Lennar Corporation, Lennar Homes of Texas Sales & Marketing Ltd. and Lennar Homes of Texas Land & Construction, Ltd. v. Markel American Insurance Company

IN THE SUPREME COURT OF TEXAS
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NO . 11-0394
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LENNAR CORPORATION, LENNAR HOMES OF TEXAS
SALES & MARKETING LTD., AND LENNAR HOMES OF TEXAS
LAND & CONSTRUCTION LTD., PETITIONERS,
v.

MARKEL AMERICAN INSURANCE COMPANY, RESPONDENT

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ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FOURTEENTH DISTRICT OF TEXAS
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JUSTICE BOYD , concurring.

If we were writing on a blank slate, I would hold that Markel’s insurance policy does not

cover Lennar’s liabilities because Lennar incurred those liabilities through settlements to which

Markel had not “previously agreed in writing.” But we are not writing on a blank slate, and our

precedent compels us to disregard the policy’s consent requirement because Lennar’s failure to

obtain Markel’s prior agreement to the settlements did not harm or prejudice Markel. I therefore

concur in the Court’s judgment. But if we are going to continue imposing the prejudice requirement,

as I agree our precedent compels us to do, we should admit we are doing so on public policy

grounds, rather than continue our well-intended but ultimately inadequate efforts to justify our

holdings on the basis of contract principles.

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 I.
Courts and Contracts

We have repeatedly said that we will not re-write contracts. “Courts cannot make new

contracts between the parties, but must enforce the contracts as written.” Royal Indem. Co. v.

Marshall, 388 S.W.2d 176, 181 (Tex. 1965). As the Court reaffirms today, insurance agreements

are simply contracts; we construe them by applying general rules of contract construction, and we

assume that the parties intended what the words of the contract say. Gilbert Tex. Constr., L.P. v.

Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010). “[W]e may neither rewrite the

parties’ contract nor add to its language.” Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 162

(Tex. 2003).

Except, sometimes, we do. Judicially implied warranties provide one obvious example. In

Humber v. Morton, we inserted into contracts between homebuilders and their purchasers an

agreement that the builder warrants that the home has been constructed in a good and workmanlike

manner and is suitable for human habitation. 426 S.W.2d 554, 555 (Tex. 1968). And in Melody

Home Mfg. v. Barnes, we implied a similar warranty in contracts between those hired to repair or

modify tangible property and the customers who sue them for deceptive trade practices. 741 S.W.2d

349, 354 (Tex. 1987). In doing so, we acknowledged that “[i]mplied warranties are created by

operation of law and are grounded more in tort than in contract,” id. at 352, but we judicially inserted

them into the parties’ contracts because “public policy so mandates.” Id. at 353.

Similarly, as in this case, we have repeatedly inserted into insurance contracts a requirement

that insurers must suffer harm or prejudice before they can deny coverage based on certain

provisions, even though the policies’ unambiguous language would have permitted the insurers to

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deny coverage without showing prejudice. In my view, we have struggled to explain and reconcile

our holdings in these cases, primarily because we (quite understandably, in my view) want to avoid

judicially inserting the prejudice requirement as a matter of public policy. I am convinced that there

is now no other way to reconcile them. Although I would hold differently in the absence of our prior

decisions, our precedent compels us to imply the prejudice requirement in this case as well. For the

sake of consistency and predictability, however, we should acknowledge that we are doing so

because “public policy so mandates.”

II.
Precedent

This Court has directly addressed the prejudice requirement five times over the past forty

years. Although we declined to impose the requirement the first time we considered it, we then did

impose it in each of the subsequent cases. Our reasons for doing so have evolved in each case, to

the point that, in my opinion, they are no longer logically or legally sufficient.

A. Cutaia

When this Court first addressed the issue more than forty years ago, we refused to read a

prejudice requirement into an insurance contract because “the matter of rewriting the insurance

provisions in question is properly within the prerogative of the State Board of Insurance or the

Legislature.” Members Mut. Ins. Co. v. Cutaia, 476 S.W.2d 278, 278 (Tex. 1972). Cutaia involved

an automobile liability policy that required the insured to “forward any suit papers immediately to

the [insurance] company.” Id. The insured failed to comply with this requirement, but “the

insurance company stipulated that it had not been harmed by the failure to forward the suit papers.”

Id. at 279. Nevertheless, the Court recognized that this prompt-service requirement was a condition

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precedent to coverage. The Court thus held that the insured’s failure to fulfill the condition negated

the insurer’s liability because, “after all, this is what the contract says.” Id.

B. Hernandez

Twenty-two years after Cutaia, the Court changed course in Hernandez v. Gulf Group

Lloyds, 875 S.W.2d 691 (Tex. 1994). Hernandez involved uninsured motorist coverage under an

automobile policy that—like the policy at issue in the present case—required the insured to obtain

the insurer’s consent prior to any settlement. Unlike the present case, the consent provision was

expressed as an exclusion to the coverage that the policy otherwise provided. Id. at 692 n.1 (policy

provided that “[t]his insurance does not apply” to liability incurred through a settlement without

consent). The insured settled a claim without obtaining the insurer’s prior consent, but the trial court

found that this caused the insurer “no material prejudice.” Id. at 692. Without citing or discussing

Cutaia, we held that “an insurer may escape liability on the basis of a settlement-without-consent

exclusion only when the insurer is actually prejudiced by the insured’s settlement . . . .” Id.

Although we noted in Hernandez that “[m]ost other jurisdictions presented with this issue

have likewise imposed a prejudice requirement, primarily on public policy grounds,” id. at 693 n.4,

we did not characterize our holding as one based on public policy considerations. Instead, we

reasoned that the insured breached the agreement by failing to obtain the insurer’s consent, but the

breach was not material because it did not cause harm or prejudice to the insurer, and it therefore did

not release the insurer from its obligation to perform. Id. at 693–94. Justice Enoch dissented

because he did not agree that the insured’s failure to obtain the insurer’s consent was a breach of the

agreement. Instead, the consent requirement simply defined what the policy covered, or more

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specifically, what the policy excluded from coverage. In Justice Enoch’s view, Hernandez is not a

case “about a breach of contract. This case is about coverage.” Id. at 694 (Enoch, J., dissenting).

C. PAJ

We have addressed the prejudice requirement three times since Hernandez, and in each case

we have imposed the prejudice requirement. First, in PAJ, Inc. v. Hanover Insurance Co., we

considered a provision in a commercial general liability policy that required the insured to notify the

insurer of any claim or suit “as soon as practicable.” 243 S.W.3d 630, 631 (Tex. 2008). The parties

stipulated that the insured failed to comply with this requirement, but they also stipulated that the

insurer was not prejudiced by the untimely notice. Id. Although the parties disagreed on whether

the provision was a condition precedent (as in Cutaia) or “merely a covenant,” we held—in a 5–4

split decision—that, in either case, the insured’s failure to provide prompt notice would negate

coverage only if the insurer was prejudiced. Id. at 632–33. As in Hernandez, we did not insert the

prejudice requirement as a matter of public policy, but instead reasoned that the insured’s failure to

give prompt notice would negate coverage only if it was “a material breach.” Id.

The four dissenting Justices concluded that the prompt-notice requirement was a condition

precedent rather than a covenant, and to them that was the controlling difference: “Hernandez’s

materiality-of-breach analysis is inapposite here because PAJ did not breach a covenant. Rather, it

failed to comply with a condition precedent, a strict requirement that precedes any obligation on the

part of Hanover under the policy.” Id. at 639 (Willett, J., dissenting).

In a discussion that is crucial to my decision in the present case, however, the dissent in PAJ

distinguished that policy’s prompt-notice requirement (which it considered to be a condition

precedent) from the settlement-without-consent provision in the policy at issue in Hernandez (which

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it considered to be a covenant). In the dissent’s view, settlement-without-consent covenants differ

from prompt-notice conditions because a breach of the former “might occur long after the insurer

has learned of a suit and assumed its duty to defend.” Id. Not inserting the prejudice requirement

into a settlement-without-consent provision, the dissent reasoned, thus “makes little sense from a

timing standpoint [and] also disserves the interests of both parties to the insurance contract.” Id.

“Considering the prejudice, if any, to the insurer of a breach of the consent requirement is therefore

warranted.” Id. (Willett, J., dissenting).

D. Prodigy

The following year, we addressed the issue again in Prodigy Communications Corp. v.

Agricultural Excess & Surplus Insurance Co., 288 S.W.3d 374 (Tex. 2009). Prodigy also involved

a prompt-notice provision, but unlike the “occurrence-based” commercial general liability policy at

issue in PAJ, the policy at issue in Prodigy was a “claims-made” directors’ and officers’ liability

policy.1 Id. at 375. More accurately, the Prodigy policy was a “claims-made-and-reported” policy,

in that it required, “as a condition precedent” to coverage, that the insured give written notice of the

claim to the insurer “as soon as practicable . . . but in no event later than ninety (90) days” after

expiration of the policy’s coverage period. Id. at 375, 379 n.7. Thus, the policy only covered claims

that the insured received and reported to the insurer during the coverage period or the 90 days

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As we explained in PAJ, a “claims-made” policy “‘only covers those claims first asserted against the insured
during the policy period. . . . This coverage differs from “occurrence” type coverage, . . . which covers only claims
arising out of occurrences happening within the policy period, regardless of when the claim is made.’” Prodigy, 288
S.W .3d at 378 (quoting 3 R OW LAN D H. L O N G , T H E L AW OF L IA BILITY I N SU RAN CE § 12A.05[3] (2006)). Stated
otherwise,“[a] ‘claims-made’ policy covers occurrences [that] may give rise to a claim that comes to the attention of the
insured and is made known to the insurer during the policy period. An ‘occurrence’ policy covers all claims based on
an event occurring during the policy period, regardless of whether the claim or occurrence itself is brought to the
attention of the insured or made known to the insurer during the policy period.” Yancey v. Floyd W. & Co., 755 S.W .2d
914, 918 (Tex. App.— Fort W orth 1988, writ denied) (citations omitted).

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thereafter, and required the insured to report the claim “as soon as practicable” within that time

frame.

Prodigy received the claim and gave the required notice within the 90-day period, but did not

do so as soon as practicable. The insurer conceded, however, that it suffered no prejudice from the

delayed notice. In a 6–3 split decision, the Court held that the insured’s failure to give notice of the

claim as soon as practicable would negate coverage only if the failure prejudiced the insurer. Id. at

375. As in PAJ, the Court reasoned that the insured’s failure to give notice as soon as practicable

was a breach of the agreement, but the breach would excuse the insurer’s performance only if it was

material. Id. at 378. And also as in PAJ, the Court held that the prejudice requirement applies

regardless of whether the provision is expressed as a covenant or a condition precedent. Id.

Notably, however, the Court in Prodigy recognized an important difference between the

policy’s requirement that the insured give notice within 90 days of the coverage period and that it

do so as soon as practicable during the coverage-period-plus-90-days time frame. Specifically, the

Court explained that, unlike the “as soon as practicable” requirement, the 90-day deadline actually

“define[s] the scope of coverage” in a claims-made-and-reported policy, “by providing a certain date

after which an insurer knows it is no longer liable under the policy.” Id. at 380 (quoting Resolution

Trust Corp. v. Ayo, 31 F.3d 285, 289 (5th Cir. 1994)). The Court thus reasoned that, because the 90-

day notice deadline “is considered essential to coverage” under the policy, the insured’s failure to

report the claim by that deadline would negate coverage even if the insurer suffers no harm or

prejudice. Id. at 381. But if, as actually occurred in Prodigy, the “insured gives notice of a claim

within the policy period or other specified reporting period, the insurer must show that the insured’s

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noncompliance with the policy’s ‘as soon as practicable’ notice provision prejudiced the insurer

before it may deny coverage.” Id. at 382.

The three Justices who dissented in Prodigy had also dissented in PAJ. As in PAJ, they

concluded that, because the prompt-notice requirement was expressed in the policy as a condition

precedent, the insured’s failure to give prompt notice negated coverage regardless of whether the

insurer was prejudiced. Id. at 383 (Johnson, J., dissenting). Importantly for my decision in the

present case, they disagreed with the majority’s distinction between the “as soon as practicable”

requirement (to which the majority implied the prejudice requirement) and the 90-day deadline (to

which the majority would not have implied the prejudice requirement) because, in the dissent’s view,

both requirements were essential to the parties’ bargain as stated in the contract. Id. at 384 (Johnson,

J., dissenting).

E. Financial Industries

Finally, on the same day we issued our decision in Prodigy, we answered a certified question

in Financial Indus. Corp. v. XL Specialty Ins. Co., 285 S.W.3d 877 (Tex. 2009). The policy at issue

in Financial Indus. was a claims-made policy that required, “as a condition precedent” to coverage,

that the insured give the insurer written notice of any claim “as soon as practicable,” but (unlike the

policy in Prodigy) it did not impose a specific notice deadline that limited the scope of coverage.

Id. at 877–78. In other words, it was a claims-made policy, but not a claims-made-and-reported

policy. Without any dissent, the Court held that the insurer could not deny coverage without

showing that the insured’s failure to provide notice as soon as practicable prejudiced the insurer. Id.

at 879. Following Prodigy, the Court reasoned that, absent a showing of prejudice, the insured’s

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failure to provide prompt notice did not deny the insurer “the benefit of the claims-made nature of

its policy,” and thus the breach was not material.

III.
Application

Like the Court in Cutaia and the dissents in the subsequent cases, I believe we have pursued

the wrong path in our dealings with this issue. “The better choice for courts, as the Court noted in

Cutaia, is if changes to insurance policy language are to be mandated . . . the changes should be left

to the Legislature and regulatory agencies.” Prodigy, 288 S.W.3d at 388–89 (Johnson, J.,

dissenting). Out of respect for the parties’ freedom of contract, “this Court should not overreach its

boundaries and imply new standards into insurance contracts.” Hernandez, 875 S.W.2d at 694

(Enoch, J., dissenting) (citing Cutaia, 476 S.W.2d at 281).

Moreover, I believe the Court’s attempt to explain and reconcile these decisions based on

contract principles has only muddied the waters and is no longer workable. In Hernandez, we

acknowledged that most jurisdictions have “imposed a prejudice requirement, primarily on public

policy grounds,” 875 S.W.2d at 693 n.4, but we chose not to do so, and instead imposed the

prejudice requirement as a logical result of the rule that a party’s breach of contract excuses the other

party’s performance only if the initial breach is material. That analysis worked fine for Hernandez,

but it has become unworkable as the subsequent cases have required the Court to address a variety

of provisions (prompt service of suit papers, prompt notice, and settlement-without consent) that

serve a variety of purposes within the policies (conditions precedent, covenants, exclusions,

definitions, and descriptions of the scope of coverage).

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 Here, we are faced with a policy that expressly requires the insured to obtain the insurer’s

written agreement before settling a claim, but it does so in two different places and to serve two

different purposes. In the Policy Conditions, the requirement is a condition precedent, and the

majority holdings in PAJ and Prodigy clearly require that we impose the prejudice requirement on

that condition. In the Insuring Agreement’s Definitions, however, the settlement-without-consent

provision defines the scope of the policy’s coverage: the policy only covers an “ultimate net loss,”

which in the case of a settlement is established only by “a compromise settlement to which we have

previously agreed in writing.” In this provision, Lennar expressly agreed that Markel would only

cover losses incurred through settlements to which Markel agreed in advance and in writing. This

was the extent of the coverage Lennar purchased. Because Markel did not consent to the settlements

with the homeowners in advance and in writing, the coverage that Lennar agreed to purchase from

Markel simply did not extend to those losses.

The Court imposes a prejudice requirement anyway, based on the contract principle that,

“[g]enerally, one party’s breach does not excuse the other’s performance unless the breach is

material.” Ante at ___. But no one (not even the Court2) asserts that Lennar “breached” the policy’s

Insuring Agreement by settling the claims without first obtaining Markels’ written consent. The

policy did not prohibit Lennar from settling claims without Markel’s consent; it just didn’t provide

coverage for such a settlement. Lennar’s failure to obtain Markel’s prior written consent could not

give rise to a cause of action for breach of the Insuring Agreement Definition. Instead, it simply

prevented the settlements from falling within the types of liabilities that Lennar paid Markel to cover.

2
See ante at __ (referring to Lennar’s “failure to comply” and “non-compliance,” rather than to its “breach”
of the policy’s Insuring Agreement).

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 In this sense, the Insuring Agreement provision is akin to the 90-day deadline that the

Prodigy majority agreed would be enforceable without a showing of prejudice. See Prodigy, 288

S.W.3d at 381–82 & n.10 (“most courts have found that an insurer need not demonstrate prejudice

to deny coverage when an insured does not give notice of a claim within the policy’s specified time

frame,” and “[w]e agree with this analysis”). The Justices who dissented in Prodigy disagreed with

the majority’s distinction between the 90-day deadline and the “as soon as practicable” requirement.

Id. at 385 (“the policy language shows [the parties] intended for the two notice provisions to have

the same effect: both are conditions precedent to Prodigy’s rights under the policy”) (Johnson, J.,

dissenting). They would not have imposed the prejudice requirement on the 90-day deadline or the

“as soon as practicable” requirement. And yet in PAJ, those same dissenting Justices agreed that the

imposition of a prejudice requirement on a settlement-without-consent provision is “warranted.” 243

S.W.3d 630, 639 (Willett, J., dissenting).

Logically, the majority Justices who decided to impose the prejudice requirement in Prodigy

should decide not to do so in the present case because the settlement-without-consent provision in

the Insuring Agreement (like the 90-day period in the Prodigy policy) “defines the limits of the

insurer’s obligation” and “is considered essential to coverage” under the policy. Id. at 380, 381.

And the dissenting Justices who would not have imposed the prejudice requirement in PAJ or

Prodigy should decide to impose it in the present case because this case involves a settlement-

without-consent requirement. PAJ, 243 S.W.3d at 649.

In today’s ruling, the Court does not address these variables, but instead abruptly concludes

that the Insuring Agreement’s consent requirement is “no clearer” than, has “exactly the same”

purpose as, “is no more central to the policy than,” and “operates identically” to Condition E’s

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consent requirement. Ante at ___. I disagree with these conclusions, as should those who joined the

majority in Prodigy. In my view, at least, the Insuring Agreement “clearly” limits coverage to

settlements to which Markel previously agrees in writing, does so for the “purpose” of defining the

scope of coverage rather than imposing any affirmative obligation on Lennar, and is therefore

“central” to the coverage that the policy provides and “operates” differently than Condition E.

The Court essentially holds that it does not matter where in the policy a settlement-without-

consent provision is located, and it does not matter whether it is expressed as a condition precedent,

a covenant, an exclusion to coverage, or a definition of the scope of coverage. Presumably, the Court

shares Lennar’s concern that the prejudice requirement would be easily circumvented if we allowed

it to turn on such variables, because insurers could simply move the appropriate sentences into the

definition portion of their agreements and thereby avoid the prejudice requirement. But I do not see

what is wrong with that. If “parties are free to contract as they choose,” Solar Applications Eng., Inc.

v. T.A. Operating Corp., 327 S.W.3d 104, 112 (Tex. 2010), they can define the scope of coverage

however they may agree to do so, subject only to statutory, regulatory, or judicially-imposed policy

limitations.

I believe the Court’s effort to parse through all the variables affecting the prejudice

requirement has only made Texas law more uncertain and has thereby rendered a disservice to both

insureds and insurers alike. In my view, we should either imply a prejudice requirement as a matter

of public policy, or not. Again, if we were writing on a clean slate, I would not. But, I “recognize

the impropriety of unsettling questions [that] have been well settled by former decisions of this

Court, and thereby rendering the law uncertain . . . .” Higgins v. Bordages, 31 S.W. 803, 804 (Tex.

1895). I agree that, with only rare exceptions, stare decisis dictates that we “adhere to our precedents

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for reasons of efficiency, fairness, and legitimacy . . . .” Sw. Bell Tel. Co., L.P. v. Mitchell, 276

S.W.3d 443, 447 (Tex. 2008) (citations omitted). Although I believe the Court should defer to the

Legislature to decide whether and when to insert policy-based requirements into private contracts,

we have repeatedly inserted the prejudice requirement for more than twenty years, and it would be

imprudent to suddenly stop doing so now.

IV.
Conclusion

Although our precedents may be difficult to understand and reconcile, they have undoubtedly

given insurers, insureds, regulators, and even the Legislature reason to expect and rely on the implied

prejudice requirement. I agree we should not now alter these reasonable expectations. But for the

sake of clarity, consistency, and predictability, I would stop trying to imply the requirement based

on contract principles. I would instead expressly hold that, as a matter of public policy, a prompt-

notice, prompt-service, or settlement-without-consent provision will negate coverage only if the lack

of prompt notice, prompt service, or consent causes harm or prejudice to the insurer. Because

Lennar’s failure to obtain Markel’s prior written agreement to Lennar’s settlements did not harm or

prejudice Markel, I concur in the Court’s decision to reverse the judgment of the court of appeals and

affirm the judgment of the trial court.

.

_______________________________________
Jeffrey S. Boyd
Justice

OPINION DELIVERED: August 23, 2013

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