REVISED February 29, 2008
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUITUnited States Court of Appeals
Fifth Circuit
FILED
No. 06-40286 February 22, 2008
Charles R. Fulbruge III
Clerk
JAVIER CARRIZALES; EVA CARRIZALES,
Plaintiffs-Appellants,
v.
STATE FARM LLOYDS,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Texas
Before JONES, Chief Judge, and REAVLEY and SMITH, Circuit Judges.
PER CURIAM:
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
No. 06-40286
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.
I.
Plaintiffs hold a standardized insurance policy issued by State Farm: the
Texas Standardized Homeowners PolicySSForm 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 re-
pairs 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 Hinojosa, who granted
in part and denied in part State Farm’s motion for summary judgment, conclud-
ing that Form B excludes coverage for mold damage to the dwelling. Summary
judgment was also granted on plaintiffs’ common law and statutory good faith
1
At least fourteen other suits, by other plaintiffs, were filed against State Farm con-
cerning the mold issue.
2
No. 06-40286
claims.
The case proceeded to trial, shepherded by Judge Hudspeth. Based on
Judge Hinojosa’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 reconsidera-
tion of the mold issue. We do not reach the second question, because we deter-
mine 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, 275 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 cov-
ers 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 (1938); Mayo v. Hartford Line Ins. Co., 354 F3d 400, 406 (5th Cir.
2004). Insurance contracts are subject to normal rules of contract construction.
3
No. 06-40286
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. Beatson, 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 surround-
ings or considering apart from other provisions a single phrase, sentence, or sec-
tion of a contract.” Id.
Ambiguities in insurance contracts giving rise to two reasonable interpre-
tations, one providing and the other denying coverage, are read contra proferen-
tem 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 proferentum 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 Un-
ion, 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
SSthe mold exclusion and the exclusion repeal provision. Because the interac-
tion of the two provisions creates no ambiguity, mold is not covered.
Form B divides coverage into two discrete subdivisions, A and B.2
2
COVERAGE A (DWELLING)
We insure against all risk of physical loss to the property described in Section I
Property Coverage, Coverage A (Dwelling) unless the loss is excluded in Sec-
tion I Exclusions.
COVERAGE B (PERSONAL PROPERTY)
We insure against physical loss to the property described in Section I Property
Coverage, Coverage B (Personal Property) caused by a peril listed below, unless
(continued...)
4
No. 06-40286
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
2
(...continued)
the loss is excluded in Section I Exclusions.
***
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.h under Section I Exclusions do not apply to loss
caused by this peril.
3
Section I SS Exclusions
The following exclusions apply to loss to property described under Coverage A
(Dwelling) or Coverage B (Personal Property) . . .
***
f. We do not cover loss caused by:
***
(2) rust, rot, mold or other fungi.
***
We do cover ensuing loss caused by collapse of building or any other part of the
(continued...)
5
No. 06-40286
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 re-
pealed Section I’s exclusion of foundation damage caused by a plumbing leak un-
der Coverage A. The court advanced two reasons in reaching that decision.
First, it opined that “the exclusion repeal provision could be located under Cover-
age B simply because that is the only place in the policy that the ‘accidental dis-
charge’ 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 exclu-
sion 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 1.h unless it repealed
it in respect to Coverage A. This result led to an ambiguity, because the insur-
ers’ argument against coverage was also reasonable. Applying contra proferen-
tum, 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 evi-
dence in favor of coverage. As the dissent and the insurer urged, “[t]he word
3
(...continued)
building, water damage or breakage of glass which is part of the building if the
loss would otherwise be covered under this policy.
4
Provision 1.h begins: “We do not cover loss under Coverage A (Dwelling) . . . ”
6
No. 06-40286
‘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 Balandran court did not say that Section 9 of Coverage B repealed all cov-
ered exclusions for both itself and Coverage A. Rather, the court reasoned that
with respect to 1.h, the words “[e]xclusions 1.a. through 1.h. under Section I Ex-
clusions do not apply to loss by this peril” would be wholly inoperative, because
exclusion 1.h by its terms applies only to Coverage A. Such is not the case with
exclusion 1.f. Section 9’s operation on exclusion 1.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, leak-
age, 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 conjunc-
tion 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.
7
No. 06-40286
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 provision accomplished, the court
reaffirmed that the “only reasonable construction of this clause was that it ap-
plied 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 re-
sult 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 Balandran court’s first conclusion, then, is that al-
though 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 (impli-
citly) as well as Coverage B (explicitly) covered mold damage resulting from
plumbing leaks.
8
No. 06-40286
“The question in this case is not whether insurers should provide mold cov-
erage in Texas, a public policy question beyond our jurisdiction as a court. The
question instead is whether the language in an insurance policy provides such
coverageSSno 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
5
Plaintiffs assert that the jury instruction excusing State Farm from paying costs or
expenses from damages caused by mold was erroneous. Because the policy does not cover mold
damage, that argument fails.
9
No. 06-40286
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 and 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 interroga-
tories 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.
6
The district court’s oral instructions to the jury directed the jurors only to reduce the
amount of reimbursement plaintiffs were owed if the jury concluded plaintiffs failed to mitigate
damages.
7
Interrogatory 1 asked whether the jury found that the plaintiffs failed to give prompt
notice of their claims. Answering Interrogatory 2 was conditioned on a “yes” answer to
Interrogatory 1. Interrogatory 2 asked the jury whether they found that State Farm suffered
prejudice from the failure to give prompt notice. If the jury found that the plaintiffs did not
fail to give prompt notice or if they found that the failure did not prejudice State Farm, the jury
would proceed to Interrogatory 3. Interrogatory 3 asked the jury whether the plaintiffs failed
to mitigate their damages. Interrogatory 4 was conditioned on a “no” answer to Interrogatory
3. Interrogatory 4 asked whether the jury found that State Farm breached its contract with
the plaintiffs and set out four possible theories for the breach. Interrogatory 5 was conditioned
on a “yes” answer to any one of the theories contained in Interrogatory 4. Interrogatory 5
asked whether the breach was the proximate cause of any damages to the plaintiffs and set
out the breach theories. Interrogatory 6 was conditioned on a “yes” answer to any one of the
theories contained in Interrogatory 5. Interrogatory 6 asked what amount of damages, if any,
would fairly and adequately compensate the plaintiffs for their loss and set out a blank for each
breach theory. The jury answered “no” in response to Interrogatory 1 and “yes” in response
to Interrogatory 3. No answers were given for the remaining interrogatories.
10
No. 06-40286
“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,
11
No. 06-40286
others are not. See Progressive County Mut. Ins. Co. 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.2d 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 PRACTICE § 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.
12
No. 06-40286
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 instruc-
tions.”). 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
13
No. 06-40286
(5th Cir. 2000).
For 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.
8
Plaintiffs challenge the denial of their motion for new trial on the grounds that they
reasonably mitigated their damages. This argument is moot in view of the previous discussion.
14
No. 06-40286
REAVLEY, Circuit Judge, concurring:
I concur in the judgment and agree with the holding that mold damage
to the Carrizales’ dwelling caused by plumbing leaks is not covered under
Form B of the Texas Standardized Homeowners Policy issued by State Farm. I
write in the hope that it will be useful to review the Texas law on mold
damage under the current policy language.
As noted by the majority, the policy divides coverage into Coverage A
(Dwelling), insuring against risk of physical loss to the dwelling, and Coverage
B (Personal Property), insuring against loss to personal property caused by
specific, enumerated perils. The policy specifically excludes from coverage all
“loss caused by . . . mold . . . .” There are two policy provisions that could
possibly negate this general mold exclusion. The first is the “ensuing loss”
provision of the mold exclusion itself, which states in relevant part: “We do
cover ensuing loss caused by . . . water damage . . . .”1 Although mold is
certainly caused by water, Texas law controls our decision and the Texas
Supreme Court has refused to read the ensuing loss provision as providing
coverage for damage in mold cases. See Feiss v. State Farm Lloyds, 202
1
Exclusion 1.f of the policy states:
We do not cover loss caused by:
***
(2) rust, rot, mold or other fungi.
***
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.
15
No. 06-40286
S.W.3d 744, 750-51 (Tex. 2006).
The second provision that could negate the mold exclusion is the so-
called “exclusion repeal” provision, which is located textually in Coverage B.
This provision was not at issue in Feiss. See Feiss, 202 S.W.3d at 746 n.3.
Subsection 9 of Coverage B affords coverage for loss to personal property from
plumbing leaks. It then provides that “[e]xclusions 1.a through 1.h [including
the mold exclusion of 1.f] under Section I Exclusions do not apply to loss
caused by this peril.”2 It is clear from the plain language of this provision that
the exclusion for loss to personal property from mold caused by plumbing leaks
is repealed. In other words, the exclusion repeal provision reinstates coverage
for mold damage to personal property that arises from a plumbing leak. The
question is whether this provision applies to any loss or only to losses to
personal property under Coverage B. The Carrizaleses would have this
provision also repeal the exclusion to Coverage A for loss to the dwelling
2
The policy states:
COVERAGE B (PERSONAL PROPERTY)
We ensure against physical loss to the property described in Section I Property
Coverage, Coverage B (Personal Property) caused by a peril listed below, unless
the loss is excluded in Section I Exclusions.
***
9. Accidental Discharge, Leakage or overflow of Water or Steam from within a
plumbing, heating or air conditioning system or household appliance.
***
Exclusions 1.a through 1.h under Section I Exclusions do not apply to loss
caused by this peril.
16
No. 06-40286
caused by mold arising from plumbing leaks.
The Carrizaleses rely on Balandran v. Safeco Ins. Co. of America, 972
S.W.2d 738, 740–41 (Tex. 1998), where the Texas Supreme Court held that the
exclusion repeal provision repealed exclusion 1.h3 for foundation damage in a
dwelling and reinstated coverage even though the repeal provision was
textually located within Coverage B. The Balandran court read the 1.h
exclusion to apply to the limited dwelling damage of 1.h because of its concern
with affording meaning to all policy language. See id. at 741 (“We must read
all parts of the contract together, . . . striving to give meaning to every sen-
tence, clause, and word to avoid rendering any portion inoperative. . . . [The
insurer’s] construction of the policy renders a part of the policy language
meaningless.” (internal citation omitted)). Because exclusion 1.h applies only
to the limited dwelling and not to personal property losses, its inclusion in the
list of provisions that are repealed would be meaningless if the repeal was not
meant to reinstate coverage for that loss to the dwelling in Coverage A. Id. at
741. In other words, because exclusion 1.h does not apply to personal prop-
erty, it would not be necessary to include 1.h in the repeal provision—unless
the repeal provision reinstated coverage for that peril with respect to Coverage
A.
In the instant case, the same concern for affording meaning to all policy
language is not present. Unlike exclusion 1.h, the mold exclusion in 1.f
3
Exclusion 1.h of the policy states in relevant part:
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.
17
No. 06-40286
applies to both dwelling and personal property loss. Because mold can affect
both real and personal property, the policy language is not left without
meaning by concluding that the exclusion repeal provision reinstates coverage
for mold only for losses to personal property in Coverage B. Rather, Coverage
B appears specifically intended to provide greater coverage for such a loss to
personal property. See Salinas v. Allstate Texas Lloyd’s Co., 278 F. Supp. 2d
820, 823 (S.D. Tex. 2003).
The plaintiffs’ argument for the exclusion repeal provision to reinstate
coverage for exclusion 1.f with respect to the dwelling in Coverage A ignores
the structure of the policy. Coverage B insures against risks to personal
property from specific perils, one of which is plumbing leaks. The exclusion
repeal provision expressly negates exclusion 1.f with respect to “loss caused by
this peril.” The “peril” referred to is plumbing leaks which affect the personal
property of the insured. Other than Balandran, which is distinguishable,
there is no reason apparent in the policy to apply the exclusion repeal provi-
sion to the dwelling in Coverage A.
The majority, and some district court opinions, have reached a similar
result and found support in the Texas Supreme Court’s decision in Feiss.
Although Feiss found no mold coverage, it concerned a wholly separate part of
the policy—the ensuing loss provision—and is inapposite.
This case involves a standard form policy mandated by the Texas
Insurance Commissioner. See Feiss, 202 S.W.3d at 746; Balandran, 972
S.W.2d at 741; TEX. INS. CODE ANN. art. 5.35. If state regulators want to
require the exclusion repeal provision to reinstate mold coverage for damage
to a dwelling under Coverage A they could do so by simply amending the form
18
No. 06-40286
to read, “Exclusions 1.a through 1.h under Section I Exclusions do not apply to
loss to the dwelling or personal property caused by this peril.” As currently
drafted, the exclusion repeal provision with respect to mold applies only to
personal property.
Finally, I agree that if plaintiffs’ proved damages not attributed to mold
damage to the dwelling or to State Farm’s refusal to cover that, and not to the
plaintiffs’ failure to mitigate same, the judgment must be reversed. I do not
understand what part of the judgment we are affirming.
19
No. 06-40286
JERRY E. SMITH, Circuit Judge, dissenting in part:
I would affirm the judgment. I concur in the majority opinion in regard
to the coverage issue, but I respectfully dissent from part III.B, regarding the
duty to protect property, because the majority finds ambiguity in the contract
where there is none; it misinterprets Texas caselaw and policy; and it misap-
plies the abuse of discretion standard.
I.
We review jury instruction for abuse of discretion. See, e.g., Fiber Sys.
Int’l v. Roeher, 470 F.3d 1150, 1158 (5th Cir. 2006). A properly-objected-to
instruction should not be reversed unless, as a whole, it does not correctly
reflect the law. United States v. Stephens, 779 F.2d 23, 241 (5th Cir. 1985).
Because here the instruction as a whole correctly reflects the law, we should
affirm.
Fairness requires we begin with the text of the instruction. Interroga-
tory 3 reads, “Do you find from a preponderance of the evidence that Plaintiffs
failed (1) to protect their property from further damage and (2) to make
reasonable and necessary repairs to protect their property from further
damage?” The jury answered “Yes,” so judgment was entered in favor of the
insurer (“State Farm”).
It is important to quote the instruction as a whole, because it follows the
duties imposed by the insurance contract on the plaintiffs, Javier and Eva
Carrizales. The instruction tracks the language found in the “Duties After
Loss” section of the contract, which provides in part as follows:
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No. 06-40286
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:
(1) give prompt notice to us of the facts relat-
ing to the claim.
(2) notify the police in case of loss by theft.
(3) (a) protect the property from further
damage.
(b) make reasonable and necessary
repairs to protect the property.
(4) furnish a complete inventory of damaged
personal property showing the quantity,
description and amount of loss. Attach all
bills, receipts and related documents
which you have that justify the figures in
the inventory.
(5) as often as this company reasonably
requires:
(a) provide this company access to the
damaged property.
(b) provide this company with perti-
nent records and documents requested
and permit copies to be made.
(c) submit to examination under oath
and sign and swear to it.
***
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No. 06-40286
(11) Suits Against Us. No suit or action can
be brought unless the policy provisions
have been complied with . . . .
II.
The issue is whether Duty (3) is a condition precedent. Because the
Texas Supreme Court has not ruled on that issue, we must make an “Erie-
guess” as to what that court would do. Mayo v. Hartford Life Ins. Co., 354
F.3d 400, 406 (5th Cir. 2004).
The proper starting point is the text of the contract, because insurance
contracts are subject to the normal rules of contract construction. Nat’l
Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995). “The
primary concern of a court in construing a written contract is to ascertain the
true intent of the parties as expressed in the instrument.” Id. (emphasis
added). All parts of the contract are read together to give effect to the intent
of the parties. State Farm Life Ins. Co. v. Beatson, 907 S.W.2d 430, 433 (Tex.
1995). The majority, in its discussion of mold, recognizes this and goes so far
as to quote the Texas Supreme Court for the proposition that we are to be
“particularly wary of isolating from its surrounding or considering apart from
other provisions a single phrase, sentence, or section of a contract” (quoting
Beatson, 907 S.W.2d at 433). The majority, however, seems unmoved by the
text of the contract1 with regard to the “Duties After Loss” and, instead of
1
The contract speaks of a duty to “protect property from further damage” and “make
reasonable and necessary repairs to protect the property.” The majority speaks of the duty to
mitigate damages.
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No. 06-40286
discussing it, immediately turns to what we do in the face of an ambiguity.2
“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). The text of the instant contract is without ambiguity:
Duty (11) requires insureds to comply with the “Duties After Loss” section
before suing; otherwise, “[n]o suit or action can be brought.” In other words,
before State Farm was required to pay under the contract, and therefore
before it could breach the contract, plaintiffs were required to comply with
Duty (3). The majority, to the contrary, reads Duty (3) out of its context and
thereby reads the compliance provision out of the contract entirely.
There is no ambiguity in the requirement to protect property from
further damage, so I would give effect to the intent of the parties and would
hold Duty (3) to be a condition precedent to suit. The majority does not say
why it departs from the plain language of the contract and fails to give effect
to the intent of the parties.
III.
Maybe the key that unlocks the majority’s anti-textualist reading of the
contract is to be found in Texas cases and the policy underlying them. The
Texas Supreme Court has been fairly silent on the “Duties After Loss” section
2
The majority also notes that “[b]arring 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.” The law, however, requires that we favor insureds in ambiguous situa-
tions, not in onerous ones.
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No. 06-40286
except with respect to the notice requirement. When one looks to Texas
caselaw, what emerges is a story quite different from the majority’s.
In Delta Lloyds Insurance Co. v. Southwest Savings Association, 559
S.W.2d.372, 375 (Tex. Civ. App.SSDallas 1977, writ ref’d n.r.e.), the
policy required the insured to ‘give immediate notice to this Com-
pany of any loss (and) protect the property from further damage.
. . .’ Special issue number twelve was submitted in the following
form:
Do you find from a preponderance of the evidence that the loss
in question was caused, directly or indirectly, by the neglect of
Plaintiff to use all reasonable means to save and preserve the
property at and after a loss that the property may have sustained
prior to the loss in question and subsequent to December 15,
1973?
ANSWER: ‘We Do’ or ‘We Do Not’
ANSWER: We do.
We hold that this finding establishes a breach of the policy by
Southwest and, therefore, precludes its recovery.
This decision from a state court of appeals is directly on point and is not an
aberration from other Texas courts’ characterization of the remaining “Duties
After Loss,” but the majority overlooks it.
The first duty the contract imposes on insureds requires that they “give
prompt notice to [the insurance company] of the facts relating to the claim.”
Texas courts have held this requirement is a condition precedent.3
3
E.g., Caddell v. Travelers Lloyds, 2007 Tex. App. LEXIS 4296 (Tex. App.SSTexarkana
June 1, 2007, no pet.); cf. de Laurentis v. United Servs. Auto. Ass'n, 162 S.W.3d 714, 720-21
(Tex. App.SSHouston[14th] 2005, pet. denied) (discussing notice and inventory requirements
(continued...)
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No. 06-40286
Insureds are next required to “notify the police in case of loss by theft.”
The majority cites Lambrecht & Assoc. v. State Farm Lloyds, 119 S.W.3d 16
(Tex. App.SSTyler 2003, no pet.), for the proposition that this section is not a
condition precedent. There insureds filed a claim for lost income because a
hacker had unlawfully broken into their computer system and released a
virus. Id. at 19. State Farm argued that, because the insureds had failed to
notify the police, they were barred from recovery. The court held that “this
provision in the policy does not create a condition precedent because it does
not condition payment of a covered loss on contacting the police if a law was
broken.” Id. at 26. The question was not whether contacting the police in
case of loss by theft was a condition precedent; instead, and quite reasonably,
the court merely refused to extend the police notice requirement to all in-
stances of law-breaking.
The majority cites Beacon National Insurance Co. v. Glaze, 114 S.W.3d
1 (Tex. App.SSTyler 2003, pet. denied), for the proposition that the record-
keeping requirement is not a condition precedent. In that case, the appeals
court upheld the trial court’s determination that whether insureds needed to
submit written records was ambiguous and therefore was a not a condition
precedent under the principle of contra proferentum. Id. at 4. The insurance
company contended that insureds had a duty to provide written documenta-
tion and receipts of repair expenses. Id. at 2. The insureds countered that
Duty (5)(c) seemed to allow oral statements under oath in addition to receipts
and written documentation. Id at 4. The court of appeals agreed that the
3
(...continued)
in light of waiver of a condition precedent).
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No. 06-40286
requirement was ambiguous with respect to what kinds of documentation
were required. The court therefore held that failure to provide written
documentation was not a condition precedent, because insureds arguably
could satisfy the duty with a statement under oath. Id. Beacon does not
stand for the proposition that record-keeping is not a condition precedent, but
only that the method of keeping said record is ambiguous.
The next provision requires insureds to provide a complete inventory of
damaged personal property. In de Laurentis, 162 S.W.3d at 721, the court
said that “[w]e conclude the Insurer waived the requirement for the personal
property inventory . . . . The condition precedent having been waived, the
Policy holder is not barred from recovery . . . .” If an insurer can waive a
condition precedent, it necessarily follows that what was waived was a
condition precedent. In other words, the inventory provision too is a condition
precedent.
The final section requires insureds to “submit to examination under
oath and sign and swear to it.” This is a condition precedent. Trahan v. Fire
Ins. Exch., 179 S.W.3d 669, 674 (Tex. App.SSBeaumont 2005, no pet.).
The caselaw being unhelpful to it, the majority turns to treatises, but
even here the panel has no friends. The duty to protect property is “absolute,
and is a condition precedent to recovery.” 6 JOHN A. APPLEMAN, INSURANCE
LAW AND PRACTICE § 3980 (1972).
The majority reasons, however, that the duty is not a condition prece-
dent but an offset to damages. The majority bases this notion in general
contract principles, the Texas Rules of Civil Procedure, and the Texas Decep-
tive Trade Practices Act. It must do this because the contract, the cases, and
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No. 06-40286
the treatises all disagree with its position.
No case relied on by the majority declares any provision of the “Duties
After Loss” section not to be a condition precedent, and the secondary litera-
ture indicates that it is. A district judge, surveying a field in which cases
addressing the issue all point in the direction that the section as a whole
contains conditions precedent, would not expect to commit reversible error by
assuming another provision in the same section was also a condition prece-
dent. The majority does not see it that way.
IV.
If the duty to protect property is a condition precedent, what is the
effect of plaintiff’s failure to satisfy it? The breach of a condition precedent
“voids policy coverage.” Stonewall Ins. Co. v. Modern Exploration, Inc., 757
S.W.2d 432, 435 (Tex. App.SSDallas 1998, no writ). The majority instead says
that “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 preju-
diced.” But if the majority is correct, consistency should dictate adding a pre-
judice requirement to the timely-notice “condition” as well.4 Overlooking the
4
The prejudice requirement has been discussed only in the context of the notice provi-
sion. See, e.g. PAJ, Inc. v. Hanover Ins. Co., 2008 Tex. LEXIS 8, at *18 (Tex. 2008). Even
then, the prejudice requirement does not extend to all insurance policies. Id. at *17 (distin-
guishing “occurrence” liability policies from “claims-based” liability policies.) It is incongruous
to take a requirement that has been limited, for the most part, to a requirement in some liabil-
ity polices and effectively require it in all casualty policies. Cf. Ridglea Estate Condo. Ass’n v.
(continued...)
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No. 06-40286
need for consistency, the majority instead fashions an offset remedy.
Even with a prejudice requirement, the duty of notice is still a complete
bar to recovery. A showing of prejudice functions as a bar to recovery and
does not offset damages. Harwell v. State Farm Mut. Auto Ins. Co., 896
S.W.2d 170, 173-74 (Tex. 1995). Additionally, there are no other require-
ments in the contract that have a remedy like that fashioned by the majority;
certainly, the majority points to no such examples.
In summary, the majority bears the burden of demonstrating why of all
the requirements in the “Duties After Loss” section, the failure to protect
property does not bar recovery completely but is only an offset to damages.
Alternatively, the majority does not argue that prejudice should be extended
to the situation at bar, a showing of which would still bar recovery.5
For these reasons, I respectfully dissent.
4
(...continued)
Lexington Ins. Co., 415 F.3d 474, 479-80 (5th Cir. 1995) (on petition for rehearing) (extending
the prejudice requirement to the notice provision in a casualty policy, but noting that the preju-
dice requirement does not extend to all insurance policies.).
5
I do not agree that a showing of prejudice should be necessary for the duty to protect
property to bar any recovery. I point this out only because to the extent Texas courts have
fashioned any additional steps, they have done so with respect to notice and only by requiring
a showing of prejudice.
28