The United States Fifth Circuit Court of Appeals recently issued the Sharp opinion in which the court held that the Texas Standard Homeowner's Policy Form HO-B does not cover structural and cosmetic damage to a dwelling that results from a foundation shift which itself was caused by a plumbing leak beneath the house. Since the issuance of this opinion, the Department has received numerous inquiries from consumers, attorneys, and insurers on the Department's position on this matter. The Department does not agree with the Sharp holding. The purpose of this bulletin is to state the Department's position that there is coverage under Coverage A (Dwelling) in the HO-B policy form for such damage and to explain the reasons for this position.
Since the Texas Standard Homeowners Policy Form HO-B (HO-B) was first promulgated in Texas, the policy has provided coverage for damage to the dwelling, including the foundation, resulting from the peril of accidental discharge, leakage, or overflow of water from within a plumbing, heating, or air conditioning system or household appliance. (This peril is referred to as simply "accidental discharge" in the remainder of this bulletin.) In 1978, because some companies were paying for these losses and some were not, the Board amended the HO-B policy to clarify that all losses to the dwelling, including the foundation, caused by accidental discharge were covered. The language and formatting for Coverage A (Dwelling), Coverage B (Personal Property), and Section I Exclusions in the current HO-B policy form was first adopted in 1990 by the former State Board of Insurance (Board) upon the recommendation of the Board-appointed Advisory Committee for a Readable Homeowners Policy. Since the 1990 adoption, the Department has consistently interpreted the HO-B policy to provide coverage for losses to the dwelling, including the foundation, caused by accidental discharge. It is the Department's position that under all risk coverage, as provided under Coverage A (Dwelling) in the HO-B policy, there is coverage under the policy when one of the exclusions in the Section I Exclusions is qualified by the terms of the policy (i.e., all risk coverage) to provide coverage where the otherwise excluded peril is itself caused by a covered peril. For example, if accidental discharge, which is a covered peril under Coverage A (Dwelling) all risk coverage, causes settling, cracking, bulging, shrinkage, or expansion of the foundation (settling, cracking, etc. is an excluded peril under Section I Exclusions) the damage to the foundation is a covered loss. The Department believes that any analysis of whether there is coverage for losses to the dwelling, including the foundation, under the HO-B policy form must include consideration of the nature and intent of "all risk" coverage, as provided under the Coverage A (Dwelling) provision of the policy.
The Department's position that there is coverage in the HO-B policy for damage to foundations resulting from accidental discharge is supported by the following facts:
--The Advisory Committee for a Readable Homeowners Policy, which was appointed in 1989 to review existing residential property policies and draft "easy to read" policies, was directed by the former Board to not in any manner restrict coverage currently available to an insured under the then existing residential property policies. The existing HO-B policy provided coverage for damage to foundations, including cracking and settling resulting from accidental discharge. The advisory committee in presenting the revised readable policies to the Board for adoption in February 1990 indicated that the committee had fulfilled its mandate that no major restrictions in coverage had been made. This advisory committee was composed of representatives of the insurance industry, agents, and consumers and was assisted by Department staff.
--The premiums paid by HO-B policyholders policies are based on benchmark rates that include these types of losses. Had these types of losses been removed from the policy coverage in 1990, there would have been a reduction in rates to reflect this change, and there has been no such reduction. To the contrary, the Department believes that a substantial portion of the increase in homeowners rates in certain areas of the state over the past two years is due to foundation damage caused by accidental discharge of water. For example, according to data collected by the Department, approximately 75% to 80% of the homeowners losses in Nueces County are due to water damage. This compares to the statewide average of 15% to 20%. The Department estimates that approximately 85% of these water losses in Nueces County are due to damage to foundations as a result of accidental discharge. Concomitantly, homeowners rates in Nueces County have increased by 36.4% over the past two years, compared to a statewide decrease of 4.1%.
--Insurers have interpreted the HO-B policy (both before 1990 and since 1990) to provide coverage for damage to foundations resulting from accidental discharge because they have paid such claims. Some of the larger insurers have recently indicated to the Department that they have always paid claims for damage resulting from accidental discharge of water, even when settling and cracking of the foundation was involved, and that they continue to pay these types of claims.
--In 1993, the Texas Legislature adopted Article 5.35-2 of the Texas Insurance Code to require the Commissioner to adopt an endorsement form, to be attached to homeowners, farm and ranch owners, and fire insurance policies promulgated under Article 5.35, that excluded coverage for damage to foundations or slabs of insured dwellings when such damage was caused by accidental discharge. The enactment of this statute and the adoption of the endorsement in 1994 were fully supported by insurers. The Legislature would not have enacted this statute if the HO-B policy was not being interpreted to provide coverage for damage to foundations or slabs caused by accidental discharge. Clearly, according to the Legislature, without the exclusionary endorsement, the coverage is provided in the policy. Article 5.35-2 was repealed in 1995 to enable the Commissioner to determine the best means of addressing the issue of foundation losses from accidental discharge.
--In 1995, a working group was formed at the initiative of the Legislature, and in cooperation with the Department, to address the issue of foundation losses from accidental discharge occurring in various areas of the state. The group was composed of representatives of insurers, agents, the Office of Public Insurance Counsel, and the Department. While the group did discuss the coverage in the HO-B policy for damage to foundations and slabs caused by accidental discharge, the existence of that coverage was not an issue to the group. The group concluded that coverage should be limited for tear-out and replacement of building and land for accessing plumbing leaks and recommended the adoption of endorsements to provide for this limitation in coverage. The Commissioner adopted the recommended endorsements which cannot be used until premium credits for the endorsements are promulgated. The endorsement to the HO-B policy, as adopted by the Commissioner, specifically states that the tear-out limitation endorsement does not affect coverage otherwise provided in the policy for damage or loss to slabs or foundations.
Because decisions of federal circuit courts of appeals and federal district courts with respect to issues of state law are not binding on Texas state courts, the Department expects insurers to pay claims in accordance with the Department's position as stated in this bulletin, and the Department will monitor insurers for compliance. The Department recognizes that there may be legitimate disputes about the cause of a loss, and this bulletin is not intended to address these disputes or render such disputes invalid.
An insurer's refusal to pay claims under the Texas Standard Homeowners Policy Form HO-B for damage to the insured dwelling, including damage to the foundation caused by settling, cracking, bulging, shrinkage, or expansion, caused by the peril of accidental discharge, leakage, or overflow of water from within a plumbing, heating, or air conditioning system or household appliance may subject the insurer to disciplinary action for violations of the Texas Insurance Code, including unfair claim settlement practices pursuant to Article 21.21 4(10)(a) and Article 21.21-2. Under both statutory and common law, insurers have a duty to deal fairly and in good faith with their insureds. The Texas Supreme Court recently unified the common law and statutory standard for bad faith. Adopting the statutory bad-faith standard in Article 21.21 4(10)(a)(ii) of the Texas Insurance Code, the court held that an insurer breaches its duty of good faith and fair dealing when the insurer fails to settle a claim if the insurer knew or should have known that it was reasonably clear that the claim was covered.
Elton BomerCommissioner Of Insurance