A. Wallis Places the Ultimate Burden of Proof on Insureds to Allocate Damages to A Covered Cause.

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1 HANNA&PLAUTLLP ATTORNEYSATLAW Whose Burden Is It Anyway? Article and the Burden of Proving Covered and Non-covered Causes in Property Insurance Cases By Jeff Glass 1 and David L. Plaut 2 Prior to September of 1991, an insurance carrier claiming a policy exclusion precluded coverage only needed to plead the exclusion and the burden then shifted to the insured to prove the exclusion did not apply. Telepak v. United Services Auto. Ass n, 887 S.W.2d 506, 507 (Tex. App.--San Antonio 1994, writ denied). See also TEX. R. CIV. P. 94 (requiring insurer to plead applicable exceptions to coverage). Article of the Insurance Code, however, now imposes on insurers the burden of proof as to any avoidance or affirmative defense that must be affirmatively pleaded, including any language of exclusion in the policy and any exception to coverage. See TEX. INS. CODE. art (b) (Vernon Supp.). 3 The statute requires insurers both to plead and prove the applicability of an exclusion. Id.; Telepak, 887 S.W.2d at 507. This article addresses the impact of Article on the rule that [a]n insured cannot recover under an insurance policy unless facts are pleaded and proved showing that damages are covered by his policy. Employers Cas. Co. v. Block, 744 S.W.2d 940, 945 (Tex. 1988), overruled on other grounds, State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996). We analyze three decisions in foundation damage cases that illuminate a fundamental problem in reconciling Article with the traditional burden borne by the insured/plaintiff. See Wallis v. United Serv. Auto. Ass n, 2 S.W.3d 300, 303 (Tex. App.-- San Antonio 1999, review denied) ( when covered and non-covered perils combine to create a loss, the insured is entitled to recover only that portion of the damage caused solely by the covered peril(s)... insureds are not entitled to recover under an insurance policy unless they prove their damage is covered by the policy ); Telepak v. United Serv. Auto. Ass n, 887 S.W.2d 506, 507 (Tex. App.-- San Antonio 1994, writ denied) (if the insured seeks coverage under an exception to an 1 Jeff Glass is an associate with the Austin law firm Hanna & Plaut, LLP. He graduated from Abilene Christian University (B.A., with highest honors) in 1980 and the University of Texas School of Law (J.D. with honors) in He served as a law clerk to the Honorable Robert M. Hill, U.S. Court of Appeals, Fifth Circuit, , and has been in private practice since that time. His practice focuses on insurance coverage matters, insurance bad faith litigation, and appellate work. 2 David L. Plaut is a partner with Hanna & Plaut, LLP. He graduated from Johns Hopkins University with honors in 1985 and the University of Texas School of Law in He was articles editor of the TEXAS LAW REVIEW and served as a law clerk for United States District Judge Edward Prado in San Antonio for two years before beginning private practice. His practice focuses on insurance coverage matters, insurance bad faith litigation, school district litigation, trial and appellate work. 3 Article (b) provides as follows: In any suit to recover under an insurance contract, the insurer has the burden of proof as to any avoidance or affirmative defense that must be affirmatively pleaded under the Texas Rules of Civil Procedure. Any language of exclusion in the policy and any exception to coverage claimed by the insurer constitutes an avoidance or an affirmative defense. TEX. INS. CODE ANN. art (West Supp. 2000).

2 exclusion, the burden lies on the insured to prove applicability of the exception); Oram v. State Farm Lloyds, 977 S.W.2d 163 (Tex. App.-- Austin 1998, no pet.) (insurer bore the burden of pleading and securing jury findings applying proportional causation to elements of damage). We then discuss related cases that further inform the issue and assess the arguments on who has the burden of proof in multi-cause property cases from both the insurer and policyholder perspectives. A. Wallis Places the Ultimate Burden of Proof on Insureds to Allocate Damages to A Covered Cause. In a recent mixed peril case involving foundation damage, the San Antonio Court of Appeals held the insured bears the burden of segregating the damage attributable solely to the covered event. Wallis v. United Serv. Auto. Ass n, 2 S.W.3d 300, 303 (Tex. App. San Antonio 1999, no pet.). Despite the allocation of the burden of proof set forth in Article 21.58(b), Wallis emphasizes the general, long-standing rule that insureds are not entitled to recover under an insurance policy unless they prove their damage is covered by the policy. Id. 1. Factual dispute about whether plumbing leaks caused foundation damage The homeowners in Wallis believed plumbing leaks a covered risk caused damage to their foundation. 2 S.W.3d at 301. Although the investigation detected leaks, the carrier concluded the damage was caused by several excluded perils, including foundation settlement and improper compaction of fill dirt and ultimately concluded the plumbing leaks had not caused or contributed to the damage. Id. at 302. The jury found that both plumbing leaks and excluded earth movement, related to the lot s topography, contributed to the loss with plumbing leaks causing 35% of the damage. Id. at 302. The trial court, however, entered a takenothing judgment for the insurer, concluding there was legally insufficient evidence plumbing leaks caused the damage. The San Antonio Court of Appeals affirmed. Id. 2. Insured has the burden of proof under the concurrent causes doctrine At trial, engineering experts for the homeowners had not challenged the insurer s evidence regarding the excluded perils, but they had testified that the plumbing leaks contributed to the damage, could have contributed to the damage, or could not be excluded as a contributing factor to the damage. Wallis, 2 S.W.3d at 303. The plaintiffs engineers, however, had not quantified the extent to which plumbing leaks damaged the home. Id. at 304. The San Antonio Court of Appeals held this was fatal to the plaintiffs claim, reasoning that in a mixed peril case the doctrine of concurrent causes places on the insured the burden of presenting evidence upon which the jury can allocate damages attributable to the covered peril. Id. at ( when covered and non-covered perils combine to create a loss, the insured is entitled to recover only that portion of the damage caused solely by the covered peril(s) ). The court also rejected the insured s argument that Article legislatively overruled 2

3 the common law duty of insureds to segregate damages in this way and imposed that burden on the carrier. Wallis, 2 S.W.3d at 303. The court reasoned that the doctrine of concurrent causation is not an affirmative defense or an avoidance issue under Article 21.58, but a rule which embodies the basic principle that insureds are entitled to recover only that which is covered under their policy; that for which they paid premiums. Id. The court emphasized the general common law rule that although a plaintiff is not required to establish the amount of his damages with mathematical precision, there must be some reasonable basis upon which the jury's finding rests. Id. (citing Oyster Creek Financial Corp. v. Richwood Investments, II, Inc., 957 S.W.2d 640, 649 (Tex. App.--Amarillo 1997, pet. denied)). Because the jury heard neither mathematically precise nor, indeed, any testimony at all quantifying the damage attributable to the leaks, the court held there was no evidence supporting the verdict that 35% of the damage arose from the leaks and thus affirmed the take-nothing judgment in favor of the insurer. Id. at 304. Because of this insufficiency in the policyholder s evidence, the court also rejected the argument that the decision in Balandran v. Safeco Insurance Company of America, 972 S.W.2d 738, 740 (Tex. 1998), required the court to find coverage for the Wallises' loss caused by plumbing leaks. Wallis, 2 S.W.3d at 304. In Balandran the Texas Supreme Court addressed a standard homeowner s policy in a foundation case in which all the damage resulted from plumbing leaks. Coverage A covers the dwelling for all risks except those specifically excluded and contains an exclusion for foundation settlement. Coverage B, however, insures personal property only against twelve enumerated perils, including Accidental Discharge, Leakage or Overflow of Water or Steam from within a plumbing, heating or air conditioning system or household appliance. Balandran, 972 S.W.2d at This peril provision also contains what the Court termed an exclusion repeal provision, which provides that certain exclusions, including the foundation exclusion and the earth movement exclusions, do not apply to loss caused by this peril. 4 Id. Balandran determined that this exclusion repeal 4 Coverage A of this policy form provides: We insure against all risks of physical loss to the [dwelling] unless the loss is excluded in Section I Exclusions. * * * Exclusions * * * 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. The ninth of the twelve perils enumerated in Coverage B provides coverage for: 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

4 provision found in Coverage B was ambiguous as to whether it applied to dwelling losses in Coverage A. Id. at 741. Construing the policy in the insured s favor, the Court held the foundation settlement exclusion does not apply to loss caused by the accidental discharge, leakage or overflow of water or steam from within a plumbing, heating or air conditioning system or household appliance. Id. at 741, 742. Although Balandran held that the accidental discharge provision is an exception to the foundation and earth movement exclusions, among others, it did not address the question of who has the burden of allocating damages between covered and excluded damages. The Wallis court noted that Balandran did not control because all the damage in Balandran was caused by plumbing leaks. Wallis, 2 S.W.3d at 304. By contrast, the disputed causation evidence in Wallis required the insured to present some evidence to support the jury s allocation of 35% of the damage to the covered cause. Id. Since the insured failed to do so, the court barred recovery entirely. B. Wallis and Oram: Flip sides of the same coin? At first glance, the Wallis decision appears to conflict with the earlier decision in Oram v. State Farm Lloyds, 977 S.W.2d 163 (Tex. App. Austin 1998, no pet.), which held that the insurer bore the burden of pleading and securing jury findings on an apportionment of certain types of damage to non-covered versus covered perils. 1. Appropriate Apportionment of Damages Like Wallis, Oram involved a foundation claim and competing proof concerning the cause of three types of damage: foundation damage, damage to the cosmetic finishes of the house, and additional living expenses ( ALE ), which are recoverable when the insured must find other accommodations during repair of the insured residence. 977 S.W.2d at State Farm denied the homeowners claim for the costs of repairing the foundation, concluding the damage was caused by seasonal moisture fluctuations and soil desiccation by surrounding trees. Id. The jury in Oram found that 60% of the foundation damage was caused by covered plumbing leaks, but the jury questions, as submitted, requested no such allocation of causation to the cosmetic damage or ALE. Id. at 166, 168. The Austin Court of Appeals held that because the insurer failed to plead or request a jury finding on the amount of cosmetic damages and ALE attributable to excluded causes, the jury s allocation of foundation damages would not apply to these additional elements of damage. Id. at 168. Balandran, 972 S.W.2d at The underlined phrase is the exclusion repeal provision on which the court focused. 4

5 2. The Conflict and the Conundrum Oram s holding appears to imply that the insurer bears the burden to plead and prove damages attributable solely to excluded causes. Oram holds that if any part of the insured s foundation claim is covered, the insurer bears the burden of proving the excluded portion of all related expenses. Oram s general applicability, however, is limited by its procedural context. The mere fact that the insurer did not plead the applicability of the foundation settlement exclusion to cosmetic and ALE damages would have resulted in the same result under Rule 94. Further, unlike Wallis, Oram did not involve a factual sufficiency challenge to the plaintiff s proof of covered damages. Instead, the insurer argued that damages for cosmetic repairs and ALE had to be reduced by 40%, as a matter of law, despite the fact that these damages were unsegregated in the verdict. 5 In Oram, the insurer essentially waived its right to exclude noncovered cosmetic damages or ALE by failing to plead or secure finding on these questions. Wallis, however, holds that insureds cannot recover if their evidence fails to quantify the amount of damages attributable to a covered cause -- a direct application of the insured s primary burden in coverage cases. Together these cases indicate that neither party bears the entire burden of pleading, proving and securing findings on allocation of damages to covered and non-covered causes. Each party must plead, prove and secure findings on its own burden of proof, with the insured bearing the ultimate burden of allocating between covered and uncovered damage. The conceptual difficulty regarding the burden of proof arises from the mutually exclusive nature of proof of causation in such cases: the insured s proof that a percentage or quantity of damage resulted from a plumbing leak necessarily proves this quantity of damage was not caused by mere foundation settling or other excluded causes. In this sense, Wallis requires that the insured negate the exclusion. Because the insured must first prove covered damage under the general rule, and this sort of proof necessarily negates excluded damage, the insured bears the brunt of the segregation burden. Attorneys representing policyholders have complained that this is unfair because there are technical and conceptual obstacles to assigning precise percentages to different causes in mixed-peril cases. In light of the perceived difficulty of assessing soil dynamics underneath a concrete slab, these attorneys have argued that policyholders should not have to shoulder the burden of allocating between covered and uncovered causes in foundation cases. Of course, re-distributing this burden would require the courts to overrule the traditional and fundamental principle that plaintiffs must prove their loss is within the policy coverage. Further, both Oram and Wallis were decided after the passage of Article 21.58, and at least one post-enactment decision of the Texas Supreme Court also indicates that the doctrine of concurrent causation continues to apply as previously articulated in multi-peril property cases. C. Supporting Authority for Wallis 5 In the context of mixed peril foundation cases, where causation must be determined by engineering and other experts, this result makes sense. Just because 60% of foundation damage results from plumbing leaks, it does not necessarily follow that the same amount of cosmetic damage resulted from those leaks; soil movement resulting from plumbing leaks may affect interior and exterior cosmetic finishes differently than the foundation. The same is true with regard to ALE. 5

6 As support for its application of the concurrent causes doctrine, Wallis cited the following cases: Telepak v. United Services Automobile Association, 887 S.W.2d 506 (Tex. App.--San Antonio 1994, writ denied); Lyons v. Millers Casualty Ins. Co. of Texas, 866 S.W.2d 597, 601 (Tex. 1993); Employers Casualty Co. v. Block, 744 S.W.2d 940, 945 (Tex. 1988), overruled on other grounds, State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996); Travelers Indem. Co. v. McKillip, 469 S.W.2d 160, 163 (Tex. 1971); Paulson v. Fire Ins. Exch., 393 S.W.2d 316, 319 (Tex. 1965); and Warrilow v. Norrell, 791 S.W.2d 515, 527 (Tex. App.--Corpus Christi 1989, writ denied). All of these cases except Telepak and Lyons, however, were decided before Article of the Insurance Code was enacted and thus could be questioned as viable authority on this issue. The decisions in Telepak and Lyons support the result in Wallis, but only Lyons explicitly considered the doctrine of concurrent causation. 1. Telepak on the Insured s Burden of Proof Telepak v. United Services Automobile Association, 887 S.W.2d 506 (Tex. App.--San Antonio 1994, writ denied) is the most instructive decision among those cited by the court in Wallis because of the similarity of the underlying facts and policy language. The Telepak decision addressed policy provisions similar but not identical to those at issue in Wallis and Oram. The policy excluded damages to the dwelling resulting from the settling, cracking, etc. of a foundation. Id. at 506. An exception located within this exclusion provided coverage where the settling, cracking, etc. was caused by the accidental discharge of water from a plumbing or air conditioning system. 6 Id. at 507 n. 1. The relevant jury question asked: Do you find that the damage to the Telepaks' residence was caused by an accidental discharge, leakage or overflow of water from within an air conditioning system? The jury answered "No." Id. at 507. There was no jury question on whether the damage was caused by settling or cracking, as that issue was undisputed. Id. The trial court rendered judgment for the insurer, and the insureds appealed, arguing that the jury charge improperly placed the burden of proof on them to negate the application of the foundation exclusion. 6 The relevant language of the policy in Telepak provided as follows: Property as described and limited under Coverage A is insured against: ALL RISKS OF PHYSICAL LOSS except as otherwise excluded. * * * EXCLUSIONS... This insurance does not cover: * * * k. Loss under Coverage A caused by settling, cracking, bulging, shrinkage, or expansion of foundation, walls, floors, ceilings, roof structures, walks, drives, curbs, fences, retaining walls, or swimming pools. The foregoing Exclusions a, b, c, f, h, i, j and k shall not apply to Accidental discharge, leakage or overflow of water or steam from within a plumbing, heating or air conditioning system or a domestic appliance (including necessary tearing out and replacing any part of the building covered). The property insured under "Coverage A" includes the plaintiffs' dwelling, which is the property at issue in this lawsuit. 6

7 Noting that the case presented an issue of first impression, the court of appeals affirmed and held the insureds bore the burden to demonstrate the existence of facts supporting the air conditioner exception to the exclusion. Id. at The court reasoned that because the exception functioned to create coverage, it was not an exclusion" or "exception to coverage" within Article Id. at 507. Therefore, the general rule requiring the insured to prove the loss was in fact covered by the policy applied to the exception. Id. (citing Employers Cas. Co. v. Block, 744 S.W.2d 940, 945 (Tex. 1988)). In so holding, the court emphasized that neither party contended Article 21.58(b) or the insurance policy was ambiguous. Id. at 507. Like Wallis, Telepak supports the argument that insureds have the burden of allocating between covered and non-covered damages in a multi-peril case. The only difference between the policies in the two cases was that the exception to the exclusion in Telepak was located directly in the provision containing the exclusion itself, while the exception to the exclusion of coverage in Wallis, the exclusion repeal provision, was located in Coverage B, a separate section from Coverage A, which contained the foundation exclusion. In light of Balandran, both of these policy provisions create coverage where it would otherwise be excluded and are therefore arguably not within Article Telepak, like Wallis, considered the impact of Article on the general rule requiring the insured to prove damage resulted from a covered cause. Telepak did not, however, discuss concurrent causation, but merely referred to the general rule requiring the insured to prove coverage. Lyons, by contrast referred to concurrent causation precedent, but did not address Article Lyons Requires Insured To Prove Allocation In Lyons, the Texas Supreme Court reiterated the concurrent causation doctrine holding that [w]hen covered and excluded perils combine to cause an injury, the insured must present some evidence affording the jury a reasonable basis on which to allocate the damage. 866 S.W.2d at 601( citing Paulson v. Fire Insurance Exchange, 393 S.W.2d 316, 319 (Tex. 1965)). See also Employers Cas. Co. v. Block, 744 S.W.2d 940 (Tex. 1988) ( An insured cannot recover under an insurance policy unless facts are pleaded and proved showing that damages are covered by his policy ). In Lyons the question was whether the homeowner s damages had been caused by a storm, a covered peril, or pre-existing structural problems, which were not covered. The court observed that circumstantial evidence can suffice to allocate damages between covered and excluded risks and held that the testimony of the insured and her neighbors that there was no pre-existing damage to the house constituted some evidence of the extent of damage attributable solely to the windstorm. Id. at 601. Thus, Lyons also highlights the difficulty that Oram and Wallis have brought to a head: the insured proved the damage was caused by a covered peril by disproving that the exclusion applied. In foundation cases such as Oram, Wallis, and Telepak, however, it is often far more difficult to determine the agent of damage and what has caused soil movement underneath a residence. 7

8 3. Cases Decided Before Article Enacted Other cases cited in Wallis are less persuasive due to their pre-dating Article These early cases, however, do outline the function of the concurrent cause doctrine in mixedperil property damage cases, which the Lyons decision reaffirmed. For example, in Travelers Indemnity Company v. McKillip, 469 S.W.2d 160 (Tex. 1971), the insurer relied on a snowstorm exclusion while the insureds claimed damage to their barn was caused by wind, a covered peril. The Texas Supreme Court emphasized that the insureds were obligated to introduce evidence to prove and secure jury findings that the damage was caused solely by the windstorm... or segregat[e] the damage caused by the insured peril from that caused by the snowstorm, an excluded peril. Id. at 162. The trial court, however, submitted the case on the theory that if the windstorm was the dominant efficient cause of the building's collapse, although other causes may have contributed to the loss, the insurer was liable. Id. The Supreme Court rejected this construction, holding the trial court erred in refusing to submit the insurer s requested special issue on whether damage was caused by a combination of the wind and weight of the snow, and if so, the percentage or the proportionate part of the damage caused by the snow. Id. at 163. Similarly, Hardware Dealers Mutual Insurance Company v. Berglund, 393 S.W.2d 311, 315 (Tex. 1965), involved a mixed-peril situation and damage to the insured s buildings caused by a hurricane. The policies at issue covered loss resulting from windstorm and hurricane but excluded loss resulting from high water, whether or not driven by wind. The trial court submitted the case on questions that allocated damage to the buildings according to cause and the Texas Supreme Court held the insured could recover only that portion of the damage unrelated to the excluded perils. The court noted that the adoption of Rule 94 in 1941 changed the rule that the insured was required to plead, as well as prove, that exclusions did not apply. Id. at 311 (citing Pelican Ins. Co. v. Troy Co-op. Ass'n, 77 Tex. 225, 13 S.W. 980 (1890)). Rule 94, however, specifically states that nothing herein shall be construed to change the burden of proof on such issue as it now exists, and the court held that the insured continued to bear the burden of persuading the jury of the amount of damage attributable solely to the covered cause. 7 Paulson v. Fire Insurance Exchange, 393 S.W.2d 316 (Tex. 1965), cited by the Lyons court for the concurrent cause doctrine, was another hurricane case involving policy provisions similar to those in Berglund. The Paulson decision, however, precluded the insured s recovery entirely because the jury submission, unlike that in Berglund, failed to ask the jury to segregate damages according to covered and non-covered risks. Although the insured secured a jury 7 The court discussed the doctrine under which Texas courts had held that if a there are two concurrent causes of a loss in which the damage done by each cannot be distinguished, the predominating cause will be deemed the proximate cause. The court noted that the policy language excluding high water, whether or not driven by wind, specifically eliminated this argument in a case in which winds combine with water to cause the damage. Id. at 312. Thus, the policy unambiguously provided coverage only for wind damage that was unmixed with water damage. Id. 8

9 finding that the damage was caused by a hurricane, this was not sufficient to justify recovery. The court emphasized that the insured must produce evidence which will afford a reasonable basis for estimating the amount of damage or the proportionate part of damage caused by a risk covered by the insurance policy. Id. at 319. The evidence showed that a substantial portion of the loss resulted from wind driven water, an excluded cause, but there was no evidence from eyewitnesses about the damage done by wind action alone, nor did anyone attempt to estimate the proportionate part of the damage caused by wind action, independent of all other causes. Id. at 319. The court therefore held that the jury finding could not sustain a recovery for the insured and rendered judgment that they take nothing. Id. See also Sherman v. Provident American Ins. Co., 421 S.W.2d 652 (Tex. 1967) ( the burden of proof was on the [insured] to negative the exclusions and limitations contained in the policy and pleaded as a defense by the insurer, even if insurer pleaded all exclusions generally). Like Wallis, McKillip and Paulson require insureds to allocate between covered and uncovered damages, arguably placing the burden on the insured to negative the exclusions and limitations contained in the policy. Sherman, 421 S.W.2d at 654. McKillip and Paulson (as well as Sherman, and Berglund), however, were decided before the advent of Article of the Insurance Code, giving rise to the argument that Article shifted the burden of proof -- even in mixed peril cases -- to the insurer, thus changing the law as it existed before Nevertheless, Lyons cited Paulson as viable authority on concurrent causation, but did not address the impact of Article Read together with Paulson, Lyons and Wallis, both decided after Article was enacted, indicate that the statute effected no change in allocation of the burden of proof in multi-peril property cases. D. Conclusion In property insurance coverage actions involving multiple perils, Lyons, Telepak and Wallis currently require that the insured present sufficient evidence quantifying the proportion of damage attributable to a covered peril. As against the defendant/insurer in such cases, this distribution of the burden of proof makes at least historical sense, expressing as it does the traditional principle requiring the plaintiff to establish coverage, whether pursuing claims in tort or contract. This rule also comports with Texas precedent that applies the doctrine of concurrent causation to insurance coverage claims. Short of a fundamental modification of long-standing principles, Texas courts have few options in re-distributing the burden. The rule remains that policyholders in multi-peril property cases must establish coverage first and last. 8 Note, however, that although Article might have changed the language in McKillip, there is no real argument the statute would have altered the limited result in that case: the insurer would have been entitled to its requested jury instruction apportioning damage between the covered and non-covered causes. 9