Carrizales v. State Farm Lloyds

• Decision Date: 22 February 2008
• Docket Number: No. 06-40286.,06-40286.
• Citation: 518 F.3d 343
• Parties: Javier CARRIZALES; Eva Carrizales, Plaintiffs-Appellants, v. STATE FARM LLOYDS, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

518 F.3d 343

Javier CARRIZALES; Eva Carrizales, Plaintiffs-Appellants, v. STATE FARM LLOYDS, Defendant-Appellee.

No. 06-40286.

United States Court of Appeals, Fifth Circuit.

February 22, 2008.

Savannah Lina Robinson (argued), Danbury, TX, for Plaintiffs-Appellants.

David R. Stephens, Carrie Davis Holloway, Lindow & Treat, San Antonio, TX, Christopher Weldon Martin (argued), Levon G. Hovnatanian, Martin, Disiere, Jefferson & Wisdom, Houston, TX, for Defendant-Appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before JONES, Chief Judge, and REAVLEY and SMITH, Circuit Judges.

PER CURIAM:

Javier and Eva Carrizales ("Plaintiffs") urge that Texas's standardized homeowners insurance policy with State Farm Lloyds ("State Farm") covers mold contamination resulting from a plumbing leak. The district court determined that it did not and entered summary judgment in favor of State Farm. Plaintiffs also challenge the district court's trial instruction to the jury that the failure to mitigate damages is a condition precedent to recovery. We affirm on the former conclusion but must reverse and remand for a new trial on the jury instruction. Plaintiffs' duty to mitigate may reduce their damage recovery from the insurance company, but it is no affirmative defense to the company's liability.

I.

Plaintiffs hold a standardized insurance policy issued by State Farm: the Texas Standardized Homeowners Policy—Form B ("Form B"). They filed a claim with State Farm for damages resulting from a plumbing leak in their garage. Because the cost of repair was less than their deductible, State Farm did not pay any benefits. Plaintiffs then submitted additional claims, and State Farm, after inspection and investigation, paid $107,724.30.

For the next year and a half, plaintiffs lived in an apartment, for which State Farm paid an additional $60,154.52 in living expenses. No significant repairs to the house were begun during that vacancy, and the air conditioner and other utilities were turned off. After filing suit, plaintiffs submitted three mold remediation claims, totaling more than $200,000, which were denied.

II.

Plaintiffs sued State Farm for alleged violations of the insurance code, breach of the insurance contract, and breach of the duty of good faith and fair dealing.¹ State Farm removed to federal court. The case was handled at one time or another by four district judges, including Judge Hinojosa, who granted in part and denied in part State Farm's motion for summary judgment, concluding that Form B excludes coverage for mold damage to the dwelling. Summary judgment was also granted on plaintiffs' common law and statutory good faith claims.

The case proceeded to trial, shepherded by Judge Hudspeth. Based on Judge Hinojosa's summary judgment ruling, Judge Hudspeth excluded evidence of mold damage. At the close of evidence, the court formulated the jury charge so as to require mitigation of damages on the part of plaintiffs as a condition precedent to State Farm's liability. The jury found for State Farm.

III.

Plaintiffs challenge Judge Hinojosa's grant of summary judgment and Judge Hudspeth's determination that the law of the case precluded reconsideration of the mold issue. We do not reach the second question, because we determine that mold is not covered under Form B. Plaintiffs further challenge the verdict and the jury instruction requiring mitigation of damages as a condition precedent to recovery.

A.

We review a summary judgment de novo, applying the same standard as did the district court. United States v. Lawrence, 276 F.3d 193, 195 (5th Cir.2001). Summary judgment is proper where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R.CIV.P. 56(c).

Because the Texas Supreme Court has not addressed whether Form B covers mold damage that results from plumbing leaks, we make an "Erie guess" as to how the state supreme court would decide the issue. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 406 (5th Cir.2004). Insurance contracts are subject to normal rules of contract construction. Nat'l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex.1995). It follows that all parts of the contract must be read together so as to give effect to the parties' intent. State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex.1995) (citing Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994)). We must, however, be "particularly wary of isolating from its surroundings or considering apart from other provisions a single phrase, sentence, or section of a contract." Id.

Ambiguities in insurance contracts giving rise to two reasonable interpretations, one providing and the other denying coverage, are read contra proferentem and in favor of the insured. Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex.1984). The principle of contra proferentem applies only if the contract is ambiguous. Id. Ambiguity is a question of law for the court. Sharp v. State Farm Fire & Cas. Ins. Co., 115 F.3d 1258, 1261 (5th Cir.1997) (citing Nat'l Union, 907 S.W.2d at 520). The fact that the parties disagree as to the contract's coverage does not create an ambiguity. Id.

The primary issue involves the interaction of two provisions in Form B — the mold exclusion and the exclusion repeal provision. Because the interaction of the two provisions creates no ambiguity, mold is not covered.

Form B divides coverage into two discrete subdivisions, A and B.² Coverage A covers "all risks" to the dwelling unless specifically excluded by Section I-Exclusions ("Section I"). Coverage B insures personal property against certain, enumerated perils, including, in subsection nine, damage from plumbing leaks ("Section 9"). Subheading 1 of Section I lists 11 exclusions, of which only the first eight are referenced in the exclusion repeal provision; mold is one of those exclusions.³ The dispositive issue, then, is whether Coverage B's exclusion repeal provision also repeals Section I with respect to Coverage A.

In Balandran v. Safeco Ins. Co., 972 S.W.2d 738, 749 (Tex.1998), which plaintiffs argue compels a result in their favor, the court held that Section 9 repealed Section I's exclusion of foundation damage caused by a plumbing leak under Coverage A. The court advanced two reasons in reaching that decision. First, it opined that "the exclusion repeal provision could be located under Coverage B simply because that is the only place in the policy that the `accidental discharge' risk is specifically described." Id. at 741.

The court's second conclusion followed closely from the first. Reading the entire contract so as to give meaning to every clause, the court viewed the exclusion repeal provision language to require an application to the dwelling because "exclusion 1(h) on its face applies only to damage to the dwelling."⁴ Id. In other words, the exclusion repeal provision would never repeal 1.h unless it repealed it in respect to Coverage A. This result led to an ambiguity, because the insurers' argument against coverage was also reasonable. Applying contra proferentem, the court held that Form B covered foundation damage caused by plumbing leaks.

That line of reasoning is not persuasive in our case. The two conclusions are not really independent: The first makes sense only in light of the second. If the contract could have been read such that one part of it would not have been a nullity, the location of the exclusion repeal provision would not have been evidence in favor of coverage. As the dissent and the insurer urged, "[t]he word `loss' in the exclusion repeal provision can reasonably refer only to the type of loss at issue in Coverage B, which is personal property loss." Id. at 744 (Owen, J., dissenting). In other words, the location of the exclusion repeal provision in the contract would have controlled.

Because the second conclusion is ultimately controlling, we begin there. The Balandran court did not say that Section 9 of Coverage B repealed all covered exclusions for both itself and Coverage A. Rather, the court reasoned that with respect to 1.h, the words "[e]xclusions 1.a. through 1.h. under Section I Exclusions do not apply to loss by this peril" would be wholly inoperative, because exclusion 1.h by its terms applies only to Coverage A. Such is not the case with exclusion 1.f. Section 9's operation on exclusion 1.f gives effect precisely to what its location in the text of Form B implies: Mold damage to personal property caused by accidental discharge is covered.

To decide that Form B covers mold damage resulting from discharge, leakage, or overflow from plumbing would eviscerate the mold exclusion entirely. The most recent mold decision by the Texas Supreme Court confirms this.

We earlier certified to that court the question whether "the ensuing loss provision contained in Section I-Exclusions, part 1(f) . . . when read in conjunction with the remainder of the policy, provide[s] coverage for mold contamination caused by water damage that is otherwise covered by the policy." Fiess v. State Farm Lloyds, 392 F.3d 802, 811-12 (5th Cir.2004). The court answered that question with a broadly phrased and unambiguous "no." Fiess v. State Farm Lloyds, 202 S.W.3d 744, 747 (Tex.2006). The court said that "[w]hile other parts of the policy sometimes made it difficult to decipher, we cannot hold that mold damage is covered when the policy says it is not." Id. at 745.

First, the court noted that the words "we do not cover loss caused by mold" in Section I are plain and unambiguous. Id. Second, the ensuing loss provision did not rewrite the first line to say "we do too cover loss caused by mold." Id. With respect to what...