Court Opinion

ID: 7804332
Source: CourtListenerOpinion
Date Created: 2022-08-29 00:18:45.516127+00
Date Added: 2024-06-11T16:29:49.439832
License: Public Domain

Affirmed and Memorandum Opinion filed August 25, 2022.

                                     In The

                    Fourteenth Court of Appeals

                              NO. 14-20-00736-CV

            THE HANOVER CASUALTY COMPANY, Appellant

                                        V.
        SEVEN ACRES JEWISH CARE SERVICES, INC., Appellee

                   On Appeal from the 127th District Court
                           Harris County, Texas
                     Trial Court Cause No. 2019-88919

                                  OPINION

      In this dispute over insurance coverage, appellant The Hanover Casualty
Company brings a permissive appeal from the trial court’s interlocutory order
rendering partial summary judgment in favor of appellee Seven Acres Jewish Care
Services, Inc. and asks this court to resolve the following controlling question of
law: Does Hanover policy’s flood endorsement and flood limit control the amount
of coverage available for Seven Acres’ claimed business income and/or extra
expense losses resulting from Hurricane Harvey flooding?
       We conclude the flood endorsement did not control the amount of coverage
available for Seven Acres’ claimed business income and/or extra expense losses
resulting from Hurricane Harvey flooding and affirm the interlocutory order of the
trial court.

                                   I.      BACKGROUND

       Seven Acres is a not-for-profit licensed nursing facility and licensed
assisted-living facility in Houston, Texas. As a result of Hurricane Harvey, the
facility sustained extensive physical damage and loss after its first floor was
flooded. Seven Acres had to suspend operations following Hurricane Harvey and
then resumed reduced operations for several months until the facility was repaired
and relicensed with the state.

       The parties do not dispute that Seven Acres was covered at the time of this
loss by a commercial property policy issued by Hanover. The policy declarations
describe two subtypes of commercial property coverage: (1) building and contents
and (2) business-income coverage, including extra expense. The policy also
contained a special endorsement providing a limit of $4.5 million in coverage for
the peril of flood.1

       Seven Acres made a claim on the policy for losses due to building damage
as well as business-income losses. Hanover paid Seven Acres the entire $4.5
million limit applicable to the flood endorsement in the policy but refused to make
any payments beyond the flood limit explaining that all claims arising from the
flood—whether claims for property damage or business-income losses and extra
expense—were subject to the flood limit. Seven Acres disagreed on the basis that
its business-income losses claim was subject to a separate policy limit.

       1
         The flood endorsement at issue in this appeal is not alleged to be part of the National
Flood Insurance Program.

                                               2
       In January 2020, Seven Acres filed suit against Hanover seeking payment
for its business-income and extra-expense claim pursuant to the policy.2 Seven
Acres filed a partial traditional summary-judgment motion seeking judgment as a
matter of law that the policy’s flood limit does not control the amount of coverage
available for its business income losses, and the trial court granted the motion in
October 2020. Hanover subsequently received permission from the trial court to
appeal this interlocutory order of the trial court. See Tex. Civ. Prac. & Rem. Code
Ann. § 51.014(d); Tex. R. Civ. P. 168.3, 4

                                      II.     ANALYSIS

       We review a trial court’s granting of a summary judgment de novo. Valence
Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). The movant on a
traditional motion for summary judgment has the burden of showing that no
genuine issue of material fact exists and that it is entitled to judgment as a matter
of law. See Tex. R. Civ. P. 166a(c); Mann Frankfort Stein & Lipp Advisors, Inc. v.

       2
        Seven Acres’ petition also included a claim for hail damage, which loss occurred before
Hurricane Harvey. However, in its petition for permissive appeal, Hanover clarified the hail
claim was not part of the permissive appeal and that it would seek severance of the claim.
       3
           The rule states:
       On a party’s motion or on its own initiative, a trial court may permit an appeal
       from an interlocutory order that is not otherwise appealable, as provided by
       statute. Permission must be stated in the order to be appealed. An order previously
       issued may be amended to include such permission. The permission must identify
       the controlling question of law as to which there is a substantial ground for
       difference of opinion, and must state why an immediate appeal may materially
       advance the ultimate termination of the litigation.
Tex. R. Civ. P. 168. Hanover received permission from the trial court to appeal the
interlocutory ruling in the order appealed. This court granted Hanover’s petition for
permissive interlocutory appeal on April 6, 2021.
       4
         This permissive appeal is governed by the rules for accelerated appeals. Tex. R. App. P.
28.3 (k) (permissive appeals); see also Tex. R. App. P. 28.1(a) (accelerated appeals). As such,
this court may hear an accelerated appeal on sworn and uncontroverted copies of the relevant
documents in lieu of a clerk’s record, as the parties did here. Tex. R. App. P. 28.1(e).

                                               3
Fielding, 289 S.W.3d 844, 848 (Tex. 2009). If the movant satisfies this initial
burden on the issues expressly presented in the motion, then the burden shifts to
the nonmovant to present to the trial court any issues or evidence that would
preclude a summary judgment. See City of Houston v. Clear Creek Basin Auth.,
589 S.W.2d 671, 678–79 (Tex. 1979).

      An insured has the initial burden of establishing coverage under the terms of
the policy. JAW The Pointe, L.L.C. v. Lexington Ins. Co., 460 S.W.3d 597, 603
(Tex. 2015). To avoid liability, the insurer then has the burden to plead and prove
that the loss falls within an exclusion to the policy’s coverage. Id.; Tex. R. Civ. P.
94 (“Where the suit is on an insurance contract which insures against certain
general hazards, but contains other provisions limiting such general liability, the
party suing on such contract shall never be required to allege that the loss was not
due to a risk or cause coming within any of the exceptions specified in the contract,
nor shall the insurer be allowed to raise such issue unless it shall specifically allege
that the loss was due to a risk or cause coming within a particular exception to the
general liability[.]”). “If the insurer proves that an exclusion applies, the burden
shifts back to the insured to show that an exception to the exclusion brings the
claim back within coverage.” JAW The Pointe, 460 S.W.3d at 603.

      Seven Acres generally established coverage under the terms of the policy.
We must now decide whether Hanover established the disputed loss falls within an
exclusion or limitation to the policy’s coverage.

A.    Principles of construction

      Texas courts construe insurance policies “using ordinary rules of contract
interpretation.” Nassar v. Liberty Mut. Fire Ins. Co., 508 S.W.3d 254, 257 (Tex.
2017). When doing so, courts must “determin[e] the parties’ intent as reflected in
the terms of the policy itself.” Tanner v. Nationwide Mut. Fire Ins. Co., 289
                                           4
S.W.3d 828, 831 (Tex. 2009). Courts must “examine the entire agreement and seek
to harmonize and give effect to all provisions so that none will be meaningless.”
Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126
(Tex. 2010). “[N]o one phrase, sentence, or section [of a contract] should be
isolated from its setting and considered apart from the other provisions.” Forbau v.
Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994) (quoting Guardian Trust Co.
v. Bauereisen, 121 S.W.2d 579, 583 (Tex. 1938)). “Unless the policy dictates
otherwise, [courts] give words and phrases their ordinary and generally accepted
meaning, reading them in context and in light of the rules of grammar and common
usage.” RSUI Indem. Co. v. The Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015)
(citing Gilbert, 327 S.W.3d at 126). If we determine that only one party’s
interpretation of the insurance policy is reasonable, then the policy is unambiguous
and the reasonable interpretation should be adopted. Nassar, 508 S.W.3d at 258.
Alternatively, if we determine that both interpretations are reasonable, then the
policy is ambiguous. Id. In that event, “we must resolve the uncertainty by
adopting the construction that most favors the insured,” and because we are
construing a limitation on coverage, we must do so “even if the construction urged
by the insurer appears to be more reasonable or a more accurate reflection of the
parties’ intent.” RSUI Indem. Co., 466 S.W.3d at 119 (quoting Nat’l Union Fire
Ins. Co. of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.
1991)).

B.    The policy

      The Building and Personal Property Coverage Form insured direct physical
loss and damage to the property: “We will pay for direct physical loss of or
damage to Covered Property at the premises described in the Declarations caused
by or resulting from any Covered Cause of Loss.” The policy defines Covered

                                         5
Cause of Loss to “mean[] direct physical loss unless the loss is excluded or limited
in this policy.”

      Without a flood endorsement, the policy did not cover “loss or damage
caused directly or indirectly” by flood or other water damage. However, Seven
Acres’ policy included an optional flood endorsement which modified the policy
and included flood as a Covered Cause of Loss.

      The Business Income (and Extra Expense) Coverage Form insured against
the loss of business due to the necessary suspension of operations caused by a
direct physical loss or damage to property:

      1. Business Income
      ....
      We will pay for the actual loss of Business Income you sustain due to
      the necessary “suspension” of your “operations” during the “period of
      restoration.” The “suspension” must be caused by direct physical loss
      of or damage to property at premises which are described in the
      Declarations and for which a Business Income Limit of Insurance is
      shown in the Declarations. The loss or damage must be caused by or
      result from a Covered Cause of Loss.
      ....
      2. Extra Expense
      a. Extra Expense Coverage is provided at the premises described in
      the Declarations only if the Declarations show that Business Income
      Coverage applies at that premises.
      b. Extra Expense means necessary expenses you incur during the
      “period of restoration” that you would not have incurred if there had
      been no direct physical loss or damage to property caused by or
      resulting from a Covered Cause of Loss.

      The flood endorsement only addresses the business-income coverage to
clarify that the definition for the “period of restoration” for purposes of a
business-income or extra-expense claim “applies to each Flood event.”

                                         6
      The flood endorsement contains a separate limit of insurance with the
following explanation of the limits of the insurance:

      E. Limits of Insurance
      1. Per “Occurrence” Limit Of Insurance
      The most we will pay for loss or damage caused by Flood in any one
      “occurrence” is the applicable per “occurrence” Limit Of Insurance
      shown in the Flood Declarations regardless of the number of locations
      involved.
      ....
      3. Maximum Per “Occurrence” Limit Of Insurance
      Regardless of the number of per “occurrence” Limits shown in the
      Flood Declarations, the Maximum per “Occurrence” Limit Of
      Insurance shown in the Flood Declarations is the Most we will pay in
      any one “Occurrence”.

C.    Analysis

      1.     Hanover’s interpretation

      Hanover argues that the flood endorsement plainly and unequivocally states
the parties’ intent to modify the terms of the Policy, including the Business Income
(and Extra Expense) Coverage form. Hanover also relies on the language and
definitions in the flood endorsement which state the policy will only cover $4.5
million for all loss and damage caused by flood.5 Because the flood endorsement
provides a benefit to Seven Acres not otherwise afforded by the policy, Hanover
maintains that Seven Acres is bound by the terms and the limit of the flood
endorsement. For these reasons, Hanover asserts the only reasonable interpretation
of the policy language is that if an insured’s business-income claim is triggered by
and arises out of a peril that provides a specific limitation—as the Flood
      5
         In contrast, the general Building and Personal Property Coverage Form states with
respect to the limits of insurance: “The most we will pay for loss or damage in any one
occurrence is the applicable Limit of Insurance shown in the Declarations.”

                                            7
Endorsement does in this case—the business-income coverage arising from that
peril is subject to that same limitation.

      2.     Seven Acres’ interpretation

      Seven Acres responds that the language of the policy is unambiguous that
the flood limit does not also cap business-interruption and extra-expense claims
arising out of a flood event. Seven Acres addresses the structure of the policy
noting that the property-coverage form covers “direct physical loss” to real and
personal property. The Business Income Coverage Form covers business losses
flowing from a suspension of business operations due to a covered direct physical
loss. The business-income coverage has a separate premium and limit from the
property coverage. Given that the flood endorsement added flood as a covered
cause of loss under the policy, Seven Acres argues that the flood endorsement and
its limit applied only to “direct physical loss.” Seven Acres also argues that if
Hanover wanted to make business-income and extra-expense claims subject to the
flood limit, then Hanover could have expressly added language to that end as
Hanover did with other provisions in the policy.

      3.     Policy construction

             a.     The flood endorsement modified business-income coverage

      Hanover argues that the flood endorsement expressly modified the insurance
provided under the Business Income Coverage Form. While the flood endorsement
does clearly state that it modified that form, as well as several other forms,
Hanover makes too much of this statement. The preamble to the flood endorsement
states that the Business Income Coverage Form is modified but does not
specifically explain how it is modified. Not only does the flood endorsement
specifically modify a definition applicable to the Business Income Coverage

                                            8
Form,6 the flood endorsement never states that any coverage under the Business
Income Coverage Form would be subject to the flood limit of insurance.

               b.     The flood endorsement does not subject Business Income or
                      Extra Expenses claims resulting from the aftermath of a flood
                      event to the flood limit

       Hanover relies on language in the policy that the “most we will pay for loss
or damage caused by Flood in any one ‘occurrence’ is the applicable per
‘occurrence’ Limit Of Insurance shown in the Flood Declarations regardless of the
number of locations involved.” Hanover further cites language in the flood
endorsement which states “Occurrence” means all loss or damage that is
attributable to an act, event, cause, or series of similar, related acts, events, or
causes involving one or more persons or not involving any persons.7

       Flood, which the policy defines as a “general and temporary condition of
partial or complete inundation of normally dry land areas,” causes direct physical
damage or loss to property. The flood endorsement adds flood as a Covered Cause
of Loss and therefore provides insurance coverage for “direct physical loss” caused
by flood. In contrast, the Business Income Coverage Form provides coverage for
actual loss of busines income sustained due to the necessary suspension of business
operations. The triggering event for business-income coverage is the suspension of
business caused by a Covered Cause of Loss. Here, Seven Acres alleged that it
sustained actual losses in business income because it was necessary to temporarily
suspend its business operations. It was not the flood itself that caused the
       6
        The flood endorsement states: “The ‘period of restoration’ definition stated in the
Coverage Form . . . applies to each Flood event.”
       7
         It is noteworthy that the language repeatedly used by Hanover in its appellate briefing is
that the flood limit “shall apply to all covered damages/losses resulting from a covered flood
event.” However, the policy does not use the phrase “resulting from.” The policy itself states that
the “most we will pay for loss or damage caused by Flood in any one occurrence is the
applicable per ‘occurrence’ limit.”

                                                9
business-income losses, but rather the temporary suspension of business
operations. Therefore, we disagree with Hanover that the parties’ clear intent was
that the flood limit shall apply to business-income losses “resulting from” a
covered flood event and decline to read additional language into the policy that
restricts coverage.

      Although the business-income form is part of and related to the other parts
of the policy, each part of the policy covers different types of loss, and different
forms or endorsements contain different limits that apply to that type of loss. These
limits do not apply to other losses not covered by that part. The purpose of
purchasing business-income coverage is for an insured to protect itself against
monetary losses when the insured was required to temporarily suspend its business
operations. Such a claim is intended to coexist with a claim for damage, or
physical loss, to a building or other covered property. Because we have no explicit
language subjecting business-income claims to the flood limit in this policy, we
must give effect to the policy language as written and not effectively read into the
flood endorsement a broader exclusion than intended.

      If Hanover had intended to restrict business-income claims resulting from a
flood event, Hanover should have included language in the flood endorsement to
that effect as it has in other endorsements in the policy. For instance, in the Data
Breach Coverage Form, the policy specifically states “[t]he Additional Expense
Coverages Aggregate Sublimit of Insurance is part of, and not in addition to, the
Data Breach Coverage Aggregate Limit of Insurance.”

      Further confirming Seven Acres’ interpretation, the language in the flood
endorsement discussing ensuing loss clearly explains that the flood limit does not
subject all other policy claims for ensuing loss to the flood limit:

                                          10
      5. Ensuing Loss

      In the event of covered insuring loss for example, loss caused by Fire,
      Explosion or Sprinkler Leakage which results from the Flood, the
      most we will pay, for the total of all loss or damage caused by Flood,
      Fire, Explosion, and Sprinkler Leakage is the Limit of Insurance
      applicable to Fire. We will not pay the sum of the Fire and Flood
      Limits of Insurance.
      ....
      Example #1
      The damage due to Flood is $500,000. The damage due to Fire is
      $500,000.
      Payment for Flood damage is $400,000 ($500,000 damage minus
      $5,000 Flood deductible = $495,000; Limit is $400,000).
      Payment for Fire damage is $400,000 ($500,000 damage capped at the
      difference between the Basic Limit and the Flood Limit).
      Total Loss Payment is $800,000.

      In the example of ensuing loss described in the policy, a fire caused by a
flood resulted in additional losses. The fire damage in the example could be
described as a loss resulting from a flood event. Despite the fact that the fire was a
result or consequence of the flood, the policy example makes clear there could be
coverage for the fire loss above and beyond the flood limit.

      The language of the flood endorsement does not support Hanover’s
interpretation to strictly subordinate all flood-related losses and claims to the flood
limit, and we conclude Hanover’s interpretation is not reasonable.

             c.     Seven Acres benefits from the flood endorsement

      Hanover also argues that Seven Acres cannot benefit from the flood
endorsement while at the same time escaping its limits. However, this argument
requires acceptance of Hanover’s interpretation that the limit in the flood
endorsement limited all claims resulting from a flood event. Because we disagree
                                          11
with Hanover’s interpretation, this argument is also unpersuasive.8

       4.     Case law

       The parties extensively brief case law in which insureds make claims for
busines-income losses after flood or water events. All the cases cited are merely
persuasive authority for this court, which we may follow or disagree with in our
discretion. See Penrod Drilling Corp. v. Williams, 868 S.W.2d 294, 296 (Tex.
1993) (“While Texas courts may certainly draw upon the precedents of the Fifth
Circuit, or any other federal or state court, in determining the appropriate federal
rule of decision, they are obligated to follow only higher Texas courts and the
United States Supreme Court.”). The common thread between all the cases reflects,
unsurprisingly, that the breadth of the language in the flood endorsement
determines whether business-income coverage is subject to a limit.

       Seven Acres relies on a recent case from the Southern District of Texas
involving a similar contest over business-income coverage arising out of flooding
from Hurricane Harvey. See Alley Theatre v. Hanover Ins. Co., 436 F. Supp. 3d
938 (S.D. Tex. 2020) (Rosenthal, J.). Seven Acres argues Alley Theatre is
particularly persuasive because it involved the same insurance company, the same
law firm representing Hanover, and the exact coverage issues in dispute here. Id. at
940–41. In Alley Theatre, the federal district court found that Alley Theatre’s
business-loss claims were not subject to the flood limit. Id. at 946 (“Hanover’s
interpretation applies the Flood Endorsement Limit to more categories of damage
than the Flood Endorsement covers and fails to give effect to the overall Policy
structure and language.”).

       8
         Similarly, Hanover’s argument that the flood-endorsement limit applies when “the
Business Income Form is interrelated to other provisions in the Policy” requires acceptance of
the same interpretation.

                                             12
      Another case relied on by Seven Acres is Baylor College of Medicine v.
American Guarantee & Liability Insurance Co., No. CV H-02-1711, 2002 WL
35644976 (S.D. Tex. Oct. 30, 2002) (Rosenthal, J.). In Baylor, the parties
disagreed over whether a flood-endorsement limit applied to lost-business income
caused by flood. Id. at *1. The court found that the two coverage parts “reflect the
distinction, recognized in the cases, between direct physical loss or damage to
covered property from a covered cause of loss, on the one hand, and, on the other
hand, reduction in business income resulting from the suspension of operations
during the covered property’s restoration.” Id. at *6 (collecting cases
distinguishing between two types of coverage). The district court ruled that the
flood endorsement limit applied “to all flood loss or damage covered by the Flood
Endorsement, which is all ‘direct physical loss or damage to Covered Property’
due to flood.” Id. at *7.

      Though the insurance policies discussed in Alley Theatre and Baylor are not
identical to Seven Acres’ policy, the policies contain similar definitions and
structure such that the opinions are persuasive. Hanover argues in response that
Alley Theatre and Baylor involved the interpretation and analysis of policies silent
or ambiguous as to whether the full limits applied, which they argue is not
applicable in this case. We disagree. While the flood endorsement here states that it
modifies the business-income coverage, the flood endorsement is silent as to the
effect of the flood endorsement on the limit for the business-income coverage.

      Hanover relies on cases from a variety of jurisdictions to support its position,
although these cases primarily involve different or broader flood-endorsement
policy language. In Altru Health System v. American Protection Insurance Co., the
Eight Circuit Court of Appeals concluded there was no business-income coverage
for an insured hospital which was forced to close because flood waters damaged

                                         13
the local water system. 238 F.3d 961, 964 (8th Cir. 2001). Though the hospital was
not physically damaged by flood, it made a claim for its business-income losses
and expenses. Id. at 962. In contrast to Seven Acres’ policy, the flood endorsement
in Altru unambiguously subjected all losses caused by a flood, including
business-income and extra-expense losses, to the flood limit. Id. at 965; compare
with Mark Andy, Inc. v. Hartford Fire Ins. Co., 233 F.3d 1090, 1092 (8th Cir.
2000) (policy was silent as to whether business-income and extra-expenses losses
would be subject to flood limit).9

       The only Texas state-court case cited is For Kids Only Child Development
Center, Inc. v. Philadelphia Indemnity Insurance. Co., 260 S.W.3d 652 (Tex.
App.—Dallas 2008, pet. denied), which is distinguishable. In that case, a daycare
center was flooded with sewage from floor drains in the building; the overflow was
excluded from coverage loss or damage caused directly or indirectly by water that
backs up or overflows from a sewer, drain, or sump. Id. at 653. Because the
daycare center procured an additional special endorsement covering the loss, the
insurer paid the daycare center the limits under the special endorsement. Id. at
653–54. The parties disputed whether the special-endorsement limit precluded the
daycare from recovering its business-income losses under the policy above and
beyond the special-endorsement limit. Though our sister court concluded the
daycare center’s coverage was subject to the limit in the special endorsement, its

       9
          See also El-AD 250 W., LLC v. Zurich Am. Ins. Co., 130 A.D.3d 459 (N.Y. App. Div.
2015) (“El-AD II”); El-AD 250 W., LLC v. Zurich Am. Ins. Co., 44 Misc. 3d 633, 638–39 (N.Y.
Sup. Ct. 2014) (“El-AD I”) (policy contained broader definition of flood loss); New Sea Crest
Healthcare Ctr., LLC v. Lexington Ins. Co., No. 12 CV 6414, 2014 WL 2879839, at *1–2 (E.D.
N.Y. Jun. 24, 2014) (policy contained no reference to physical damage when defining flood
damage); Gilbert/Robinson, Inc. v. Sequoia Ins. Co., 655 S.W.2d 581, 583 (Mo. Ct. App. 1983)
(policy made no reference to flood damage as physical loss). Because these cases involve
varying policy language, they do not provide any persuasive rationale affecting our interpretation
of the policy.

                                               14
holding was premised on the conclusion that no language in the endorsement
changed a sewer backup into a “covered cause of loss” Id. at 657. In Seven Acres’
policy, the flood endorsement specifically adds flood as a Covered Cause of Loss.
Therefore, the reasoning of For Kids Only is not applicable or persuasive to the
facts before us.

       We overrule Hanover’s sole issue on appeal.

                                     III.   CONCLUSION

       Having overruled Hanover’s sole issue on appeal, we affirm the
interlocutory order of the trial court.10

                                             /s/    Charles A. Spain
                                                    Justice

Panel consists of Justices Wise, Bourliot, and Spain.

       10
             Because this is a permissive appeal of the trial-court’s interlocutory
summary-judgment order, only that order is before this court—not the entire trial-court case. We
do not remand the case to the trial court because the case is not before us. Chappell Hill Sausage
Co. v. Durrenberger, No. 14-19-00897-CV, 2021 WL 2656585, at *5 n.6 (Tex. App.—Houston
[14th Dist.] June 29, 2021, no pet.) (mem. op.).

                                               15