Joe Balandran and Dolores Balandran, Appellants

Safeco Insurance Company of America, Appellee

Chief Justice Phillips delivered the opinion of the Court, in which Justice Gonzalez, Justice Enoch, Justice Spector, Justice Baker, Justice Abbott and Justice Hankinson join.

Justice Owen filed a dissenting opinion, in which Justice Hecht joins.

This case comes to us on a certified question from the United States Court of Appeals for the Fifth Circuit. The issue certified is whether the 1991 Texas Standard Homeowner's Policy--Form B covers damage to the insured's dwelling from foundation movement caused by an underground plumbing leak. We hold that the policy provides this coverage.

Safeco Insurance Company of America insured the home of Joe and Dolores Balandran. The form of the policy was the 1991 Texas Standard Homeowner's Policy--Form B. In September 1993, the Balandrans filed a claim against Safeco for damage to their home caused by an underground plumbing leak. The leak caused the soil to expand, damaging the home's foundation as well as its interior and exterior finishes. When Safeco denied the claim, the Balandrans sued the company in state district court. Safeco removed the case to federal court on diversity jurisdiction.

At trial, the jury found that the structural damage was caused by the plumbing leak and awarded the Balandrans $66,500. Safeco, however, moved for judgment as a matter of law, contending that the Balandrans' policy excluded this structural damage regardless of the underlying cause. The trial court granted this motion, rendering a take-nothing judgment for Safeco.

The Balandrans appealed to the Fifth Circuit Court of Appeals. While their appeal was pending, a separate Fifth Circuit panel considered this issue, holding that an identical policy did not provide coverage for foundation damage from a plumbing leak. See Sharp v. State Farm Fire & Cas. Ins. Co. , 115 F.3d 1258 (5th Cir. 1997). Subsequently, however, the Texas Commissioner of Insurance issued a bulletin vigorously disagreeing with the Sharp decision. See Tex. Dep't of Ins. Bulletin B-0032-97 (Aug. 22, 1997). In light of these developments, the panel hearing the Balandrans' appeal certified to us the controlling question regarding policy coverage.

The Balandrans' policy provides two types of coverage. "Coverage A" insures the dwelling itself, while "Coverage B" insures personal property. Coverage A provides the following protection:

We insure against all risks of physical loss to the [dwelling] unless the loss is excluded in Section I Exclusions.

The exclusion relevant to this case is 1(h), which provides:

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.

We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of glass which is part of the building if the loss would otherwise be covered under this policy.

Safeco argues that the damage to the Balandrans' home clearly falls under this exclusion. The Balandrans apparently concede that, if the exclusion applies, it excludes their claim. However, they present three arguments about why the exclusion does not apply. First, they contend that language in Coverage B (the personal property section of the policy) creates an exception to exclusion 1(h) when the structural damage results from a plumbing leak. Second, they argue that exclusion 1(h) does not apply to structural damage resulting from an underlying cause -- in this case a plumbing leak -- which itself is not an excluded peril under the policy. Finally, the Balandrans argue that the last sentence of exclusion 1(h) (the "ensuing loss" provision) creates an exception to exclusion 1(h) under the present circumstances. Because we conclude that the Balandrans are entitled to prevail on their first argument, we do not reach the other two.

Unlike Coverage A, which insures the dwelling against "all risks," Coverage B insures personal property only against twelve enumerated perils. The ninth of these twelve perils is:

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.

(bold in original, italics added). Even though Coverage B deals with personal property loss, which the Balandrans did not suffer, the Balandrans rely heavily on the last sentence quoted above. They argue that this provision (the "exclusion repeal provision") means exactly what it says: Exclusions 1(a) through 1(h) do not apply to a loss caused by a plumbing leak. Because exclusion 1(h) does not apply to the Balandrans' loss, it is covered under Coverage A, which insures against any risk to the dwelling. In other words, the exclusion repeal provision, on its face, applies to any "loss," not just personal property losses.

Safeco, relying on the structure of the policy, argues that the exclusion repeal provision applies only to personal property losses resulting from a plumbing leak. Because Coverage B deals with personal property coverage, Safeco contends that the exclusion repeal provision should be similarly limited. Safeco argues that we may not construe this sentence without considering its context within the policy. See State Farm Life Ins. Co. v. Beaston , 907 S.W.2d 430, 433 (Tex. 1995) ("[C]ourts must be particularly wary of isolating from its surroundings or considering apart from other provisions a single phrase, sentence, or section of a contract.").

As we have already noted, one Fifth Circuit panel has adopted Safeco's approach. See Sharp v. State Farm Fire & Cas. Ins. Co. , 115 F.3d 1258 (5th Cir. 1997). Under identical facts, the court held that the damage to the dwelling was excluded under exclusion 1(h), and that the exclusion repeal provision applied only to personal property losses:

We are sympathetic to the Sharps' situation, but we cannot agree that text specifically included in Coverage B, which applies only to personal property, may be imported into Coverage A, which applies to the dwelling or house, in order to create coverage for a loss that does not involve personal property damage. The Sharps' policy clearly and unambiguously divides dwelling losses and personal property losses into two separate "coverages." It therefore would appear to be nonsensical, and a rejection of the obvious structure of the policy, to reach into text that applies solely to Coverage B (Personal Property) to determine the extent of coverage provided under Coverage A (Dwelling).

115 F.3d at 1262.

Several rules of construction guide our consideration of this issue. First, insurance contracts are subject to the same rules of construction as other contracts. See Beaston , 907 S.W.2d at 433; National Union Fire Ins. Co. v. CBI Indus. , 907 S.W.2d 517, 520 (Tex. 1995); Forbau v. Aetna Life Ins. Co ., 876 S.W.2d 132, 133 (Tex. 1994). Our primary goal, therefore, is to give effect to the written expression of the parties' intent. See Beaston , 907 S.W.2d at 433; Forbau , 876 S.W.2d at 133. We must read all parts of the contract together, see Beaston , 907 S.W.2d at 433, striving to give meaning to every sentence, clause, and word to avoid rendering any portion inoperative. See United Serv. Auto. Ass'n v. Miles , 161 S.W.2d 1048, 1050 (Tex. 1942). While parol evidence of the parties' intent is not admissible to create an ambiguity, see National Union , 907 S.W.2d at 520, the contract may be read in light of the surrounding circumstances to determine whether an ambiguity exists. See Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd. , 940 S.W.2d 587, 589 (Tex. 1996); National Union , 907 S.W.2d at 520.

If, after applying these rules, a contract is subject to two or more reasonable interpretations, it is ambiguous. See National Union , 907 S.W.2d at 520. Where an ambiguity involves an exclusionary provision of an insurance policy, we "must adopt the construction . . . urged by the insured as long as that construction is not unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties' intent." National Union Fire Ins. Co. v. Hudson Energy Co. , 811 S.W.2d 552, 555 (Tex. 1991); see also Glover v. National Ins. Underwriters , 545 S.W.2d 755, 761 (Tex. 1977).

Applying these rules, we conclude that the exclusion repeal provision is subject to two reasonable interpretations, and is therefore ambiguous. We are mindful of the Fifth Circuit's reasoning in Sharp , and we agree that it reflects one reasonable interpretation of the policy language. However, the Balandrans' interpretation is also reasonable. First, the policy on its face states that exclusion 1(h) does not apply to "loss" caused by a plumbing leak; this repeal of exclusion 1(h) is not expressly limited to "personal property loss." That the exclusion repeal provision is contained in Coverage B does not necessarily dictate Safeco's narrow reading. Instead, the exclusion repeal provision could be located under Coverage B simply because that is the only place in the policy that the "accidental discharge" risk is specifically described. Because the exclusion repeal provision applies solely to that risk, it is logical for it to be adjacent to the policy's description of the risk.

Further, Safeco's construction of the policy renders a part of the policy language meaningless. The exclusion repeal provision applies to "[e]xclusions 1.a. through 1.h." Under Safeco's reading, of course, exclusions 1(a) through 1(h) are repealed only for personal property losses caused by a plumbing leak. However, exclusion 1(h) on its face applies only to damage to the dwelling. Thus, if Safeco's reading is correct, it would have been unnecessary to extend the exclusion repeal provision to exclusion 1(h), because that exclusion can never affect personal property losses. Under Safeco's approach, therefore, the part of the exclusion repeal provision referring to exclusion 1(h) is without any effect.

The Balandrans' interpretation becomes even more reasonable when we consider the circumstances surrounding the promulgation of this policy form. Article 5.35 of the Texas Insurance Code, subject to certain exceptions not relevant here, requires insurers to use policy forms adopted or approved by the Commissioner of Insurance. The policy at issue here was promulgated in 1990 by an advisory committee appointed by the Board of Insurance, the Commissioner's statutory predecessor. The Board directed this committee, which consisted of insurance industry representatives and consumer representatives, "to assist the Board with conversion of the Texas Standard Homeowners Policies into a simplified, easy-to-read form for use in the State of Texas." See Record of Official Action of the State Bd. of Ins. no. 54929 (July 18, 1989). The Board expressly instructed the committee "that such conversion process shall not in any manner restrict coverages currently available to the insured under a homeowners policy." Id .

The policy in effect when the committee started its work unambiguously covered foundation damage resulting from a plumbing leak. Effective since 1978, that policy contained exclusion repeal language similar to that at issue here, but it was located in the exclusions section. Thus, one could not argue that the exclusion repeal provision applied only to personal property loss. See State Farm Lloyds v. Nicolau , 951 S.W.2d 444, 446 (Tex. 1997) ("Under an express exception, however, these exclusions [referring to, among others, the foundation-damage exclusion] do not apply to losses caused by an `accidental discharge, leakage or overflow of water' from within a plumbing system."). The 1978 policy, like the present one, also recited the "accidental discharge" language in the Coverage B (personal property) section. The committee, in promulgating its "easy-to-read" policy, moved the exclusion repeal language to section B, adjacent to the "accidental discharge" language there, thus eliminating the need to restate this language. The Board subsequently adopted the committee's form after being assured by the committee's chairman, Don Olsen (a representative of State Farm Fire & Casualty Insurance Company), that the revisions were "accomplished in line with [the Board's] charge of making sure that there is no restriction in coverage available to any insured under an existing homeowner policy in Texas." See February 14, 1990, Hearing on Property Ins. Rules Concerning Texas Homeowners Policy and Related Matters at 5. The circumstances surrounding the drafting of this policy thus support the Balandrans' theory that the exclusion repeal provision is located within Coverage B merely to simplify the policy, not to restrict the scope of the exclusion repeal.

Safeco cites several cases for the proposition that exclusion 1(h) excludes damage to foundations, regardless of the underlying cause. See, e.g., General Ins. Co. of America v. Hallmark , 575 S.W.2d 134, 136 (Tex. Civ. App.--Eastland 1978, writ ref'd n.r.e.); Lambros v. Standard Fire Ins. Co. , 530 S.W.2d 138, 140 (Tex. Civ. App.--San Antonio 1975, writ ref'd); Bentley v. National Standard Ins. Co. , 507 S.W.2d 652, 654 (Tex. Civ. App.--Waco 1974, writ ref'd n.r.e.). These cases construe the standard homeowner's policy in effect before 1978, which contained no exclusion repeal provision for accidental discharge of water from a plumbing unit. These cases do not apply to the issue before us.

In sum, we conclude that the Balandrans' interpretation of the exclusion repeal provision is not unreasonable. Because the Balandrans are the insureds, we adopt their interpretation as the proper construction of the policy.

Accordingly, we hold that exclusion 1(h) in the 1991 Texas Standard Homeowner's Policy--Form B 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.

____________________________

Thomas R. Phillips

Chief Justice

Opinion Delivered: July 3, 1998

This widely followed rule is an outgrowth of the general principle that uncertain contractual language is construed against the party selecting that language. See Segalla, 2 Couch on Insurance § 22.14 (3d ed. 1997). It is also justified by the special relationship between insurers and insureds arising from the parties' unequal bargaining power. See Arnold v. National County Mut. Fire Ins. Co. , 725 S.W.2d 165, 167 (Tex. 1987).

The relevant language from the 1978 policy was as follows:

EXCLUSIONS (Applicable to Property Insured under Coverages A and B and Perils Insured Against)--This insurance does not cover:

k. Loss under Coverage A 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 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).

Contrary to the dissenting justices' contention, we are not considering this evidence for the purpose of creating an ambiguity. Because the Balandrans' interpretation of the contract language is reasonable, an ambiguity exists on the face of the policy. We merely highlight this evidence because it further supports the result we reach.