Homeowner’s Recovery Limited to Direct Financial Loss

April 23rd, 2017 By Todd Key

Under Texas law, property insurance policies are intended solely to indemnify the insured for its actual monetary loss. Maryland Cas. Co. v. Palestine Fashions, Inc., 402 S.W.2d 883, 888 (Tex. 1966). “Since a contract for insurance . . . is ordinarily a contract of indemnity . . . the insured is entitled to receive the sum necessary to indemnify him, or to be put, as far as practicable, in the same condition pecuniarily in which he would have been had there been no [loss]; that is, he may recover to the extent of his loss . . . but no more, and he cannot recover if he sustained no loss.” Paramount Fire Ins. Co. v. Aetna Cas. & Sur. Co., 353 S.W.2d 841, 844 (Tex. 1962). Hence, the direct financial loss incurred by the homeowner will be equivalent to the amount necessary to return the property to its pre-loss condition.
In certain circumstances, however, the direct financial loss and repair costs are not equivalent. Imagine that Andy agrees to sell his home to Bob for $100,000.00. Andy and Bob sign a contract and agree that the ownership will transfer on May 1. On April 29, the house is damaged by fire. Since Bob has insurance on the property already, he goes through with the contract and pays Andy $100,000.00 on May 1, and receives the property in exchange. Can Andy file a claim with his insurer seeking to recover insurance benefits from the loss? In Paramount, the Texas Supreme Court said no. Even though the seller Andy had initially sustained a loss, the sale of the property at full price effectively eliminated his loss. The court refused to allow a “metaphysical loss” as would require the insurer to pay even though the insureds had not suffered a direct financial loss.
Judge Jane Boyle of the Norther District of Texas recently reaffirmed this rule in , 3:15-CV-1939-B, 2017 WL 879211 (N.D. Tex. Mar. 6, 2017). In that case, the plaintiffs claimed water damage to their home when a washer overflowed. Before they filed their claim with Safeco, the plaintiffs agreed to sell their home to a third party. The issue before Judge Boyle was whether the direct financial loss provision limited the plaintiffs’ recovery. She ruled that it did. Citing Paramount, Judge Boyle agreed that the plaintiffs’ insurance claim must be calculated by examining whether they suffered any direct financial loss, measured by either pre-sale repairs to the property or diminution in sale value on the open market. Thus, the direct financial loss provision can have enormous implications on an insured’s claim for benefits if he or she has already been made whole in a related transaction.