The Zelle Lonestar Lowdown
The United States Fifth Circuit Court of Appeals recently affirmed summary judgment granted by the bankruptcy court in favor of commercial property insurer in a Winter Storm Uri claim, holding that the insured motel owners could not provide a reasonable basis for estimating the amount of damages attributable solely to covered damage versus uncovered damage and failed to assert an injury independent of its contractual claims.
In The Matter of New York Inn, Inc. v. Associated Industries Insurance Co., 2025 WL 999084, (5th Cir. 2025), Associated Industries Insurance Co. (Associated) issued an insurance policy to Viva Inn, Inc. (Viva) for the Viva Inn Motel in Arlington, Texas (the Motel). Following Winter Storm Uri in February 2021, Viva filed a claim for water damage to the Motel from a burst pipe. Between March 2021 and June 2022, Associated paid Viva $271,538.65 for damage to the Motel.
In May 2021, an involuntary chapter 11 bankruptcy proceeding was filed against New York Inn, a corporate affiliate of Viva and additional insured under the policy at issue, in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division.
New York Inn and Viva (collectively the “Motel Owners”) then filed a complaint in the bankruptcy proceeding against Associated alleging that Associated failed to perform under the policy by underpaying the claim. Motel Owners asserted a breach of contract claim, statutory bad faith claims, and a common law bad faith claim. Associated filed a motion to dismiss and motion to deny the request for attorney’s fees as well as a motion for summary judgment. The bankruptcy court granted all three motions and Motel Owners appealed.
The U.S. District Court for the Northern District of Texas did not rule on the motion to dismiss nor the motion to deny attorney’s fees, therefore the 5th Circuit remanded these motions for review, however, the district court did adopt the bankruptcy’s court report and recommendation as to Associated’s summary judgment, which is the subject of this 5th Circuit opinion.
On appeal, Motel Owners raised three theories of breach of contract including Associated’s failure to pay the full amount owed for (1) repairs to the Motel (Building Repair), (2) contents in the Motel (Contents), and (3) interruption to the business caused by damage from the storm (Business Interruption). Motel Owners also asserted extra-contractual claims of (1) common law bad faith; (2) statutory bad faith under the Deceptive Trade Practices Act (the DTPA), and Chapter 541 of the Texas Insurance Code; and (3) statutory bad faith under Chapters 542 and 542A of the Texas Insurance Code.
A. Breach of Contract
1. Building Repair
In evaluating Motel Owners’ breach of contract claim with respect to Building Repair, the Fifth Circuit assessed Motel Owners’ (1) evidence of direct damage to the Motel and (2) evidence related to additional payment for the fire alarm and held both forms of evidence did not create a genuine dispute of material fact sufficient to overcome Associated’ summary judgment motion.
Motel Owners provided three sources of evidence: (1) Decagon’s, the renovation company, invoices, subcontractor invoices, and expert testimony from Roger Pate, owner of Decagon. The bankruptcy court concluded that Motel Owners’ evidence did not differentiate between costs of Building Repairs attributable to risks covered by the Policy (i.e., the water damage from the storm) and costs attributable to risks not covered by the Policy (i.e., the mold damage due to the delay in remediating the water damage).
On appeal, Motel Owners argued that the bankruptcy court (1) improperly attributed the delay in remediation to the Motel Owners, rather than Associated, (2) did not recognize that Motel Owners sought moisture mapping before remediation, and the request was denied, and (3) did not acknowledge the scarcity of remediation contractors following the storm.
The Fifth Circuit concluded that [a]lthough we sympathize with Motel Owners’ struggle to secure a contractor following the storm and their insufficient funds to commence immediate remediation, that does not make the doctrine of concurrent causes disappear. The Court cited to Dallas Nat'l Ins. Co. v. Calitex Corp., 458 S.W.3d 210 (Tex. App. 2015), stating that “[u]nder the doctrine of concurrent causes, when covered and non-covered perils combine to create a loss, the insured is entitled to recover that portion of the damage caused solely by the covered peril” and that it is the insured’s burden to segregate covered and noncovered perils.
The Court held that Motel Owners did not provide any case law to support the proposition that an insurer’s delay in issuing a payment for a claim means that any resulting damage to the property during the delay should be covered by the insurance policy. The Court also noted that Motel Owners’ argument contradicted the language in the policy that instructs the insured to “[t]ake all reasonable steps to protect the Covered Property from further damage and keep a record of your expenses necessary to protect the Covered Property” as well as the claim adjuster’s specific recommendation to insured’s public adjuster that Motel Owners should begin water mitigation because the requested moisture mapping will unnecessarily delay the mitigation process. Based on the same, the Court concluded that the responsibility rested with Motel Owners to begin remediation efforts, but they waited at least six weeks to do so, and as a result, the Motel suffered additional, non-covered damage.
As to the Decagon and subcontractor invoices, Motel Owners conceded that the invoices included references to noncovered repairs but argued that “such repairs were not included in its damages calculations,” and even if they were, they “can be easily deducted with mathematical certainty.” The Court rejected this argument and held that Motel Owners cannot provide a reasonable basis for estimating the amount of damage or proportionate damages attributable solely to the water damage (rather than the mold) with invoices that do not differentiate between those two causes.
Regarding Associated’s expert’s inconsistent statements, Pate testified in his deposition that some of the line items on his invoices and the repairs he made were not done to remediate damage caused by the flood, but in his affidavit filed in January 2023, he stated that “[m]y invoice and billing only includes work done to remediate the flood damage. Other work, such as for the roof, does not appear in Decagon's charges.” The Court held that Motel Owners did not provide an explanation as required under Texas law but instead simply asserted that there is no conflict. Nonetheless, the Court held that even if Motel Owner provided an explanation, Pate’s statements did not create a genuine dispute of material fact as to whether Associated owed Motel Owners more money for Building Repairs because his statements did not differentiate between costs attributable to covered versus noncovered damages.
Finally, with respect to the fire suppression system, Motel Owners replaced the original plastic pipes in the sprinkler system with metal pipes. The Court held, however, that Motel Owners did not offer any argument/evidence that plastic and metal pipes are “of comparable material and quality” under the terms of the policy, therefore, Motel Owners are not entitled to more money for the RCV payment.
2. Contents
The bankruptcy court concluded that no reasonable juror could find that Motel Owners were entitled to more than $10,000 for Contents because Motel Owners had not submitted the required documentation for additional coverage, the valuation data Motel Owners pointed to was outdated, and no credible evidence existed in the record showing that Motel Owners paid more than $9,600 to replace its Contents.
On appeal, Motel Owners did not dispute that they did not submit the requested documentation but instead argued that the bankruptcy court improperly placed the burden on them to support their request for more money and that Associated’s internal records showed that the Contents were valued at $175,000 during Associated’s 2019 inspection of the Motel. In response, the Court again emphasized that it is the insured’s burden to prove it suffered a loss and that the loss is covered by the Policy and that the valuation in 2019 does not reflect the value of the Contents at the time of the loss or damage, which occurred in 2021, because it does not account for depreciation and there was no evidence that the Contents’ value has remained the same since 2019.
3. Building Interruption
Motel Owners argued that they are entitled to at least an additional $73,650.19 to compensate them for the entire duration of the Motel’s restoration from February 2021 to December 2022, when the Motel reopened and that this time frame is both reasonable and feasible. However, as the Fifth Circuit, specifically pointed out, Motel Owners do not cite the record, i.e. the text of the policy, nor case law. The Court noted that the Policy does not define the duration of time for Business Interruption based on what is reasonable or feasible. Ultimately, the Fifth Circuit held that the Motel Owners abandoned their business interruption claim because they failed to adequately brief their argument that the bankruptcy court, and district court, erred in granting Associated’s summary judgment. This is significant because even though the policy was ambiguous as to what is reasonable/feasible, the Court still held that Motel Owners should have cited to the policy along with case law in support.
B. Extracontractual Claims
Motel Owners argued that Associated’s delays in adjustment/payment of the claim and unjustified rejection of several components of the claim clearly show bad faith. The Court, however, held that this argument fails because Motel Owners did not cite any case law or argue that such actions were so extreme as to make the injury independent of the policy claim. Likewise, the Court held that Motel Owners were not are not entitled to recover damages in the form of policy benefits for their statutory and common law claims since Associated did not breach the policy.
The Lowdown: This case is favorable to insurers and significant for many reasons. First, this claim arose out of Winter Storm Uri, at this time the entire construction, appraisal, and insurance industry were all inundated with claims and delays were expected, but the Court still emphasized the insured’s responsibility to mitigate damages. Second, the Court explicitly rejected the expert’s conclusory arguments the invoices could be segregated out and inconsistent statements. Finally, the Court repeatedly emphasized the doctrine of concurrent causation, the policy’s language, and the insured’s burden.
