Texas Supreme Court Reiterates Cost to Repair Property Must Be "Reasonable and Necessary"

In a subrogation case, what type of evidence is required to prove real property damages at trial? Many times, the only evidence of damages that is readily available is the property adjuster’s Xactimate estimate and testimony. As of late, this type of evidence is no longer sufficient. In McGinty v. Hennen, Texas Supreme Court held that the plaintiff must provide specific evidence that the cost to repair the damaged property was reasonable and necessary.

In Texas, the plaintiff can recover the reasonable and necessary costs to repair damaged real property, as long as there is not economic waste (i.e., the cost to rebuild the property does not exceed the value of the property). The plaintiff in McGinty alleged his house had developed mold due to water leaks from several construction defects. The plaintiff sued the builder for breach of the construction contract alleging that his damages were in excess of $600,000 for mold remediation and the repair work. The plaintiff presented two damages experts: a mold remediation expert and a local general contractor who had 30 years of experience. The Xactimate estimates from both experts were admitted as evidence. The defendant did not present any expert testimony challenging the amount of the plaintiff’s damages. During trial, the plaintiff’s experts testified regarding their estimated costs to rebuild and that the Xactimate prices were within 1%-2% of the costs in Corpus Christi. However, neither expert gave an opinion that the repairs were necessary or that the costs were reasonable. In fact, the experts never said the words “reasonable and necessary.” Defendant appealed on grounds that there was no evidence that the cost to repair was reasonable and necessary.

The 14th Court of Appeals in Houston held that although the plaintiff’s experts did not opine that the costs were reasonable and necessary, there was sufficient evidence (the estimates and testimony) to support the jury’s finding that the costs were reasonable and necessary. The Texas Supreme Court disagreed. The Court stated that the legal standard for damages is reasonable and necessary. The plaintiff’s experts merely explained their process for arriving at the cost to repair the house by using the Xactimate program, researching local material and relying on information from previous jobs. They did not provide evidence that these costs were reasonable and necessary. Without some other evidence that the costs were reasonable and necessary (the Court referenced using competitive bids), there simply was no evidence to support the plaintiff’s damages.

Therefore, how does one prove property damages in Texas? The Court did not list what types of evidence is sufficient to prove that the damages were “reasonable and necessary,” but the opinion referenced those terms on numerous occasions. Reading between the lines, a damages expert should be prepared to testify that each element of damage is “reasonable and necessary.” Further, it is necessary to meet with your damages expert early on—be it an adjuster or building consultant—to specifically identify all the information that the expert relied upon to arrive at his/her estimate. If it is only an Xactimate estimate, that may not be sufficient evidence.

When is an Expert Report a Draft and When is it a Report? That is the Question.

When to draft an expert report is an area of disagreement amongst subrogation professionals, attorneys and experts. Typically the attorney will request that an expert wait to draft a report until discovery is complete and the deadline to designate testifying experts is on the horizon. Conversely, most adjusters ask for a report as soon as possible in order to finalize the claim. Luckily, the recent changes to the Federal Rules of Civil Procedure helps both the subrogation professional and adjuster achieve their goals.

In 2011, Rule 26(b)(4) (expert disclosures) was amended to “protect drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.” Originally, drafts of an expert’s report were discoverable when the testifying expert was disclosed. The expert had one chance to draft a complete report. Any changes to the report that were suggested by counsel, however mundane, subjected the expert to a scathing cross-examination and an inference that the lawyer was telling the expert what to say. Now, all drafts are protected from disclosure by the work-product privilege. This permits the lawyer to work with the expert to craft a thorough report and avoid incomplete or lazy report writing that may provide opposing counsel the necessary ammunition to damage a case.

But the question is--what is a draft and what is a final report? Because the rule was only recently amended, the case law interpreting the rule has not yet developed. The only decision thus far is out of the Western District of Louisiana. Magistrate Judge Mark Hornsby denied the plaintiff’s request for a report that was drafted 5 months before counsel was retained and the lawsuit was filed. See Greenwood 950, LLC v. Chesapeake Louisiana, LP 2011 WL 1234735 (W.D. La). The opinion is unpublished and carries no precedential value, however, it may provide guidance to other district judges and magistrates that are confronted with this issue.

The Advisory Committee to the rule amendment noted that the work-product privilege was extended to draft reports because unlimited access to expert discovery has “had undesirable effects.” 2010 Notes of Advisory Committee ¶ 2. The Advisory Committee specifically noted that the changes to the rule were due to rising costs under the old rule and the old rule hindered the free exchange of information between the attorney and expert. Id. The notes from the Advisory Committee imply that the rule should be interpreted broadly. A court will likely consider whether the report was drafted in anticipation of litigation and when counsel was retained. Determining what is a draft report and what is a final report is yet to be settled, but we will be closely monitoring any new developments.

Subrogation in Louisiana: Differences and Opportunities

Louisiana. Home of the Big Easy, Mardi Gras and drive-thru daiquiri bars. Louisiana is also home to a unique legal system called the civil code system, which the Pelican State inherited from French and Spanish settlers. Basically, a civil code legal system means that most of Louisiana law originates from codes and statutes, rather than from judge-made law (common law). For this reason, handling subrogation matters in Louisiana can present unique challenges, but it can also provide opportunities not found in common law states.

In general, I found that Louisiana law is more supportive of subrogation actions than common law jurisdictions. For example, a subrogated carrier may assert claims against a defendant for causes of loss that are not covered under the policy. See Independent Fire Insurance Co. v. Kline, 454 So.2d 418, 419 (La. App. 3rd Cir. 1984). In Kline, the insured’s carport collapsed during high winds. Damages caused by high winds were covered under the insured’s policy. The subrogated insurer (that paid under the policy) sued the contractor that built the carport for construction defects. Defects in construction were not covered under the homeowner’s policy. The contractor-defendant asserted that the subrogated insurer did not have subrogation rights because the claims asserted in the petition were not covered losses under the homeowner’s policy. On appeal, the 3rd Circuit Court noted that the subrogation agreement assigned “all claims” to the insurer. The Court reasoned that the term “all claims” included all the claims that could have been asserted by insured against any potential defendant, including those claims not covered under the insurance policy. The Court returned the case to the trial court for a trial on the issue of causation (high winds or construction defects).

Another important difference in Louisiana is the general acceptance of subrogation rights arising from settling third-party liability claims. In general, Louisiana permits a liability insurance carrier to subrogate against a third-party tortfeasor after settling the plaintiff’s claims. Many times, this situation presents itself in environmental contamination or personal injury cases. In general, the settling plaintiff assigns his/her subrogation rights to the liability carrier through the settlement agreement and release, thereby granting the settling carrier conventional (contractual) subrogation rights.

While the vast majority of Louisiana law is conceptually the same as common law jurisdictions, a major difference is in the terminology. For example, a statute of limitations is referred to as “prescription,” and a statute of repose is referred to “peremption.” As I joked with my colleagues after obtaining my Louisiana bar license last year, the Louisiana bar should provide a Louisiana-to-common-law dictionary for those of us who started our practice at the common law.  Once the differences and opportunities in Louisiana are understood, as they say in Cajun country: Laissez les bon temps rouler—Let the good times roll.