Sharp v. State Farm Fire & Casualty Insurance

REVISED

United States Court of Appeals,

Fifth Circuit.

No. 96-50725.

James B. SHARP; Brenda Sharp, Plaintiffs-Appellants,

v.

STATE FARM FIRE AND CASUALTY INSURANCE COMPANY, et al.,
Defendants,

State Farm Fire and Casualty Insurance Company, Defendant-
Appellee.

June 30, 1997.

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

Before JOLLY, DUHÉ and EMILIO M. GARZA, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

State Farm denied the Sharps' claim for structural and

cosmetic damage to their house that resulted from a foundation

shift, which was itself caused by a plumbing leak beneath the

house. We are called upon to determine whether the standardized

Texas homeowner's policy provides coverage. The district court

determined that such damage was not covered by the policy, and

granted State Farm's motion for summary judgment. We affirm.

I

James and Brenda Sharp are the holders of a homeowner's

insurance policy issued by State Farm; the Sharps' policy is a

standardized state contract: the Texas Standard Homeowners

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Policy—Form B. In September 1993, the Sharps discovered that

foundation movement had caused extensive foundation, structural and

cosmetic damage to their home. The Sharps believe that the

foundation shift was caused by water leaking from deteriorated

sub-surface plumbing beneath their home.

The Sharps notified their insurance agent of their claim for

damages to their house. The Sharps did not file a claim for damage

to personal property, nor have they alleged that they suffered any

loss beyond the structural and cosmetic damage to the house itself.

Apparently, State Farm initially paid the cost of accessing the

plumbing system to correct the leak. However, State Farm

ultimately determined that the claim was not covered, and denied

payment.

The Sharps filed suit in Texas state court. State Farm

removed the case to federal district court on the basis of

diversity of citizenship. State Farm subsequently filed a motion

for summary judgment on the ground that the policy did not cover

the Sharps' claim for foundation damage. For purposes of the

summary judgment motion only, the parties assumed that leaking

plumbing caused the foundation shift and resulting damage to the

Sharps' house. The district court granted the motion for summary

judgment, and this appeal followed.

II

A

Texas law applies to our review of the district court's

2
determination that the Sharps' policy did not afford coverage for

their claim. We review the district court's application of Texas

law concerning insurance contract interpretation de novo. Farm

Credit Bank of Texas v. Guidry, 110 F.3d 1147, 1149 (5th Cir.1997).

Under Texas law, insurance policies are interpreted in

accordance with the rules of construction that apply to all

contracts generally. National Union Fire Ins. Co. of Pittsburgh,

Pennsylvania v. CBI Industries, Inc., 907 S.W.2d 517, 520

(Tex.1995). It is well-established that ambiguities in insurance

contracts are to be strictly construed against the insurer.

Puckett v. U.S. Fire Insurance Co., 678 S.W.2d 936, 938 (Tex.1984).

However, this rule of strict construction applies only if the

contract is determined to be ambiguous.

Whether the contract is ambiguous is a question of law for

the court to decide. National Union Fire Ins. Co., 907 S.W.2d at

520 (citing Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983)). The

fact that the parties disagree as to coverage does not create an

ambiguity, nor may extrinsic evidence be admitted for the purpose

of creating an ambiguity. Id. As in all contract cases, the court

looks first to the language of the contract itself, and "[w]hen

there is no ambiguity, it is the court's duty to give the words

used their plain meaning." Puckett, 678 S.W.2d at 938.

Accordingly, we now turn to the policy itself.

B

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 The Sharps' policy is divided into two separate sections:

"Coverage A," which covers damage to the dwelling itself, and

"Coverage B," which covers damage to personal property. Coverage

A covers "all risks" to the dwelling unless specifically excluded

in the Exclusions section. Coverage B covers only personal

property losses caused by certain enumerated "perils," again unless

those losses are specifically excluded in the Exclusions section.

The list of covered perils under Coverage B, the personal property

coverage section (listed in full in the Appendix to this opinion),

specifically includes plumbing leaks:

Accidental Discharge, Leakage, or Overflow of Water or Steam
from within a plumbing, heating or air conditioning system or
household appliance.

A loss resulting from this peril includes the cost of tearing
out and replacing any part of the building necessary to repair
or replace the system or appliance. But this does not include
loss to the system or appliance from which the water or steam
escaped.

Exclusions 1.a. through 1.h. under Section I Exclusions do not
apply to loss caused by this peril.

The separate Exclusions section, which generally applies to both

the dwelling coverage and the personal property coverage,

enumerates eleven specific types of losses that are not covered.

Exclusion "h," which State Farm argues completely precludes

the Sharps' claim, states:

We do not cover loss under Coverage A (Dwelling) caused by
settling, cracking, bulging, shrinkage, or expansion of
foundations, walls, floors, ceilings, roof structures, walks,
drives, curbs, fences, retaining walls or swimming pools.

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 We do cover ensuing loss caused by collapse of building or any
part of the building, water damage or breakage of glass which
is part of the building if the loss would otherwise be covered
under this policy.

The Sharps seek compensation for structural and cosmetic damage to

their house, which is indisputably covered under "Coverage A

(Dwelling)." The Sharps have not filed a claim for damage to

personal property, nor alleged that they suffered any such damage.

On its face, Exclusion "h" bars coverage of the Sharps' claim. The

only substantial issue in this appeal, therefore, is whether any

interplay between Exclusion "h" and the "accidental discharge"

peril could permit coverage of this claim solely for damage to the

Sharps' house.1

III

A

The Sharps' principal argument to the district court and on

appeal is that the text describing the "accidental discharge" peril

under Coverage B (Personal Property) somehow overrides the specific

exclusion of losses to the dwelling "caused by settling, cracking,

The Sharps advanced several other arguments in support of
their claim that their foundation damage is covered. The Sharps
argued: (1) that State Farm should be estopped from denying
coverage, because State Farm paid them several thousand dollars to
access the plumbing leak and correct it; (2) that the structural
damage to their house is a covered "ensuing loss" under the
exclusion against loss caused by "inherent vice, wear, and tear or
deterioration"; and (3) that the damage was, in effect, caused by
a "minor" earth movement and is therefore covered because the
policy exclusion of "loss caused by earthquake, landslide, or earth
movement" refers to "abnormally large movements." We find that the
district court correctly rejected these arguments, and we need not
address them further.

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bulging, shrinkage or expansion of foundations ..."

We are sympathetic to the Sharps' situation, but we cannot

agree that text specifically included in Coverage B, which applies

only to personal property, may be imported into Coverage A, which

applies to the dwelling or house, in order to create coverage for

a loss that does not involve personal property damage. The Sharps'

policy clearly and unambiguously divides dwelling losses and

personal property losses into two separate "coverages." It

therefore would appear to be nonsensical, and a rejection of the

obvious structure of the policy, to reach into text that applies

solely to Coverage B (Personal Property) to determine the extent of

coverage provided under Coverage A (Dwelling).

B

Nevertheless, the Sharps insist that the final sentence of the

"accidental discharge peril," which reads "Exclusions 1.a. through

1.h. under Section I Exclusions do not apply to this peril,"

applies to both Coverage A (Dwelling) and Coverage B (Personal

Property), even though it is found only in Coverage B. The Sharps

argue that this sentence overrides Exclusion "h" in all cases where

any loss may be attributable to a plumbing leak.

As support for this assertion, the Sharps argue that the

history of the "accidental discharge" peril indicates that it is

supposed to permit coverage in cases like theirs, and that it

clearly did so before a 1990 revision to the standardized policy.

6
The Sharps insist that the committee charged with revising the

forms was not authorized to restrict coverage in any significant

way, and therefore the current policy must not be read to restrict

coverage that existed under the prior policy.

Yet even if we assume, as the Sharps assert, that the prior

version of the Texas Homeowner's Policy—Form B provided coverage

for their claim, that fact cannot alter our view of the current

policy that constitutes the contract between State Farm and the

Sharps. As a form of extrinsic evidence, the prior version of the

standardized policy is not relevant unless the current policy is

found to be ambiguous; the Sharps may not point to the revision

process to create an ambiguity. See National Union Fire Ins. Co.,

907 S.W.2d at 520 ("[o]nly where a contract is first determined to

be ambiguous may the courts consider the parties' interpretation,

and admit extraneous evidence to determine the true meaning of the

instrument" (internal citation omitted)). Because there is no such

predicate ambiguity in this contract, the Sharps gain nothing from

this argument.

We also must reject the Sharps' argument that we are bound by

a statement by the Texas Department of Insurance (the "Department")

that the "current policy language in these forms is ambiguous and

unclear as to coverage for the tear out and replacement of building

or land in the event of accidental discharge or leakage of water

..." 20 Tex. Reg. 10398, 10399 (Dec. 8, 1995). First, we note that

7
the statement describes an ambiguity in the extent of "tear out and

replace" coverage, not an ambiguity concerning the effect of the

sentence eliminating Exclusion "h" from the "accidental discharge"

peril. As such, the Department's statement does not help the

Sharps because they seek to be compensated for cosmetic and

structural damage caused by the leak, rather than reimbursement for

the cost of accessing the leak in order to repair it.2 Second,

although the Sharps repeatedly refer to this statement as contained

in a "final order," the document in question does not constitute a

binding adjudication by a state agency: it is simply a notice that

the Department has adopted certain endorsements that it believes

are clearer than the standardized policy.

Unless we first find that the policy is ambiguous, our duty

is to hold the parties to the plain terms of the contract to which

they have agreed, and that duty cannot be overridden by the

possibility that the revision committee improperly eliminated

coverage for this type of claim,3 nor by the Department's post-hoc

The parties have provided no indication that the Sharps' claim
seeks coverage for the necessary expenses of accessing the plumbing
leak. We do not address the question whether "tear out and
replace" costs could be sought under Coverage B (Personal Property)
where there is a threat of personal property damage, but no actual
damage sustained.

Amicus curiae argues that State Farm should be estopped from
denying coverage because a State Farm representative served on the
revision committee. It is well-established under Texas law that
insurance coverage may not be created by estoppel where none exists
under the plain terms of the policy. Texas Farmers Ins. Co. v.
McGuire, 744 S.W.2d 601, 602-3 (Tex.1988) (citing Washington Nat.

8
suggestion that the "tear out and replace" provision of the

"accidental discharge" peril to personal property is confusing. As

discussed above, under the plain terms of the policy, the Sharps'

claim is for structural and cosmetic damage to their house only,

and therefore falls under Coverage A (Dwelling), and not under

Coverage B (Personal Property). Coverage B, in its entirety, is

simply inapplicable to the Sharps' claim.

C

Thus, examining the plain terms of the Sharps' policy, we

must reject the argument that the sentence

Exclusions 1.a. through 1.h. under Section I Exclusions do not
apply to loss caused by this peril

in Coverage B (Personal Property) affects Coverage A (Dwelling) in

any way. The Exclusions section indicates that all of the

exclusions apply to both Coverage A and Coverage B. Consequently,

in order to invalidate any exclusion from a particular type of

peril, the policy must so state within the language of the

"Coverage," either A or B, to which the exclusion is to be made

inapplicable. That is exactly what this policy accomplishes:

Exclusion "h" is made inapplicable to the "accidental discharge"

peril under Coverage B (Personal Property), but not under Coverage

Ins. Co. v. Craddock, 130 Tex. 251, 109 S.W.2d 165 (1937)). Any
disagreement between the Texas Department of Insurance and the 1990
revision committee concerning the manner in which the committee
fulfilled its assigned duties is a dispute that must be adjudicated
in a different forum.

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A (Dwelling).

If Exclusion "h," or any other exclusion, were intended

jointly to be inapplicable under both Coverage A (Dwelling) and

Coverage B (Personal Property) in "accidental discharge" cases, the

structure of the policy suggests that such a limitation would be

found within the Exclusions section itself, rather than within only

one of the "Coverage" sections. We note that several of the

individual exclusions contain explicit limitations within their

text. More significantly, the entire Exclusions section begins

with the observation that none of the exclusions under Arabic

numeral "1" apply to "ensuing loss caused by fire, smoke or

explosion." We would expect to see the same treatment if Exclusion

"h" were to be made inapplicable in "accidental discharge" cases

under both Coverage A and Coverage B—rather than only under

Coverage B where it is, in fact, found.

The Sharps and amicus curiae argue that the sentence

eliminating Exclusion "h" under the "accidental discharge" peril to

personal property cannot reasonably apply only to cases of personal

property damage because Exclusion "h" itself addresses only

"dwelling" damage. The Sharps argue that rendering the foundation

loss exclusion inapplicable to the "accidental discharge" peril

would serve no purpose if the terms of the accidental discharge

peril applied only to personal property. We disagree. The import

of rendering certain exclusions inapplicable in cases of

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"accidental discharge, leakage or overflow of water or steam" is to

benefit the insured by avoiding disputes over causation in certain

personal property losses. Exclusion "h" only addresses "dwelling"

damage, but the dwelling damage in question can be a cause of

personal property damage.

Leakage or overflow of water may often combine with or lead to

other causes of damage to personal property. Leakage or overflow

of water, for example, may cause electrical problems that damage

electrical devices (otherwise excluded under Exclusion "a"),

mechanical failures that damage machinery or appliances (Exclusion

"e"), or structural cracking or settling that may itself damage

personal property if the structure collapses or breaks apart

(Exclusion "h"). Leakage or overflow of water, in most case, will

itself be caused by inherent wear, tear or deterioration (otherwise

excluded under Exclusion "f").

Eliminating these exclusions with respect to the "accidental

discharge" peril to personal property prevents needless litigation

in the large number of mixed causation cases where the underlying

source of the problem is a typical leak or overflow of water from

a plumbing, heating or air conditioning system. This conclusion is

confirmed by the fact that the three exclusions not eliminated

under the "accidental discharge" peril to personal

property—Exclusions "i," "j," and "k"—involve cases where the

discharge or leak is caused either by a natural catastrophe (flood,

11
earthquake or landslide) or by the neglect of the insured (failure

to take reasonable precautions to protect against frozen pipes).

IV

Because we conclude that the policy that State Farm issued to

the Sharps unambiguously excludes coverage for damage to their

house that results from a foundation shift caused by a sub-surface

plumbing leak, we affirm the district court's decision granting

summary judgment to State Farm on the Sharps' contractual claim.

We also affirm summary judgment on the claim for breach of duty of

good faith and fair dealing. State Farm validly rejected the

Sharps' claim for coverage, and did not thereby violate any

common-law or statutory duty owed to the Sharps.4

AFFIRMED.

APPENDIX

TEXAS HOMEOWNERS POLICY—FORM B

(in relevant part)

SECTION I PERILS INSURED AGAINST

COVERAGE A (DWELLING)

We insure against all risks of physical loss to the property
described in Section I Property Coverage, Coverage A
(Dwelling) unless the loss is excluded in Section I
Exclusions.

COVERAGE B (PERSONAL PROPERTY)

We insure against physical loss to the property described in
Section I Property Coverage, Coverage B (Personal Property)

Additionally, all pending motions concerning the briefing of
this appeal are hereby denied.

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 caused by a peril listed below, unless the less is excluded in
Section I Exclusions.

1. Fire and Lightning.

2. Sudden and Accidental Damage from Smoke.

3. Windstorm, Hurricane and Hail.

4. Explosion.

5. Aircraft and Vehicles.

6. Vandalism and Malicious Mischief.

7. Riot and Civil Commotion.

8. Collapse of Building or any part of the building.

9. Accidental Discharge, Leakage or Overflow of Water or Steam from
within a plumbing, heating, or air conditioning system or
household appliance. A loss resulting from this peril
includes the cost of tearing out and replacing any part of the
building necessary to replace the system or appliance. But
this does not include loss to the system or appliance from
which the water or steam escaped. Exclusions 1.a. through
1.h. under Section I Exclusions do not apply to loss caused by
this peril.

10. Falling Objects. This peril does not include loss to property
contained in a building unless the roof or outside wall of the
building is first damaged by the falling object.

11. Freezing of household appliances.

12. Theft, including attempted theft and loss of property from a
known place when it is likely that the property has been
stolen.

SECTION I EXCLUSIONS

1. The following exclusions apply to loss to property described
under Coverage A (Dwelling) or Coverage B (Personal Property),
but they do not apply to an ensuing loss caused by fire, smoke
or explosion.

a. We do not cover loss to electrical devices or wiring caused by
electricity other than lightning.

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b. We do not cover loss caused by smog or by smoke from industrial
or agricultural operations.

c. We do not cover loss caused by windstorm, hurricane, or hail to:
(1) cloth awnings, greenhouses ... (2) radio and television
towers ... (3) personal property contained in a building
unless direct force of wind or hail ...

d. We do not cover loss of the following property by theft ...

e. We do not cover loss to machinery, appliances and mechanical
devices caused by mechanical breakdown.

f. We do not cover loss caused by: (1) inherent vice, wear and
tear or deterioration. (2) rust, rot, mold or other fungi. (3)
dampness of atmosphere, extremes of temperature. (4)
contamination. (5) vermin, termites, moths or other insects.
We do cover ensuing loss caused by collapse of building or any
part of the building, water damage or breakage of glass which
is part of the building if the loss would otherwise be covered
under this policy.

g. We do not cover loss caused by animals or birds owned or kept by
an insured or occupant of the residence premises. We do cover
ensuing loss caused by collapse of building or any part of the
building, water damage or breakage of glass which is part of
the building if the loss would otherwise be covered under this
policy.

h. We do not cover loss under Coverage A (Dwelling) caused by
settling, cracking, bulging, shrinkage, or expansion of
foundations, walls, floors, ceilings, roof structures, walks,
drives, curbs, fences, retaining walls or swimming pools. We
do cover ensuing loss caused by collapse of building or any
part of the building, water damage or breakage of glass which
is part of the building if the loss would otherwise be covered
under this policy.

i. We do not cover loss caused by or resulting from flood, surface
water, waves, tidal water or tidal waves, overflow or streams
or other bodies of water or spray from any of these whether or
not driven by wind. We do cover an ensuing loss by theft or
attempted theft or any act or attempted act of stealing.

j. We do not cover loss caused by or resulting from freezing while
the building is unoccupied unless you have used reasonable
care to: (1) maintain heat in the building; or (2) shut off
the water supply and drain plumbing, heating and air

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 conditioning systems of water.

k. We do not cover loss caused by earthquake, landslide or earth
movement.

2. GOVERNMENTAL ACTION. We do not cover loss caused by the
destruction of property by order of governmental authority
[unless to prevent spread of an otherwise covered fire].

3. BUILDING LAWS. We do not cover loss caused by or resulting from
the enforcement of any ordinance or law regulating the
construction, repair or demolition of a building or structure.

4. WAR DAMAGE. We do not cover loss resulting directly or
indirectly from war....

5. NUCLEAR DAMAGE. We do not cover loss resulting directly or
indirectly from nuclear reaction ...

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