Ruling in favor of Fairfax unit in leaky roof case affirmed

A federal appeals court Monday affirmed a lower-court ruling in a Fairfax Financial Holding Ltd. unit’s favor in litigation against an Argonaut Insurance Co. unit involving an underlying negligence case.

Palmer Cravens LLC hired Buda, Texas-based DL Phillips Construction Inc., which does business as Ja-Mar Roofing, to replace the roof of an outpatient clinic in McAllen, Texas, in November 2012, according to the ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Colony Insurance Co. v. First Mercury Co., which are units of Argonaut and Fairfax, respectively.

The roof work was completed in February 2013, but the roof began to leak by the next month and continued to do so through September 2013.

Palmer Cravens sued DL Phillips in June 2014, alleging fraud among other claims. While the lawsuit was pending, a strong rainstorm in September 2014 caused substantial water intrusion damage to the property’s interior, and additional water damage occurred in June 2018.

First Mercury had issued two consecutive liability policies, each with a $1 million per occurrence limit of liability, to DL Phillips, with coverage effective from April 2012 to April 2014. Colony’s coverage then took over, also with a $1 million per occurrence limit, covering April 2014 to April 2015.

The insurers reached a confidential settlement agreement with Palmer and DL Phillips, after which Colony sued First Mercury, seeking in part a declaration that First Mercury had a duty to indemnify DL Phillips for the settlement’s full amount.

The U.S. District Court in Austin ruled in First Mercury’s favor and was affirmed by a three-judge appeals court panel.

First Mercury “is responsible only for the damage that occurred during the applicable policy periods, not all damage resulting from the initial roof defect,” the ruling said.

Colony “did not prove — or even create a genuine dispute — that it paid for damages that First Mercury should have covered,” the panel said, in affirming the lower-court ruling.

Attorneys in the case did not respond to requests for comment.