Decision Date26 January 2006
Docket NumberNo. 14,14
Citation192 S.W.3d 78
PartiesBruce LUNDSTROM and Vonnie Lundstrom, Appellants v. UNITED SERVICES AUTOMOBILE ASSOCIATION-CIC, Appellee.
CourtTexas Court of Appeals

Stephen W. Boyd, San Antonio, and Craig Stephen Smith, Corpus Christi, for appellants.

Brad Austin Allen, Christopher W. Martin, Levon Hovnatanian, Dolores Christene Wood, Bruce E. Ramage, Houston, for appellees.

Panel consists of Justices EDELMAN, SEYMORE, and GUZMAN.


EVA M. GUZMAN, Justice.

In this homeowners insurance coverage case, we primarily examine the propriety of the insurer's denial of coverage under the 1996 revised version of the Homeowners Form B (HO-B) insurance policy as prescribed by the Texas Department of Insurance. The case is before us on the Lundstroms' (the insureds') appeal from a summary judgment in favor of appellee United States Automobile Association-CIC ("USAA"), the insurer. Because (1) the summary judgment proof conclusively establishes USAA's defenses to the Lundstroms' contractual and bad faith claims and (2) the Lundstroms did not produce evidence to support their claim under former Insurance Code Article 21.55, we affirm.


In June 1998, the Lundstroms purchased a townhome from Gary Baker, the townhome's builder. The Lundstroms paid $279,900 for the townhome, moved in immediately, and insured the dwelling with USAA for $256,000.1

Shortly after they moved in, the Lundstroms noticed water entering the townhome. After a storm in the "early fall, late summer of '98," the Lundstroms found water in the stairwell. The Lundstroms called Baker to tell him about the problems. They did not notify USAA.

In the fall of 1998, the Lundstroms noticed more water was entering the townhome. They saw one or two wet spots, five or six inches in diameter, on the ceiling. Again, the Lundstroms called Baker, but did not contact USAA.

In February 1999, Vonnie Lundstrom wrote Baker complaining about continued leakage in the master bathroom and a damp, musty odor in the first floor stairwell. She also expressed concern that excess moisture was seeping through the foundation. As on the two prior occasions, Lundstroms did not contact USAA.

In the early summer of 1999, the Lundstroms noticed still more water leakage during some rainstorms. The water problems continued throughout that summer. The Lundstroms continued to notify Baker, but did not inform USAA. Baker tried to fix the problems and to repair the water damage to the Lundstroms' townhome. However, in July 1999, his workmen failed to properly cover a hole they cut in the Lundstroms' fourth-floor patio/roof. During a rain, water came through the hole, damaging clothes, carpet, and books. The Lundstroms wrote Baker and offered to "settle this matter for $700," but again did not contact USAA.

In April 2000, the Lundstroms experienced leaks in the master bathroom, master closet, and stairwell during some heavy rains. More water stains and water spots appeared on the ceiling. The Lundstroms again contacted Baker, but not USAA. Shortly thereafter, Baker again attempted to address the water problems. As part of Baker's attempt to fix the problems, his contractors again cut a hole in the fourth-floor patio/roof. The workers left the hole uncovered, and a heavy rain fell. Around May 20, 2000, rain poured into the townhome through the hole. In late May 2000, the Lundstroms reported a claim to USAA.

On June 5, 2000, the Lundstroms filed a pro se lawsuit against Baker individually, his construction companies, and the real estate agent who sold the Lundstroms the townhome (the "Baker lawsuit"). Four days later, the Lundstroms wrote Baker complaining about his faulty attachment of a protective tarp on the fourth-floor patio/roof and reported that, because the tarp did not hold, rain again poured into the townhome. They also complained Baker had intentionally plugged the drain on the fourth-floor patio/roof so rainwater could not go down the drain, and therefore had nowhere to go except into the townhome itself.

From mid-April to mid-June 2001, All-Around Plumbing Company, HDR Engineering, and Casteel Automatic Fire Protection performed various tests and inspections on the townhouse. All-Around found no leaks in the townhome's domestic water system or sanitary sewer system.

On the northeast corner of the townhouse, HDR found a soda can in the interior of the downspout near the bottom of the scupper box.2 The soda can obstructed the downspout and the scupper, blocking normal flow in the scupper system and allowing rainwater to "pond" on the roof. According to HDR, this blockage caused (1) staining of the wall and ceiling finishes and the wall framing at the stairwell between the second and third and third and fourth levels, (2) deterioration of the wall framing in the stairwell between the second and third levels, and (3) staining of the wall framing in the entry closet riser room and the main entry porch.

Casteel Automatic Fire Protection tested the fire sprinkler system. Casteel found the fire sprinkler system was "turned off and dry," i.e., "shut down." Casteel also found the fire sprinkler system had not been inspected, monitored, or maintained.

When Casteel activated the system to test it, water leaked from the ceiling of the riser closet, located in the northeast corner of the townhouse. Leaks also appeared in the air conditioner closet on the fourth floor, around the main entry door frame, and in the ceiling finish in the front porch. Casteel removed an area of ceiling finish and found a leak on the line serving the fire sprinkler heads below the stairwell between the first and second levels. Casteel disconnected the pipe to test the remainder of the system. At a pressure of forty-eight pounds per square inch (psi), Casteel did not find any other leaks.

At some point, a disagreement arose between USAA and the Lundstroms regarding coverage. On July 17, 2001, USAA denied coverage for at least some of the Lundstroms' claimed losses.3

In November 2001, USAA exercised its contractual right to a binding appraisal regarding the damages to the interior of the townhome caused by the "initial wetting." The Lundstroms received notice of the impending appraisal, but did not participate.

The appraisal umpire awarded the Lundstroms $4,226.19 ($1,666.19 after the deductible) for the initial wetting. USAA tendered payment of $1,666.19 to the Lundstroms, and they deposited the check.

On September 17, 2002, the Lundstroms settled with the Baker lawsuit defendants. The parties executed a "Compromise Settlement Agreement and Mutual Release," under which the Lundstroms were to receive a gross total sum of $400,000. The real estate agent contributed $45,000 and Baker contributed $355,000. As part of his contribution, Baker agreed to repurchase the townhouse from the Lundstroms for $95,000, and the sale was completed two days later. According to the terms of the settlement agreement, in addition to the $95,000 allocated for the purchase price of the townhouse, $30,000 was allocated as payment for damages to household contents and furnishings, and $275,000 was allocated as payment for "claims for damages for personal physical injuries or physical sickness allegedly suffered by the Lundstroms."

Two months after settling the Baker lawsuit, the Lundstroms sued USAA, alleging breach of the insurance contract, breach of the duty of good faith and fair dealing, violation of the Deceptive Trade Practices ActConsumer Protection Act (DTPA),4 unfair insurance practices,5 and violations of former Insurance Code article 21.55.6 USAA moved for summary judgment on traditional and no evidence grounds. In the traditional portion of its motion, USAA argued that the Lundstroms' contractual claims were barred on the following grounds: (1) as a result of the Baker lawsuit, res judicata precluded the present suit, (2) the Lundstroms' settlement in the Baker lawsuit had fully compensated them for the damages claimed in the present lawsuit,7 (3) the Lundstroms' claimed losses were excluded under the insurance policy, (4) the Lundstroms failed to segregate covered and non-covered losses, (5) the Lundstroms failed to provide USAA with timely notice of their claims, and (6) there was a binding appraisal of the covered claims. USAA asserted that the extra-contractual claims for violation of the duty of good faith and fair dealing (the "bad faith claim"), DTPA violations, and violations of the insurance code were barred because a good faith dispute existed regarding coverage. In the no-evidence portion of its motion, USAA argued there was no evidence of one or more specified elements of each of the Lundstroms' causes of action.

The trial court granted USAA's motion without specifying the grounds and dismissed all the Lundstroms' claims with prejudice. In multiple issues and arguments, the Lundstroms now challenge the trial court's summary judgment in favor of USAA on all of the Lundstroms' causes of action.


The Lundstroms frame their issues as follows: (1) whether the summary judgment should be reversed; (2) whether the law bars an insured who suffers covered and uncovered losses from suing the tortfeasor to recover uncovered damages and then suing the insurance company for covered losses; (3) whether USAA conclusively proved none of the Lundstroms' losses were covered by their HO-B policy; (4) whether more than a scintilla of evidence supports the Lundstroms' contract claim; (5) whether legally sufficient evidence supports the Lundstroms' bad faith claim; (6) whether more than a scintilla of evidence supports the challenged elements of the Lundstroms' Insurance Code and DTPA claims; (7) whether legally sufficient evidence supports the Lundstroms' recovery under former article 21.55 of the Texas Insurance Code; and (8) whether the appraisal clause negates the Lundstroms' right to...

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