within 180 days in order to have access to a lesser recovery—a burden they would never seek. Chubb’s interpretation of the last sentence of Item 4 as a contractual measure of damages thus creates more questions than it answers. We conclude that the better reading of the policy is that all components of Item 4 are limits 3 Consider the analogy to coverage grants and exclusions described above on page 4. One would expect a policy to begin by defining what it insures, and then carve-out any exclusions. See generally 14 TEX. JUR. 3d Contracts § 249 (2015) (“An exception . . . takes out of a contract that which, but for the exception, would otherwise be included in it. . . . Ordinarily, exceptions . . . are construed as limitations on the language in the agreement that precedes them.” (emphasis added)). And the Policy here does exactly that; it starts with the coverage grants and then establishes exclusions in a separate subsection titled “Exclusions.” This sequence—from affirmative coverage to negative carve-outs—makes more sense than the structure of the Verified Replacement Cost Endorsement proposed by Chubb. 9 Case: 14-51301 Document: 00513359490 Page: 10 Date Filed: 01/28/2016 No. 14-51301 of liability on which Chubb bore the burden of proof. 4 See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011) (explaining that the task of courts is to “examine and consider the entire writing in an effort to harmonize and give effect to all [of its] provisions . . .” (quoting J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003)).