Texas Judge Enforces Policy Language Requiring Physical Damage as a Prerequisite to Coverage for the Living Expenses of Displaced Homeowners
February, 2006
A Texas judge recently held that where an insurance policy requires the insured to prove physical damage to the insured property before the insurer is required to pay living expenses for displacement, courts will strictly interpret the terms of the policy. The case was filed in the 261st Judicial Civil District Court, in Travis County, Texas, and styled as The Texas Commissioner of Ins. v. Allstate Ins. Co., Cause No. GN503652.
On September 24, 2005, Hurricane Rita made landfall, devastating much of the Texas and Louisiana coasts. Shortly thereafter, the State of Texas received a temporary injunction mandating that Allstate pay living expenses to those displaced by the storm. The State then moved for a permanent injunction, which required Allstate to continue to pay such living expenses. However, Allstate obtained a hold order until the January, 2006, appeals hearing. The hearing resulted in a favorable decision for Allstate.
In the wake of Hurricane Rita, homeowners throughout the Gulf of Mexico region were displaced because their homes were left without running water and/or electricity. As a result, many of these homeowners found lodging elsewhere and requested that Allstate pay for their living expenses. In support of their claim, the homeowners cited the “Loss of Use” and “Perils Insured Against” provisions of their policies. The policies in question contained two relevant clauses:
(1) The “Loss of Use” provision, providing that “if a loss caused by a Peril Insured Against . . .makes the residence premises wholly or partially untenantable, we cover…;” and
(2) Defining the term “Peril Insured Against” as “physical loss to the property caused by . . . Windstorm, Hurricane, and Hail.”
Allstate denied the homeowners’ claims, arguing that “Loss of Use” coverage is not triggered unless and until there is physical damage to the insured’s property. Lack of running water or electricity, according to Allstate, did not constitute physical damage. Texas asserted that homes are considered uninhabitable if a homeowner suffers a power outage for a significant period of time, cannot get home safely, or is prohibited from returning home by public authorities. As such, the State argued that these conditions constituted “loss of use” under the policy and should be covered by Allstate.
On January 20, 2006, Texas Judge Lora J. Livingston denied the motion requesting the permanent injunction. In her written opinion, Judge Livingston referred to the well-established rule of contract law that “in construing the contract, the court ‘must read all parts of the contract together striving to give meaning to every sentence, clause, and word to avoid rendering any portion inoperative.’” Id. [quoting Balandran v. Safeco Ins. Co. of America, 972 S.W.2d 738, 741 (Tex., 1998)]. Judge Livingston agreed with Allstate:
When the operative provisions of the policy are read together it is apparent that the extension of coverage for loss of use is not triggered without actual physical loss or damage to the property. Loss of use applies only to ‘a loss caused by a Peril Insured Against under Section I.’ Correspondingly, Section I only insures ‘against physical loss to the property’ caused by, for example, a hurricane. The mere existence of a hurricane which tangentially causes policyholders to be either without power or access to their home is not a peril insured against.
This decision is consistent with a long-established rule of law: the terms of a contract will be read and interpreted together as a whole. Applying this rule, Judge Livingston held that the “loss of use” provision required physical damage to the insured’s property before living expense coverage could be triggered. Thus, there could be no loss of use coverage for displaced homeowners merely because they could not reach their homes or their homes were without working utilities.
Learning Point:
A property insurance policy is interpreted the same as any other contract and courts will strictly enforce its provisions. In this case, the contract specifically stated that physical damage was a prerequisite to coverage for living expenses. Adhering to long-established rules of contract interpretation, the policy language was enforced. Therefore, without physical damage to the homeowner’s property, there can be no coverage for living expenses. •
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