The Burditts brought this action seeking to recover under a homeowner’s insurance policy for foundation damage allegedly caused by a leaking pipe. They filed suit in state court against West American Insurance (the Company) for coverage under their policy, violations of the Texas Insurance Code, Tex.Ins.Code Ann. art. 21.21 § 16 (Vernon 1994) and Tex.Bus. & Com.Code Ann. § 17.50 (Vеrnon 1994), and breach of the Company’s duty of good faith and fair dealing. The Company removed the case to federal court, and it moved for summary judgment. The motion was referred to a Magistrate Judge who concluded that the terms of the policy did not allow for recovery and recommended a grant of the defendant’s motion for summary judgment. The district court adopted the Magistrate Judge’s recommendation. We reverse.
We review a grant of summary judgment de novo,
Montgomery v. Brookshire,
The Burditts seek insurance coverage for their claim that a leak in an interior pipe behind their bathroom wall caused a shift in the hоuse’s foundation and structural damage. The Company paid part of the claim, for the repair of water damage immediately ■ surrounding the pipe, but denied coverage for cracking in the foundation, walls, and ceiling.
The policy covered all risks of physical loss not excluded by Section, IIB:
This policy does not insure against ... Loss by termites or other insects; deterioration; smoke from agricultural smudging or industrial operations; wet or dry rot; mould; mechanical breakdown; settling, shrinkage, or expansion in foundations, walls, floors, or сeilings; this Exclusion, however, shall not apply to loss by fire, smoke, (Except as specifically excluded above), explosion, landslide, total or partial collapsе, water damage, and glass breakage, caused by perils excluded in this paragraph;
For convenience, we refer to the first list in the insurance clause (“Loss by ... deterioration, ... settling, shrinkage, or expansion in foundations ...”) as “excluded perils,” and the second list (“this Exclusion shall not apply to loss by ... water damage ... caused by perils excluded in this paragraph”) as “exceptions to the exclusions.” This ease involves three of the listed categories: deterioration and foundational damage (excluded perils) and wаter damage (an exception to the exclusions.)
The plaintiffs suffered foundation damage, listed in the insurance clause as an excluded peril. They argue, however, thаt deterioration of the pipe, also an excluded peril, caused water damage to the foundation, thus fitting the exception to the exclusion clause. “[T]his exclusiоn shall not apply to loss by ... water damage ... caused by perils excluded in this paragraph.” “Deterioration” of the water pipes is one of those “perils.” Thus the policy covers water damage caused by deterioration regardless of the exclusion of foundation damage.
The Magistrate Judge rejected this argument, reasoning that the list оf excluded perils is absolute, and any connection of foundational damage to water damage is irrelevant. Only the exceptions to the exclusion clause arе contingent upon causation by an excluded peril, such as deterioration or foundation damage, not the other way around. Thus if foundation damage had caused watеr damage, it would be covered, but water damage causing foundation damage (regardless *477 of what caused the water damage) does not except foundation damаge from the exclusion. The causal connection runs in only one direction.
We can find no Texas case interpreting a similar insurance clause. Generally, Texas law requires any ambiguity in the insurance policy to be interpreted in favor of coverage.
Words and clauses of insurance contracts are strictly construed against the insurer, Continental Casualty Co. v. Warren, [152 Tex. 164 ]254 S.W.2d 762 , 763 (Tex.1953), and if a word or clause is capable of more than one reasonable meaning, then the meaning favoring the insured must be adopted. Glover v. National Ins. Underwriters,545 S.W.2d 755 , 761 (Tex.1977). If the term may be interpreted аs a limiting term or the clause itself is an exclusionary clause, then the construction of the clause urged by the insured must be adopted as long as that construction is not unreasonable. Id. Even if the insurer’s construction is more reasonable than the insured’s, the insured’s must prevail.
Chen v. Metropolitan Ins. and Annuity Co.,
The Company’s intеrpretation of the policy would make the exception for water damage almost meaningless, because it would not include the excluded perils of rust, wet rot, and mold, regardless of their natural association with water damage. Also, the exception for smoke damage is explicitly limited “[e]xcept as specifically excluded аbove,” so that it does not include the excluded peril of “smoke from agricultural smudging or industrial operations.” If the Company meant to further limit water damage by exempting foundation damage, it would have done so explicitly as it did with smoke.
The Company argues that this court should uphold the summary judgment on other grounds, citing
Coral Petroleum, Inc. v. Banque Paribas
—London,
Mr. Burditt was not attempting to define the policy term “deterioration,” however, and in later testimony stated that the leak “is one of those things that just occurs through natural usage or wear and tear.” Further, the appellee contradicts itself in its brief by arguing that the Company’s payment for water damage caused in the immediate vicinity of the leaking pipe shows that they have not rendered the exception to the exclusion clause meaningless. It is thus more difficult for them to argue, as they do in the same paragraph, that they never recognized the leakage as the “deterioration” peril necessary to meet the exception to the exclusion. The Burditts also offered deposition testimony of an engineer who connected the pipe leаkage to the foundation damage.
Factual disputes remain as to the company’s intent and coverage. The appellants submitted their own testimony that the pipes аppeared to have deteriorated and an expert’s testimony in support of a causal connection between that water damage and the foundation сlaim. We therefore reverse the district court’s grant of summary judgment and remand for determination of contested issues of material fact. Fed.R.Civ.P. 56(c).
Nevertheless, the defendants аlso ask us to uphold the grant of summary judgment based on the expiration of the statute of limitations on all three claims. The parties dispute the events which toll the statute of limitatiоns and offer conflicting evidence as to when the Company first denied the Burditt’s foundation damage claim. Because we find that there exist contested issues of material facts with respect to the limitations issue, *478 we do not uphold the judgment on that ground.
The district court did not explicitly address the other two claims, for breach of the duty of good faith and fair dealing and for violation of the Insurance Code, in its grant of summary judgment. The Magistrate’s recommendations include the claims in a description of the cause of action, but proceed to rule explicitly only on the coverage issue when granting summary judgment. A denial of insurance coverage does not automatically defeat a breach of good faith duty claim under Texas law,
Harbor Ins. Co. v. Urban Construction Co.,
Accordingly, we REVERSE the district court’s grant of summary judgment and REMAND the case for further proceedings consistent with this opinion.