Sczepanik v. State Farm Fire

Revised May 15, 2000

UNITED STATES COURT OF APPEALS
For the Fifth Circuit

No. 99-50721

GERALD SCZEPANIK and JACQUELINE SCZEPANIK,

Plaintiffs-Appellants,

VERSUS

STATE FARM FIRE AND CASUALTY COMPANY,

Defendant-Appellee.

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

April 27, 2000
Before KING, Chief Judge, and GARWOOD, and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

Plaintiffs Gerald and Jacqueline Sczepanik appeal the district

court’s order granting summary judgment in favor of defendant State

Farm. The district court held that State Farm was entitled to

prevail as a matter of law because the homeowners policy issued by

State Farm to the Sczepaniks unambiguously excludes coverage with

respect to the Sczepaniks’ claim that a plumbing leak caused

foundation damage to their house. Having reviewed this narrow
issue of contract interpretation de novo, we conclude that the

controlling authorities from this Court and the Texas Supreme Court

mandate a result in favor of the Sczepaniks. We therefore vacate

the district court’s grant of summary judgment in favor of State

Farm and remand for further proceedings.

I.

The Sczepaniks filed this suit in state court after State Farm

refused to pay their claim for damage to the foundation of their

house, which the Sczepaniks claim was caused by water leaking from

a broken sewer line under the foundation of the house. The

Sczepaniks’ state court petition alleged breach of contract as well

as breach of the duty to promptly investigate and pay their claim.

State Farm removed the case to federal district court on the basis

of diversity jurisdiction. The disposition of this diversity

action is governed by Texas insurance law.

State Farm defends on the ground that the policy issued to the

Sczepaniks unambiguously excludes coverage for foundation damage,

and the district court granted summary judgment in favor of State

Farm on that ground. The Sczepaniks contend that the policy

exclusion relied upon by State Farm does not apply when the

foundation damage is caused by an accidental discharge of water,

such as the plumbing leak alleged here.

This is not the first time that this Court has been asked to

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consider whether the standard policy language promulgated for

homeowner policies by the Texas Insurance Commission includes or

excludes coverage for foundation damage caused by a plumbing leak.

In Sharp v. State Farm Fire & Cas. Ins. Co., 115 F.3d 1258 (5th

Cir. 1997), this Court held that substantively identical policy

provisions unambiguously exclude such coverage. Shortly there-

after, the Texas Insurance Commissioner (who writes the policies)

issued a bulletin “vigorously disagreeing with the Sharp decision.”

See Balandran v. Safeco Ins. Co., 972 S.W.2d 738, 739 (Tex. 1998)

(citing Tex. Dep’t of Ins. Bulletin B-0032-98 (Aug. 22, 1997)); see

also Douglas v. State Farm Lloyds, 37 F. Supp.2d 532, 538-40 (S.D.

Tex. 1999) (discussing the Texas Insurance Commissioner’s reaction

to Sharp and quoting at length from Bulletin B-0032-98). The

following year, this Court was presented with the issue again in

Balandran v. Safeco Ins. Co., 129 F.3d 747 (5th Cir. 1997). In

light of the Texas Insurance Commissioner’s Bulletin and other

post-Sharp developments, the panel in that case certified the

recurrent coverage question to the Texas Supreme Court. See id. at

749. Eight months later, the Texas Supreme Court answered the

certified question with a published opinion. See Balandran, 972

S.W.2d 738. The Texas Supreme Court held that the relevant

provisions of the form policy were ambiguous on the coverage

question presented. See id. at 741. Moreover, both the insured’s

argument that the policy covered foundation damage caused by a

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plumbing leak and the insurer’s argument that the policy excluded

such coverage were considered to be reasonable interpretations of

the ambiguous policy language. See id. at 741-43. The Texas

Supreme Court then applied the Texas rule of law that ambiguity

involving an exclusionary provision of an insurance policy must be

resolved in favor of the insured’s construction provided the

construction is reasonable. See id. at 741, 743. Given its

determination that the Balandran’s construction was reasonable, the

Texas Supreme Court held that the form policy provision excluding

coverage for foundation damage does not apply when the loss is

caused by an accidental discharge of water such as a plumbing leak.

See id. at 743. This Court subsequently gave effect to the Texas

Supreme Court’s holding in Balandran v. Safeco Ins. Co., 148 F.3d

487 (5th Cir. 1998).

II.

The parties’ arguments on appeal either rehash the contract

construction issues litigated in the earlier cases for the purpose

of establishing coverage or rely upon immaterial factual

distinctions to argue that Balandran is inapplicable to the instant

dispute. We will begin by examining the structure and relevant

language of the policy issued to the Sczepaniks.

The Sczepaniks were issued Texas Dwelling Policy-Form 3 ("TDP

Form 3"). The first page of the policy includes the heading

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“COVERAGES.” The COVERAGES section sets forth details about the

covered locations or property under subheadings titled “COVERAGE A

(DWELLING),” and “COVERAGE B (PERSONAL PROPERTY).” On the

following page, the policy sets forth the heading “PERILS INSURED

AGAINST.” Under that heading, the policy contains the following

relevant language:

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

Coverage B (Personal Property). We insure for direct
physical loss to the property described in Coverage B
(Personal Property) caused by a peril listed below unless
the loss is excluded in General Exclusions.

Immediately following this language there appears a list of

enumerated perils, which includes the following:

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 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.i. under General
Exclusions do not apply to loss caused by this
peril.

(emphasis added).

The third page of the policy sets forth a number of exclusions

under the heading “GENERAL EXCLUSIONS.” The general exclusions

provide, in relevant part:

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 1. The following exclusions apply to loss to covered
property:

i. We do not cover loss under Coverage A
(Dwelling) caused by settling, cracking,
bulging, shrinkage or expansion of
foundations, walls, floors, ceiling, 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.

Piecing these provisions together, it is clear that exclusion

1.i generally excludes coverage for foundation and similar damage

to the dwelling. The final sentence in the definition of peril 9,

which is italicized for emphasis above, repeals or precludes the

application of exclusion 1.i. when the loss is caused by the

accidental discharge of water. For this reason, the italicized

sentence is commonly referred to as the “exclusion repeal

provision.” See, e.g., Balandran, 972 S.W.2d at 740. The basic

contract interpretation question presented in this and similar

cases is whether the underlined exclusion repeal provision, which

follows the definition of peril 9, repeals the application of the

foundation damage exclusion defined in exclusion 1.i with respect

to claims made under both Coverage A (for damage to the dwelling)

and Coverage B (for damage to personal property), or whether the

exclusion repeal provision repeals the application of the

foundation damage exclusion as to claims made under Coverage B

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alone.

III.

State Farm seizes upon the fact that the exclusion repeal

provision is textually located within the list of enumerated perils

that fall under the heading "Coverage B (Personal Property)."

Thus, viewed strictly as a matter of format or structure, the

exclusion repeal provision is placed within and could be construed

to apply only to claims for personal property damage under Coverage

B. If the exclusion repeal provision is presumed not to apply to

Coverage A, then the Sczepaniks’ Coverage A claim for foundation

damage to the dwelling is taken outside the coverage of the policy

by exclusion 1.i.

State Farm’s argument that the exclusion repeal provision

applies exclusively to Coverage B is indistinguishable from the

argument that was embraced in Sharp and then subsequently rejected

by the Texas Supreme Court in Balandran. In Sharp, we interpreted

identical policy language, and observed:

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).

Sharp, 115 F.3d at 1262.

Less than one month after Sharp, the Texas Supreme Court

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issued a decision affirming a homeowner’s recovery for damages to

the foundation of the insured dwelling that were caused by a

plumbing leak without discussing this Court’s decision in Sharp.

See State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 446 (Tex. 1997)

(“The Nicolaus' homeowners policy, issued by State Farm Lloyds,

generally excludes losses caused by ‘inherent vice,’ or by

‘settling, cracking, bulging, shrinkage, or expansion of

foundations.’ Under an express exception, however, these

exclusions do not apply to losses caused by an ‘[a]ccidental

discharge, leakage or overflow of water’ from within a plumbing

system.”). One month later, the Texas Insurance Commissioner

issued Bulletin B-0032-98. The Commissioner’s bulletin denounced

Sharp as an incorrect interpretation of Texas law, advised insurers

that the decision was not binding on Texas courts, and warned

insurers that failure to pay claims for foundation damage to the

dwelling caused by an accidental discharge of water could subject

the insurer to liability or disciplinary proceedings under the

Texas Insurance Code. See Douglas, 37 F. Supp.2d at 538-39 (citing

bulletin). When presented with the issue again, this Court

certified the coverage question, asking whether the standard policy

covered “damage to a dwelling caused by movement of its foundation

that was caused by an underground plumbing leak.” Balandran, 129

F.3d at 749. The Texas Supreme Court answered that the policy

should be construed to provide such coverage. Balandran, 972

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S.W.2d at 743.

The Sczepaniks’ arguments on appeal are either drawn from or

elaborate upon the reasoning used by the Texas Supreme Court in

Balandran to reject the interpretation given identical provisions

in this Court’s opinion in Sharp. In Balandran, the Texas Supreme

Court compared the comprehensive coverage for “all risks” or perils

in Coverage A with the limited coverage for enumerated perils in

Coverage B, implying that the broader coverage specified in

Coverage A necessarily included coverage for the subset of

enumerated perils specified in Coverage B. See Balandran, 972

S.W.2d at 740. The Texas Supreme Court further noted that the

exclusion repeal provision is not, by its plain terms, limited to

claims for personal property damage. Indeed, the provision states

merely that the foundation damage exclusion does “not apply to

loss” caused by a plumbing leak. See id. at 741. Finally, the

Texas Supreme Court set forth historical and logical reasons

explaining and justifying the placement of the exclusion repeal

provision adjacent to the specific peril to which it pertained.

See Balandran, 972 S.W.2d 741.

The Texas Supreme Court also relied heavily upon the rule of

contract construction that disfavors an interpretation that renders

part of the contract meaningless or inoperative. See id. at 741.

The Texas Supreme Court recognized that the insurer’s

interpretation -- that the exclusion repeal provision repeals the

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foundation damage exclusion as to personal property claims only --

would render that part of the exclusion repeal provision

meaningless. See id. This is so because the foundation damage

exclusion is textually limited to “loss under Coverage A

(Dwelling).” Moreover, the foundation damage exclusion does not

even potentially have any application to personal property

coverage. See id. at 741 (the foundation damage exclusion “can

never affect personal property losses”). As the Texas Supreme

Court pointed out in Balandran, the exclusion repeal provision

would be both meaningless and of no effect if it merely repealed

the application of an exclusion that was inapplicable in the first

place. See id. at 741. We are not at liberty to assess the

relative strength of the reasoning used in Sharp as compared to the

reasoning used in the Texas Supreme Court’s disposition in

Balandran. To the contrary, the Texas Supreme Court has construed

identical policy provisions to provide coverage for foundation

damage to the dwelling when caused by an accidental discharge of

water such as a plumbing leak. Our task when sitting in diversity

is simply to apply that law. See, e.g., Shanks v. Allied Signal,

Inc., 169 F.3d 988, 993 (5th Cir. 1999).

State Farm attempts to avoid Balandran and breathe new life

into the argument rejected in Sharp with a single factual

distinction. State Farm argues that we are not bound by the Texas

Supreme Court’s decision in Balandran because the policy at issue

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in both Sharp and Balandran was Texas Homeowners Policy-Form B, or

HO-B, while the Sczepaniks were issued Texas’ Dwelling Policy-Form

3, or TDP Form 3. According to State Farm, HO-B is intended for

use when the homeowner desires full coverage for both the dwelling

and personal property, while TDP Form 3 is intended for use when

the insured may want to select only certain types of coverage from

a policy which contains a description of all possible coverages.

State Farm argues that TDP Form 3 is in this respect rather like

the Texas Personal Auto Policy, which permits an insured to select

comprehensive protection, liability protection, or a combination of

both. State Farm concedes that the relevant policy provisions in

the two policies are substantively identical, but maintains that

the difference permitting an election is significant because the

Sczepaniks, who owned but did not reside at the insured property,

purchased only Coverage A. State Farm then makes the further

argument that, because the Sczepaniks did not purchase Coverage B,

the exclusion repeal provision “is not part of the Sczepaniks’

contract.” Stated differently, State Farm wants the Court to

judicially excise from the insurance agreement any portions that,

in State Farm’s judgment, apply strictly to Coverage B, which was

not purchased. The district court essentially adopted this

argument when granting summary judgment.

The problem with State Farm’s argument attempting to

distinguish Balandran is that it once again depends entirely upon

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the premise that the exclusion repeal provision is unambiguously

and exclusively part of Coverage B, and does not form any part of

the coverage extended under Coverage A for damage to the dwelling.

That exact proposition was rejected by the Texas Supreme Court in

Balandran. Moreover, we have not found any authority that would

permit this Court, sitting in diversity, to create a new contract

for the parties by simply deciding which textual provisions the

parties intended to apply to what coverages and then judicially

excising the remaining portions. That premise holds particularly

true when, as here, to do so would require that this Court reach a

decision about which provisions form part of which coverages that

is directly contrary to a recent decision interpreting identical

provisions from the state’s highest court. To conclude, State Farm

relies upon the Sczepaniks’ failure to purchase personal property

coverage as a basis for distinguishing the case from Balandran. We

conclude that that factual distinction is immaterial because the

Texas Supreme Court has already held that identical policy language

does not unambiguously limit the application of the exclusion

repeal provision to personal property coverage.

For the foregoing reasons, we vacate the district court’s

summary judgment in favor of State Farm and remand for further

proceedings consistent with this opinion. The parties’ briefing

suggests that there may be unresolved factual disputes concerning

the actual cause of the damage to the Sczepaniks’ house. We do

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not, in this appeal from summary judgment on the contract

interpretation issue, resolve whatever factual disputes may exist

between the parties on that issue. Rather, we limit our holding to

the issue presented, which is whether, assuming that the foundation

damage was caused by an accidental discharge of water such as a

plumbing leak, State Farm’s policy excludes coverage as a matter of

law. As set forth above, the decisions of the Texas Supreme Court

and this Court in Balandran require that we answer that question in

the negative.

CONCLUSION

The summary judgment in favor of State Farm is VACATED and the

cause REMANDED for further proceedings consistent with this

opinion.

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