Carrizales v. State Farm Lloyds

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.

*345I.

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 Hino-josa, 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 Hi-nojosa’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 con*346tract 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 *347Fs 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 l.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 Balandrán 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 l.h, the words “[e]xclusions l.a. through l.h. under Section I Exclusions do not apply to loss by this peril” would be wholly inoperative, because exclusion l.h by its terms applies only to Coverage A. Such is not the case with exclusion l.f. Section 9’s operation on exclusion l.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 exactly the ensuing loss *348provision accomplished, the court reaffirmed that the “only reasonable construction of this clause was that it applied when an excluded risk was followed by an intervening occurrence that in turn caused an ensuing loss.” Id. at 748. Notwithstanding Balandran, Fiess shows an obvious direction in the Texas Supreme Court’s mold jurisprudence that is easier to reconcile with the result we reach in this case than with the result plaintiffs ask us to announce.

Water must be present for mold to grow. If every plumbing leak were a way around the mold exclusion, that exclusion would be meaningless. Although plaintiffs ask us to adopt just such a position, the Texas Supreme Court has said that we must be wary of turning an insurance contract into a maintenance agreement. See id. at 750. If Section 9 is expanded, as appellants in Fiess sought the ensuing loss provision to be expanded, the mold exclusion would be nugatory.

The answer to the Balandrán court’s first conclusion, then, is that although the exclusion repeal provision is in the section dealing with plumbing leaks, it does not follow that every exclusion is repealed with respect to plumbing leaks. Rather, we are to look at each provision and determine whether the court can still give effect to it in light of the exclusion repeal provision. As it stands, we cannot envision the role the mold exclusion would play if Coverage A (implicitly) as well as Coverage B (explicitly) covered mold damage resulting from plumbing leaks.

“The question in this case is not whether insurers should provide mold coverage in Texas, a public policy question beyond our jurisdiction as a court. The question instead is whether the language in an insur-anee policy provides such coverage — no more and no less.” Id. at 745. Here it does not.5

B.

Plaintiffs next contend that the jury instruction incorrectly required them to mitigate damages as a condition precedent to recovery. We review jury instructions for an abuse of discretion. See, e.g., Fiber Sys. Int’l, Inc. v. Roehrs, 470 F.3d 1150, 1158 (5th Cir.2006). Courts are given wide latitude in formulating jury charges. United States v. Monroe, 178 F.3d 304, 307 (5th Cir.1999). To establish error, the challenging party must first show the instruction as a whole “creates substantial doubt as to whether the jury was properly guided.” Green v. Adm’rs of Tulane Educ. Fund, 284 F.3d 642, 659 (5th Cir.2002).

The plaintiffs’ only remaining claims before the jury were its breach of contract claims. Plaintiffs asserted State Farm breached the policy by (1) failing to adequately investigate losses claimed by plaintiffs; (2) failing to pay the cost of repair or replacement of the dwelling; (3) failing to pay the costs of repair or replacement of personal property; and (4) failing to pay additional living expenses. The jury charge contained a number of specific instructions, among which were

Conditions Precedent to Suit

You are instructed that Plaintiffs’ contract with Defendant State Farm Lloyds requires Plaintiff to give prompt written notice to Defendant of the facts relating to the claim. The contract also requires Plaintiffs to protect property from further damage and to make reasonable *349and necessary repairs to protect the property from further damage.

This instruction was based on State Farm’s claimed affirmative defense of failure to mitigate damages.6 The charge also contained a number of interrogatories related to the plaintiffs’ duties under the policy, particularly the duty to mitigate damages, which it framed as an affirmative defense, that is, a condition precedent to recovery.7 The plaintiffs argue that mitigation of damages was an issue that the jury should decide in determining the amount of damage to award, not a condition precedent — and hence affirmative defense — to liability. We agree.

“Conditions precedent to an obligation to perform are those acts or events, which occur subsequently to the making of a contract, that must occur before there is a right to immediate performance and before there is a breach of contractual duty.” Hohenberg Bros. Co. v. George E. Gibbons & Co., 537 S.W.2d 1, 3 (Tex.1976). “Where the intent of the parties is doubtful ... the agreement will be interpreted as creating a covenant rather than a condition.” Id. The policy provides:

SECTION 1 — CONDITIONS

3. Duties After Loss. a. Your Duties After Loss. In case of a loss to covered property caused by a peril insured against, you must:

* * *

(3) (a) protect the property from further damage.

(b) make reasonable and necessary repairs to protect the property.

(11) Suit Against Us. No suit or action can be brought unless the policy provisions have been complied with ....

The policy language firmly requires homeowners to take steps to ensure prompt, correct adjustments of loss claims, but it does not expressly render these “conditions” as prerequisites to recovery. Consequently, Texas courts have concluded that while some of the “Duties After Loss” are conditions precedent, others are not. See Progressive County Mut. Ins. *350Co. v. Trevino, 202 S.W.3d 811 (Tex.App. 2006) (“notice” provision is condition precedent to recovery); Beacon National Ins. Co. v. Glaze, 114 S.W.3d 1 (Tex.App.2003) (“repair records” provision is not condition precedent to recovery); Lambrecht & Assocs. v. State Farm Lloyds, 119 S.W.3d 16 (Tex.App.2003) (“police report” is not condition precedent to recovery). Even the decisions finding a condition precedent agree that prejudice is required for the term to preclude coverage. See Harwell v. State Farm Mut. Auto. Ins. Co., 896 S.W.2d 170, 173-74 (Tex.1995). Texas courts have not yet ruled on whether the duty to mitigate damages is a condition precedent or an offset to reimbursement under the generic homeowners policy. We make an Erie guess on this question and conclude that mitigation of damages is an offset to damages rather than a condition precedent to recovery under Texas law.

In general, the duty to mitigate damages is an equitable doctrine, and means a reduction in the amount of damages, not an affirmative defense. See generally 25 C.J.S. Damages § 167; see also Hygeia Dairy Co. v. Gonzalez, 994 S.W.2d 220, 225 (Tex.App.1999). In the insurance law context, two important authorities have described the duty as a condition precedent to recovery; but they also state that the breach of the duty relieves the insurer only of any increase in loss caused by the breach. See 6 Appleman, Insurance Law AND Peactice § 3890 (1972); 11 Couch on INSURANCE § 168:13 (1998); see also Higginbotham v. New Hampshire Indem. Co., 498 So.2d 1149, 1152 (La.App.1986). Thus, the insurer still has the evidentiary burden of demonstrating the extent to which plaintiff-insured’s breach of the duty to mitigate lessens the insurer’s liability.

To the extent that a homeowner’s duty of mitigation can be informed by other sources of Texas law, we note that Texas Rule of Civil Procedure 94 does not list mitigation of damages among the affirmative defenses that must be pled. See also Moulton v. Alamo Ambulance Serv. Inc., 414 S.W.2d 444, 448 (Tex.1967) (“Failure to mitigate damages by care and treatment of personal injuries is not an affirmative defense which must be specifically pleaded to let in evidence of such failure and to entitle the wrongdoer to proper court instructions.”). Furthermore, Texas applies the principle that the failure to mitigate damages is an offset against damages in the deceptive trade practices (“DTPA”), employment and landlord-tenant contexts. See 33 Tex. Jur.3d Employer and Employee § 60 (employment); Regency Advantage Ltd. P’ship v. Bingo Idea-Watauga, Inc., 928 S.W.2d 56, 63 (Tex.App.1995) (landlord-tenant); Pinson v. Red Arrow Freight Lines, Inc., 801 S.W.2d 14, 15 (Tex.App.1990) (DTPA).

Contrary to State Farm’s position, a holding that an insured’s duty to mitigate is an affirmative defense to recovery under a homeowners insurance policy would be inconsistent with the above-noted decisions that only bar recovery for noncompliance with certain policy “conditions” (e.g., the duty to give timely notice) if the insurer is prejudiced. Conversely, reducing the homeowner’s recovery for failure to mitigate is more analogous to the “prejudice” bar, as both standards relieve the insurer of its contractual responsibility only in proportion to the seriousness of the homeowner’s default. Barring all recovery for failure to mitigate is an onerous consequence not in keeping with the rule that ambiguous policy provisions are construed in favor of the insured. See Kelley-Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex.1998); see also Empire Fire & Marine Ins. Co. v. Brantley Trucking, Inc., 220 F.3d 679, 681 (5th Cir. 2000).

*351For all these reasons, we conclude that the failure to mitigate damages is an offset to recovery under the generic homeowners policy, and the district court erred and abused its discretion when it instructed the jury that mitigation was a condition precedent to recovery. Accordingly, we reverse and remand for a new trial related to plaintiffs’ breach of contract claims.8

AFFIRMED in part, REVERSED in part, and REMANDED.