Central Mutual Insurance Company v. White Stone Properties, Ltd.
Filing
57
ORDER, DENYING 25 MOTION for Partial Summary Judgment filed by White Stone Properties, Ltd., DENYING 21 MOTION for Summary Judgment filed by Central Mutual Insurance Company.. Signed by Judge Sam Sparks. (dm)
F!
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
CENTRAL MUTUAL INSURANCE COMPANY,
Plaintiff,
2014
R
ri)
MAR 19
AM 9:22
u:
Ls-r
caui
OF
TEXAS
Er?
Case No. A-12-CA-275-SS
-vs-
WHITE STONE PROPERTIES, LTD.,
Defendant.
ORDER
BE IT REMEMBERED on the 4th day of March, 2014, the Court held a bench trial in the
above-styled cause, and the parties appeared by and through counsel. The trial of this matter lasted
one and one-half days, and the Court heard testimony from the following witnesses: Bill Sellers,
Rick Coulter, Steve Cagle, Curt Vogel, Bruce Lipshy, Lauren Laurent, and David Winn. Having
considered the evidence and testimonypresented at trial, the arguments of counsel, the parties' briefs,
and the governing law, the Court enters the following findings of fact and conclusions of law.
Background and Findings of Fact
On January 11,2010, Central Mutual Insurance Company (CMI) received an insurance claim
from White Stone Properties, Ltd. (WSP) concerning hail damage to the roof a building located at
9900 Spectrum Drive, Austin, Texas (the Spectrum Building), which occurred on or around May 25,
2009. WSP, owner of the Spectrum Building, had a Building Owner's Policy issued by CMI (the
Policy), which incorporated a Building and Personal Property Coverage Form, and WSP paid a
premium in order to get replacement cost coverage. WSP 's insurance claim was covered under this
Policy.
I
CMI hired Lon Smith Roofing to inspect the Property and prepare a roof replacement cost
estimate. The type of roof on the Spectrum Building at the time of the hail damage was a modified
bitumen roof Lon Smith Roofing prepared an estimate for the cost to replace the damaged modified
bitumen roof with a new modified bitumen roof. This roof replacement cost estimate totaled
$1,768,052.19, which included $134,747.63 in sales tax. Pl.'s Trial Ex. 4. This estimate did not
provide for a general contractor and its overhead or profits. Lon Smith Roofing also estimated the
cost to replace the corrugated siding and to flash around forty-one windows was $83,294.05, which
included $6,348.05 in sales tax. Id.
Based on this estimate, CMI calculated the actual cash value of the roof under the policy,
which was the replacement cost less depreciation. CMI made an actual cash value loss payment of
$1,238,863.85 to WSP.
See
Pl.'s
Trial Ex.
5
(describing CMI's calculation of this figure). This
payment included sales taxes of $141,095.68. The withheld depreciation for the roof amounted to
$482,690.60, and it is this money WSP contends it is entitled to in this lawsuit. Steve Cagle, CMI's
corporate representative and the insurance adjuster who handled WSP 'S claim, testified there is no
basis described in the Policy for withholding depreciation, but pointed out the Policy states CMI will
not pay on a replacement cost basis until the damaged property is actually repaired or replaced. CMI
forwarded the actual cash value to WSP up front but withheld depreciation until the repairs were
complete and final costs calculated.
CMI made two subsequent payments to WSP for other damage to the Spectrum Building
related to the roof damage. First, CMI paid WSP $95,527.04 in a settlement of repairs for lightning
protection and ISO board. Second, CMI paid WSP $109,840.00 for interior damage and damage to
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the exterior metal panels found during the re-roofing. Therefore, CMI's total payments to WSP
amount to $1,444,230.89.
After receiving these checks, WSP alleges it sought bids from contractors to do the
replacement work. Ultimately, WSP alleges it accepted a bid from Laurent Enterprises, LLC, d/b/a
Innotech Construction (Innotech). Laurent Enterprises had been formed by Jason Laurent and
Lauren Laurent, who are brother and sister. Jason Laurent had handled the maintenance for the
Spectrum Building for some time prior to the hail damage and long before obtaining the contract to
perform the replacement work for the hail damage. Jason Laurent continued to do the maintenance
until the property was sold. The contract between WSP and Innotech was for "Insurance Proceeds
Received Only," and David Winn, the owner ofWSP and the Spectrum Building, testified he entered
the contract knowing he and WSP would never have any liability other than whatever insurance
proceeds were received.
See
Def.'s Trial Ex. 12, at C0124. In addition, under the contract neither
David Winn or WSP could be sued by Innotech. Innotech placed its contract price with WSP at
$2,450,450.02. Lauren Laurent
testifiedand the numbers showthis figure was determined by
taking the figures from the Lon Smith Estimate, adding 10% for overhead, 10% for profit, and sales
tax. The Lon Smith Estimate was based on replacing the existing modified bitumen roof with a new
modified bitumen roof and already included sales tax. After signing the contract, WSP and Innotech
decided to install a TPO roof, which was considered superior to a modified bitumen roof and had
a longer warranty. Innotech then hired a roofing subcontractor, CEI Roofing Texas (CEI), and the
replacement work for the damaged property was completed in a timely fashion.
After the completion of the new roof, Innotech and WSP then went back to CMI in order to
recover the withheld depreciation, but when CMI sought documentation from WSP regarding the
-3-
cost to replace the damaged property, CMI discovered information which would ultimately lead to
its decision to refuse to provide WSP with the withheld depreciation. The amount in controversy
is the amount retained by CMI.
CMI, in its quest to determine the replacement costs, received a packet of information from
public adjuster Eric Raisman, which indicated Innotech's contract sum for the work performed
amounted to $2,450,450.02. Around this same time, CMI learned from a commercial building
permit application filed by the roofing subcontractor, CEI, that CEI performed the roofing work on
the Spectrum Building for approximately $802,225.
See
P1.' s
Trial Ex. 23. Steve Cagle testified the
discrepancy between Innotech' s claimed contract figure of roughly $2.45 million and CEI' s figure
of roughly $800,000 caused him significant concern about providing WSP with additional payment
because CMI had already paid roughly $1.4 million with $1,238,863.85 allocated for the roof.
Accordingly, Cagle sought a copy of the CEI subcontract with Innotech, which he eventually
obtained. CMI then conducted an Examination Under Oath (EUO) of Jason Laurent. This
examination was unhelpful, though, because Jason Laurent provided vague answers and claimed a
lack of memory as to most of the important questions at issue. Through the CEI contract, Cagle
discovered Innotech, as the general contractor for WSP, had hired CEI, the subcontractor, to remove
the existing modified bitumen roof and replace it with a TPO roof manufactured by Versico, not a
new modified bitumen roof. CEI also was to replace the damaged corrugated siding. CEI's price
for its work totaled $811,004. The parties stipulated the TPO roof was of comparable quality and
material as a modified bitumen roof
Rick Coulter, CEI' s project manager for work performed on the Spectrum Building, testified
CEI was paid a total of $816,852.00 to remove the existing bitumen roof and install the new TPO
El
roof. This figure included the $811,004 contract price plus a $5,848 change order for replacement
of some of the existing ISO that had become wet. He testified
CET
paid for all of the materials,
obtained the insurance for the project, paid for the permit, provided all of the workers, and oversaw
all
of the safety measures for the project. In sum, Coulter described it as a "turnkey job" for the
completed new roof. Coulter testified Jason Laurent and Innotech had a minimal role, and he merely
communicated with Laurent to let him know what sections of the roof CEI would be working on a
particular day. Jason Laurent would then notify the tenants of the building. Coulter further testified
the TPO roof is an extremely tough membrane, is at least as tough and durable as the modified
bitumen roof, and CET gave a thirty-year warranty on the TPO roof while a warranty of more than
twenty years is not possible with a modified bitumen roof In short, Coulter testified the "80-mu
TPO" roof which was installed on the Spectrum Building is one ofthe higher quality roofing systems
and is of a higher quality than the modified bitumen roof
Curt Vogel, CEI' s on-site and daily supervision project manager for the work performed on
the Spectrum Building, testified substantially the same as Coulter. Vogel, unlike Coulter, was
physically on-site on a daily basis, and he testified CEI performed all of the re-roofing work.
According to Vogel, Jason Laurent was merely there to serve as an intermediary to the tenants and
to coordinate scheduling. Vogel testified Laurent did no work to actually remove the existing roof
or install the new roof, and it was important for CEI exclusively to handle all of the work for liability
purposes.
Cagle, CMI's representative, testified it is CMI's position it has already paid more than the
replacement cost value on the projectthe $816,852 value of the CEI contractwhen it paid WSP
the actual cash value of the
roofthe
$1,238,863.85 derived from the Lon Smith Estimate.
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Therefore, CMI does not believe WSP is entitled to further payment under the policy. Cagle testified
while he did not know what Innotech's costs were on the project, he could not think of any costs
incurred beyond those incurred by CET to complete the installation of the new roof Cagle further
testified that even adding a standard general contractor's fee of 10% overhead and 10% profit to the
$8 16,852 value ofthe CEI contract, the cost for the lightning suppression repairs actuallyperformed,
the HVAC repairs, and even the amounts for exterior metal panels and interior damage (even though
these items have been settled), the resulting figure is still less than the $1,238,863.85 already paid.
These numbers roughly break down as follows:
Payments Made by CMI
Roof
Lightning Suppression
Corrugated Siding
Metal Panels
Total
$1,238,863.85
$25,603.60
$69,923.44
$109,840.00
$1,444,230.89
vs.
Actual Renlacement Costs Plus 10 & 10
Roof, Siding, and ISO Board
Lightning Suppression
HVAC
Metal Panels
Interior Damage
Subtotal
10% Overhead
10% Profit
Total
$816,852
$17,500
$48,450.54
$71,560.00
$38,280.00
$992,642.54
$99,264.25
$99,264.25
$1,191,171.04
Through the course of the trial, it became apparent no party could explain Innotech's work,
expenses, or efforts, including Lauren Laurent. Ms.
Laurent1
testified Innotech was formed to be a
construction company with a web applications component, but this entity's actual experience was
1Jason Laurent was not called as witness.
extremely limited. hmnotech had performed a handful of small construction projects for David Winn
and his related companies in the past. Innotech had also done some work for Legal Zoom. Prior to
being hired for the Spectrum Building roofing project, Innotech had absolutely zero experience with
roofing work, and Innotech has performed no roofing projects since. Ms. Laurent testified Innotech
was entitled to 10% of overhead and 10% of profit as part of its contract with WSP. She explained
she calculated the figure of roughly $2.45
millionthe supposed contract price for limotech's work
for WSPby taking the Lon Smith Estimate, adding 10% overhead, 10% profit, and sales tax. She
testified no one told her the Lon Smith Estimate was actually based on replacing the existing
modified bitumen roof with a new modified bitumen roof. Nevertheless, her spreadsheet calculating
$2.45 million indicates these numbers are based on replacing the existing modified bitumen roof
with a new TPO roof By the end of her testimony, Ms. Laurent acknowledged the $2.45 million
figure is incorrect and is based on the Lon Smith Estimate only. She claimed some appraisal or
meeting was to occur to determine how much the contract price actually should have been, but this
never happened.
The following is a comparison between the Lon Smith Estimate's calculations versus the
calculations supposedly underlying the Innotech contract with WSP.
See
Pl.'s
Trial Ex. 44
(demonstrating Innotech' s use of Lon Smith Estimate to calculate its $2.45 million contract price).
First, Lon Smith's Estimate breaks down as follows:
REPLACEMENT COST VALUE
$1,608,968.67
$33,859.38
$83,294.05
$71,560.00
$48,450.54
$38,280.00
$1,886,412.64
ITEM
Roof
Lightning Suppression
Corrugated Siding
Metal Panels
HVAC
Interior Damage
Total
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Second, the Innotech calculations of their $2.45 million contract, which essentially takes the
Lon Smith Estimate, adds 10% overhead, 10% profit, and sales tax:
REPLACEMENT COST VALUE
$2,090,050.30
$46,581.33
$108,198.97
$92,956.44
$62,937.25
$49,725.72
$2,450,450.02
ITEM
Roof
Lightning Suppression
Corrugated Siding
Metal Panels
HVAC
Interior Damage
Total
Throughout her testimony, Ms. Laurent was not able to explain the records and books of
thnotech, nor what Innotech' s actual costs were on the project, if any. For instance, she could not
explain or justify the numbers in Innotech's Applications and Certificates for Payment.
See
Pl.'s
Trial Ex. 22. In addition, Ms. Laurent acknowledged Innotech received over $1.4 million in checks
from WSP during 2011, but Innotech's tax return listed $413,876 in gross receipts for 2011.
See
P1.' s Trial Ex. 40. The tax return further indicated Innotech did not pay any money to employees or
any compensation to officers. The total expenses for 2011 were listed at $33,175. All of these
numbers are inconsistent with Innotech' s alleged work as a general contractor on the Spectrum
Building and its receipts of at least $1.4 million in checks from WSP. Ms. Laurent simply could not
explain where the $1.4 million, beyond the $816,852 paid to CEI, went. She was confronted with
a spreadsheet she made in which she calculated hmotech's overhead to be $276,351.28, but she
could not explain her numbers whatsoever.
See
P1.' s
Trial Ex. 50. The spreadsheet, on its face,
made little sense, including figures like Ms. Laurent's personal income taxes as well as sales tax,
which had already been included in the Lon Smith Estimate. Ms. Laurent could offer no explanation.
By the close of Ms. Laurent's testimony and the trial, the record was clear there was no
reasonable justification for why and how Innotech could be making a claim for over $2 million to
re-roof the Spectrum Property when the subcontractor who did essentially all of the re-roofing work
charged only $816,852. In addition, there is ample evidence in the record to support the Court's
finding there was little-to-nothing legitimate about Innotech' s role as a general contractor on this
project.
CMI filed this lawsuit in March 2012 seeking a declaratory judgment they have no further
liability to WSP. WSP believes it is entitled to the proceeds calculated as the withheld depreciation
and filed counterclaims for: (1) a declaratory judgment; (2) breach of contract; (3) breach of the
common law duty of good faith and fair dealing; and (4) violations of the Texas Insurance Code.
CMI filed a motion for summary judgment, and WSP filed its own motion for partial summary
judgment. Unable to untangle this mess and unclear on some of the factual determinations, the Court
ordered a bench trial, which occurred March 4-5,2014, and carried the parties' motions for summary
judgment. Because the case could not be completed without a trial and presentation of evidence, the
motions for summary judgment were inappropriate and are DENIED.
Conclusions of Law
Based on the record, the findings of fact at trial, and the terms of the insurance policy at issue,
the Court concludes CMI has complied with its obligations under the Policy and is not liable to WSP
for further payment.
I.
Contractual Claim
At its core, this case comes down to interpreting the insurance contract between the parties.
The interpretation of an insurance contract is governed by the same rules of construction applicable
to other contracts. Am. States Ins. Co. v. Bailey, 133 F.3d 363, 369 (5th Cir. 1998). In construing
a contract, Texas law requires the Court to strive to effectuate the intentions of the parties as they
are expressed in the contract. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994). If
the policy language is unambiguous, it must be enforced as written. Upshaw v. Trinity Comps., 842
S.W.2d 631,633 (Tex. 1992). Ifthe language is ambiguous, the construction which affords coverage
must be adopted. Gloverv. Nat'l Ins. Underwriters, 545 S.W.2d 755, 761 (Tex. 1977).
The section of the Policy at issue in this case is Section G(3), the Replacement Cost
Provision. See P1.' s Trial Ex. 1, at 25. It is undisputed WSP paid extra for the premium replacement
cost insurance coverage. To understand the Replacement Cost provision in this contract, the Court
will proceed through the relevant portions of Section G(3) step-by-step.
First, Section G(3)(a), (c) provides:
Replacement Cost
3.
a.
Replacement Cost (without deduction for depreciation) replaces
Actual Cash Value in the Loss Condition, Valuation, of this
Coverage Form.
c.
You may make a claim for loss or damage covered by this insurance
on an actual cash value basis instead of on a replacement cost basis.
In the event you elect to have loss or damage settled on an actual cash
value basis, you may still make a claim for the additional coverage
this Optional Coverage provides if you notify us of your intent to do
so within 180 days after the loss or damage.
Id.
This language is clear and unambiguous, and courts have routinely enforced replacement cost
coverage provisions. See Ghoman
2001); Kolls
v.
v.
New Hampshire Ins. Co., 159 F. Supp. 2d 928, 932 (N.D. Tex.
Aetna Cas. & Sur. Co., 378 F. Supp. 392, 403 (S.D. Iowa 1974), aff'd, 503 F.2d 569
-10-
(8th Cir. 1974);
D&
S
Realty, Inc.
v.
Markel
Ins.
Co., 816 N.W.2d 1, 14-15 (Neb. 2012). In
Ghoman, the court, in describing contract language identical to the language above, noted "[i]t
allows the insured to
either make
a claim for replacement costs, up to policy limits, or actual cash
value supplemented by additional replacement cost coverage." 159 F. Supp. 2d at 932. "The
purpose of this two-step process is to enable the insured to obtain funds 'to begin the process of
repair or replacement, at which point [the insured] could submit claims for expenditures that went
above the actual cash value of the loss." Id. at 933 (quotingFraley v. Allstate Ins.
Co., 97
Cal. Rptr.
2d 386, 390 ( Cal. Ct. App. 2000)). In other words, "if the insured has contracted for replacement
cost coverage, the insured will normally be entitled under the policy to an immediate payment
representing the actual cash value of the loss, which can be used as seed money to start the repairs."
D & SRealty, 816 N,W.2d at 15-16.
In this case, WSP, covered by replacement cost insurance, submitted a claim for hail damage
to the roof of the Spectrum Building. CMI then obtained the Lon Smith estimate of $1,768,052.19
to replace the existing modified bitumen roof with a new modified bitumen roof. This figure is the
estimated replacement cost. CMI then withheld depreciation to arrive at an actual cash value of
$1,238,863.85, which CMI paid to WSP. WSP could then take this payment and use it as up-front
seed money to start the repairs on the roof. WSP did use this money toward paying CEI (through
Irmotech) for the roof repairs.
Second, Section G(3)(d) provides:
d.
Pl.'s Trial Ex.
We will not pay on a replacement cost basis for any loss or damage:
1)
Until the lost or damaged property is actually repaired or replaced; and
2)
Unless the repairs or replacement are made as soon as reasonably
possible after the loss or damage.
1, at 25.
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This provision is also clear and unambiguous and explains the amount paid as equivalent to
the withheld depreciation. The insured is not entitled to recover replacement cost damages until the
insured actually repairs or replaces the damaged property. See Versai Mgmt. Corp.
v.
Clarendon Am.
Ins. Co., 597 F.3d 729, 737-38 (5th Cir. 2010); Fitzhugh 25 Partners v. KILN Syndicate KLN5OJ,
261 S.W.3d 861, 865 (Tex.
App.Dallas 2008, pet. denied). WSP explained whyreplacement cost
insurance works this way in its motion for partial summary judgment:
Replacement cost insurance is optional additional coverage that may be purchased
to insure against the hazard that the improvements will cost more than the actual cash
value and that insured cannot afford to pay the difference. In essence, replacement
cost coverage insures against the expected depreciation of the property. Unlike
standard indenmity, replacement cost coverage places the insured in a better position
than he or she was in before the loss. Any purported windfall to an insured who
purchases replacement cost insurance is precisely what the insured contracted to
receive in the event of a loss. Replacement cost coverage is, accordingly, more
expensive than standard indemnification coverage.
Def.'s Mot. Partial Summ. J. [#25], at
11
(quotingD & S Realty, 816 N.W.2d at 14-15).
In the instant case, CMI determined the estimated replacement cost to be $1,768,052.19.
After withholding an amount equal to the estimated depreciation, CMI paid WSP the roofs actual
cash value of$ 1,238,863.85. After the roof was repaired, the parties could then determine the actual
replacement cost, and WSP could recover the replacement cost if it were proven to be higher than
the actual cash value.
Third, Section G(3)(e) provides:
e.
Well will not pay more for loss or damage on a replacement cost basis than
the least of 1), 2), or 3), subject to f. below:
1)
The Limit of Insurance applicable to the lost or damaged property;
2)
The cost to replace the lost or damaged property with other property:
a)
Of comparable material and quality; and
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b)
3)
PL's Trial Ex.
Used for the same purpose; or
The amount actually spent that is necessary to repair or replace the lost
or damaged property.
1, at 25.
CMI and WSP have different views on "the cost to replace the lost or damaged property" in
(2) and "the amount actually spent that is necessary to repair or replace the lost or damaged property"
in (3). CMI essentially argues "the cost to replace" is the amount of the CEI
contract$816,852and "[s]ince $816,852 is less than the amount [WSP] contends was incurred
by it, being the $2,450,000 of the 'contract' with the non-existent entity, Innotech, $816,852,
represents the measure recoverable under the replacement cost coverage of the policy." Pl.'s
Proposed Findings of Fact and Conclusions of Law [#43], at 17. "Since the cost to replace the roof
was less than the actual cash value payment [of $1,238,863.85] made by [CMI], no further amount
would be owed to [WSP]." Pl.'s Post Trial Brief [#52], at 5.
WSP contends the "the cost to replace" in (2) was the estimated cost of repairs provided in
the Lon Smith Estimate$ 1,768,052.1 9and the "amount actually spent" in (3) was the amount
of the Innotech contract for roughly $2.45 million. Because (2) is less than (3), WSP argues it is
entitled to the proceeds held back by CMI until the repairs were made (the withheld depreciation).
The case law is consistent with respect to the operation of replacement cost provisions. The
"cost to replace, on the same premises, the lost or damaged property with other property of
comparable material and quality used for the same purpose" is the amount an appraisal panel
estimates is the cost to repair or replace the damaged property with property of comparable material
and quality and used for the same purpose. Mai'yland Cass. Co.
v.
Knight, 96 F.3d 1284, 1293 (9th
Cir. 1996). The amount due will be the cost of the actual expenses or this estimate. Id.; see also SR
-13-
Int'l. Bus. Ins. Co. Ltd.
v.
World Trade Ctr. Props., LLC, 445 F. Supp. 2d 320, 332-33 (S.D.N.Y.
2006). If the insured party spends less to repair the roof than the estimated replacement cost, the
insured is entitled to the amount actually spent. See Lincoln Fountain Willas Homeowners Ass 'n v.
State Farm Fire & Cas. Ins. Co., 39 Cal. Rptr. 3d 345, 351 (Cal Ct. App. 2006); Estes v. State Farm
Fire & Cas. Co., 358 N.W.2d 123, 124-25 (Minn. App. 1984); Huggins v. Hanover Ins. Co., 423
So. 2d 147, 150-51 (Ala. 1982).
Applying these principles to the instant case, WSP is correct regarding "the cost to replace"
in G(3)(e)(2); it is the $1,768,052.19 Lon Smith Estimate provided up front before any repairs were
done. WSP is incorrect, however, regarding "the amount actually spent that is necessary to repair
or replace the lost or damaged property" in G(3)(e)(3). WSP argues it is the $2.45 million dollar
Innotech contract, but the record is clear this $2.45 million figure is baseless. Lauren Laurent
testified she took the Lon Smith Estimate and added 10% overhead, 10% profit, and sales tax to
arrive at the $2.45 million contract price to replace the existing modified bitumen roof with a TPO
roof The Lon Smith Estimate, though, was the estimated cost to replace the existing modified
bitumen roof with a new modified bitumen roof In addition, the Lon Smith Estimate already
included sales tax. The record establishes CEI, the subcontractor Innotech hired, performed the re-
roofing work in a "turnkey job." Innotech's role was minimal at best, and neither Ms. Laurent, nor
anyone else, could explain, nor even attempt to explain, how or why the $2.45 million figure was
legitimate. Moreover, even
if
10% overhead, 10% profit, and sales tax were added to the CEI
contract price, the total would still not exceed the $1.2 million actual cash value payment made by
CMI to WSP. Indeed, Ms. Laurent acknowledged the $2.45 million figure was incorrect, and
claimed the intention of the parties was to conduct an appraisal after the repairs were finished to
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calculate the amount actually spent. This supposed appraisal never occurred. These issues arose
after the repairs were made, and CMI approached WSP on the amount actually spent.
Given this record, WSP's position that $2.45 million is "the amount actually spent that is
necessary to repair or replace the lost or damaged property" is untenable. WSP could not establish
"the amount actually spent" even if it tried because the Innotech "records" and "books" were a
mishmash of nonsensical calculations. Innotech had and continues to have zero experience with
roofing projects. David Winn apparently used Innotech because the Laurents were his property
managers, and there remained roughly $500,000 of available insurance proceeds based on the Lon
Smith Estimate. In addition, Winn testified he entered the contract knowing WSP would have no
liability whatsoever under the contract other than insurance proceeds received. To complete this
irrational alleged contract between WSP and Innotech, Innotech also had no liability to WSP; the
contract was a sham.
Unlike Innotech's specious numbers, the record shows the only amounts actually spent that
were necessary to replace the roof were the payments to CEI and additional payments to WSP by
CMI. CEI is a legitimate roofing companyunlike Innotechwith experience in the industry and
competent, professional employees. CEI did all of the work to remove the existing modified
bitumen roof and replace it with a TPO roof at a total cost of $816,852. This figure best describes
"the amount actually spent that is necessary to repair or replace the lost or damaged property." WSP
complains it is not correct to just look at CEI's costs because that cost was Innotech's liability, and
WSP never contracted with CEI. As noted, though, Ms. Laurent testified Innotech was to be paid
10% overhead and 10% profit. The evidence establishes, even if Innotech' s alleged overhead and
profit were added to the CEI contract, the total cost would not exceed the $1.2 million actual cash
-15-
value payment or the $1.7 million estimated cost to replace. And it certainly does not come
anywhere close to the bogus figure of $2.45 million. Nevertheless, WSP sues pretending the $2.45
million Innotech "contract" is real and should be used as the measure of"the amount actually spent."
The record simply contradicts these allegations.
In sum, the Court finds "the cost to replace" under G(3)(e)(2) was the $1,768,052.19 from
the Lon Smith Estimate provided up front before any repairs were done. The "amount actually spent
that is necessary to replace" under G(3)(e)(3) was $816,852, or, alternatively, this figure with 10%
overhead and 10% profit added. Because $81 6,852(and its alternative with 10% overhead and 10%
profit added) is less than $1,768,052.19 , then $816,852 is the limit of the replacement cost coverage
under the Policy. Since the actual cash value payment of $1,238,863.85 CMI already paid WSP is
greater than this replacement cost coverage, CMI does not owe WSP any further amount.
The Court finds CMI complied with its obligations under the Policy, and is not liable as
alleged. Accordingly, CMI owes no further payments to WSP than those already rendered.
II.
Extra-Contractual Claims
In addition to its own declaratory judgment action and breach of contract claim, WSP filed
counterclaims for: (1) breach of the common law duty of good faith and fair dealing and (2)
violations of the Texas Insurance Code Sections 542.056 and 542.058.
Under Texas law, while insurance coverage claims and bad faith claims are by their nature
independent, "in most circumstances, an insured may not prevail on a bad faith claim without first
showing that the insurer breached the contract." Liberty Nat '1 Fire Ins. Co.
629 (Tex. 1996) (citing Republic Ins. Co.
v.
v. Akin,
927 S .W.2d 627,
Stoker, 903 S.W.2d 338, 341 (Tex. 1995); Transp. Ins.
Co. v. Moriel, 879 S.W.2d 10, 17 (Tex. 1994)). Texas Insurance Code Section 542.056 required
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CMI to notify WSP in writing of the acceptance or rejection of a claim no later than the fifteenth
business day after CMI received all items, statements, and forms required to secure final proof of
loss. Texas Insurance Code Section 542.058 required CMI to pay claims within sixty days of
receiving all items, statements, and forms required to secure final proof of loss.
WSP argues CMI acted in bad faith by, among other things, (1) not timely processing the
claim, (2) not timely telling WSP why it had withheld depreciation, and (3) not timely paying the
withheld depreciation WSP believes it is entitled to. WSP argues CMI violated Texas Insurance
Code Sections 542.056 and .058, because by November 16, 2011, when WSP 's public adjuster Eric
Raisman sent CMI a packet which indicated Innotech' s contract sum for the work performed
amounted to $2,450,450.02, CMI had all the information it needed to determine its liability to pay
the withheld depreciation. Since CMI did not accept or reject the claim within fifteen days or pay
the withheld depreciation within sixty days, WSP argues CMI violated these provisions.
As demonstrated above, however, WSP has failed to show CMI breached the insurance
contract. CMI did timely pay the actual cash value of the loss on the damaged property, and while
WSP complains CMI did not pay the withheld depreciation, the record shows CMI does not owe
WSP these funds. Therefore, WSP's claims for bad faith and its complaint, pursuant to Section
542.05 8, that CMI never paid the withheld depreciation fail. In addition, WSP's arguments
concerning acceptance or rejection of the claim within fifteen days of receipt of Raisman' s packet
fails because, as described above, $2,450,450.02 is a bogus figure. Around the same time as
receiving Raisman's packet, CMI learned of the subcontractor CEI's commercial building
application, which indicated CEI was re-roofing the Spectrum Building for approximately $800,000.
The discrepancy in these figures rightly alarmed CMI, and CMI immediately began investigating the
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specifics of the actual costs to replace the damaged property. Soon thereafter, CMI filed a lawsuit,
which established via the bench trial that WSP is not entitled to the withheld depreciation, and CMI
was correct in not paying this sum.
Therefore, CMI is entitled to judgment on WSP ' s counterclaims for (1) breach of the
common law duty of good faith and fair dealing and (2) violations of Texas Insurance Code Sections
542.056 and 542.058.
Conclusion
The purpose of premium replacement cost coverage is to place "the insured in a better
position than he or she was in before the loss," and "[a]ny purported windfall to an insured who
purchases replacement cost insurance is precisely what the insured contracted to receive in the event
of a loss." Def.'s Mot. Partial Summ. J. [#25], at
11
(quotingD & SRealiy, 816 N.W.2d at 14-15).
This explains why the insured receives the actual cash value payment before repairs, and if after
repairs are complete, the amount actually spent to repair the roof exceeds the actual cash value, then
the insured is entitled to that amount. If the amount actually spent is less than the actual cash value,
then the insured gets to keep the full amount of the actual cash value. In this case, WSP was paid
$1,238,863.85 for the actual cash value of the existing modified bitumen roof before repairs as seed
money to replace the roof The roof was replaced with a higher quality roof with a longer warranty
for $816,852, or, alternatively, this figure with 10% overhead and 10% profit added, both of which
are less than the actual cash value of the previous roof WSP has benefitted from its replacement
cost coverage. Yet WSP seeks withheld depreciation in order to pay Innotech on the baseless $2.45
million contract. All the while, WSP has already forwarded the insurance proceeds it received from
CMI (over $1.4 million) to Innotech, WSP is not liable to Innotech for more than the insurance
proceeds received, and WSP cannot be sued by Innotech under their contract. Both CMI and WSP
have satisfied their obligations under their insurance contract, and neither party has any more
obligations concerning this insurance claim.
Accordingly,
IT IS ORDERED that Plaintiff Central Mutual Insurance Company's Motion for
Summary Judgment [#2 1] is DENIED;
IT IS FURTHER ORDERED that Defendant White Stone Properties, Ltd.'s Motion
for Partial Summary Judgment [#25] is DENIED;
IT IS FURTHER ORDERED that Plaintiff Central Mutual Insurance Company has
no further liability to Defendant White Stone Properties concerning Defendant's insurance
claims for hail damage incurred to the building located at 9900 Spectrum Drive, Austin,
Texas;
IT IS FINALLY ORDERED that Defendant White Stone Properties TAKE
NOTHING on its counterclaims against Plaintiff Central Mutual Insurance Company.
SIGNED this the IS' day of March 2014.
UNITED STATES DISTRICT JUDGE
275 ffcljtw3.wpd
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