Municipal Demolition and the Governmental-Action Exclusion in Homeowner Policies

Introduction

Wright v. ASI Lloyds (5th Cir. June 5, 2025) establishes that a homeowner’s insurer may invoke a “governmental-action” exclusion to deny coverage for damage caused by a municipal demolition—even of a neighboring structure—and that a policyholder who disputes coverage cannot force an appraisal when the sole dispute is whether the loss is covered at all. Elizabeth Wright purchased a homeowner’s policy from ASI Lloyds (“ASI”) covering her Clear Lake Shores, Texas home. When the City demolished an adjacent abandoned building—ordered as a public nuisance—the demolition crew breached Wright’s exterior siding and drywall. ASI denied the claim under the policy’s governmental-action exclusion. Wright sued for breach of contract and extra-contractual claims and sought to compel appraisal; ASI counter-moved for sanctions and costs. The district court granted summary judgment to ASI, denied Wright’s appraisal motion, sanctioned her counsel under Fed. R. Civ. P. 37(d), and denied ASI’s later request for additional sanctions and costs. On appeal, the Fifth Circuit affirmed most rulings, vacated the denial of ASI’s sanctions motion, and remanded for explanation and a cost award.

Summary of the Judgment

The Court of Appeals for the Fifth Circuit addressed four primary issues:

Whether Texas law permits coverage when a city orders a demolition that damages a homeowner’s property. The court held the governmental-action exclusion applied, barring coverage unless an action “at the time of a fire to prevent its spread” had occurred—and no fire existed here.
Whether Wright’s extra-contractual claims (bad faith, DTPA, Texas Insurance Code, Prompt Payment Act) survive a finding of no contractual liability. The court confirmed they do not.
Whether Wright could compel an appraisal. The court ruled appraisal applies only when parties “agree on the scope of direct physical loss or damage . . . but disagree on the amount payable,” not when coverage is denied outright—and Wright had waived any appraisal right.
The propriety of sanctions and costs. The court affirmed sanctions under Rule 37(d) for Wright’s counsel’s failure to produce a key at an agreed inspection, vacated the denial of ASI’s later sanctions motion (remanding for reasons), and instructed the district court to award ASI its costs as the prevailing party under Rule 54(d).

Analysis

Precedents Cited

Bexar County Hosp. Dist. v. Factory Mut. Ins. Co. (5th Cir. 2007): Diversity actions apply Texas contract-interpretation rules.
Flowers v. Wal-Mart Inc. (5th Cir. 2023): Standard for de novo review of summary judgment.
Anderson v. Liberty Lobby, Inc. (1986): “Genuine dispute” test under Fed. R. Civ. P. 56.
Reeves v. Sanderson Plumbing Prods. (2000): Inferences drawn in non-movant’s favor.
National Union Fire Ins. Co. v. McMurray (5th Cir. 2009): Texas law governs policy interpretation.
Kelley-Coppedge, Inc. v. Highlands Ins. Co. (Tex. 1998): Ordinary contract-interpretation rules apply to insurance policies.
Grain Dealers Mut. Ins. Co. v. McKee (Tex. 1997): Ambiguities construed in insured’s favor.
Higginbotham v. State Farm Mut. Auto. Ins. Co. (5th Cir. 1997): Elements of a bad-faith claim.
State Farm Fire & Cas. Co. v. Simmons (Tex. 1998): Bona fide coverage disputes do not constitute bad faith.
Lyda Swinerton Builders, Inc. v. Oklahoma Sur. Co. (5th Cir. 2018): Prompt-Payment-Act claim elements.
Tollett v. City of Kemah (5th Cir. 2002) & In re Volkswagen of Am., Inc. (en banc 2008): Abuse-of-discretion review of Rule 37 sanctions.
Schwarz v. Folloder (5th Cir. 1985): Requirement of explanation for denial of sanctions.

Legal Reasoning

1. Contractual Exclusion. Under Texas law, courts interpret insurance policies by ordinary contract principles, seeking the parties’ intent and construing ambiguities for the insured. The policy’s governmental-action exclusion barred “loss caused directly or indirectly by . . . destruction . . . by order of any governmental or public authority,” except when “ordered . . . at the time of a fire to prevent its spread.” The record showed no fire, but a municipal order to demolish a nuisance, so ASI had a reasonable basis to deny coverage.

2. Extra-Contractual Claims. Under Menchaca (2018), an insurer’s statutory liability depends on contractual liability unless there is a separate, independent injury. Wright pointed to no injury beyond the refused policy benefits, so her bad-faith, DTPA, Insurance Code, and Prompt Payment Act claims necessarily failed.

3. Appraisal Right. The policy provided appraisal only when the parties “agree on the scope of direct physical loss or damage covered” but dispute its value. Coverage was in dispute here, so no appraisal right existed. Wright’s long delay and active litigation constituted an implied waiver.

4. Sanctions & Costs. Rule 37(d) mandates payment of an opponent’s expenses when a party fails to attend an agreed inspection, absent substantial justification. Wright’s counsel’s innocent error—forgetting a key—did not excuse Rule 37(d). The magistrate judge tailored the award and the district court affirmed. ASI’s cross-appeal of its denied sanctions is vacated for lack of explanation, and the court will also determine Wright’s entitlement to costs under Rule 54(d)(1), which presumes allowing costs to the prevailing party.

Impact on Future Cases

Clarifies the reach of governmental-action exclusions: insurers may deny claims for municipal demolition absent an “action at the time of a fire.”
Reaffirms that appraisal clauses apply only to amount disputes, not coverage disputes, and that long delays may indicate waiver.
Emphasizes that Rule 37(d) sanctions are mandatory for missed inspections unless substantially justified—regardless of intent—and that courts must explain any denial of sanctions.
Reinforces the presumption in favor of awarding costs to the prevailing party under Rule 54(d), absent good reasons to deny them.

Complex Concepts Simplified

Governmental-Action Exclusion: A policy clause excluding coverage for damage caused by government orders—unless the order is to prevent a fire’s spread.
Summary Judgment: A ruling when no genuine factual dispute exists and one party is entitled to judgment as a matter of law (Fed. R. Civ. P. 56).
Appraisal: A contract procedure to determine the dollar value of a covered loss when coverage is undisputed.
Waiver: The intentional or implied relinquishment of a known right; here, by repeatedly litigating without insisting on appraisal.
Rule 37(d) Sanctions: A mandatory award of expenses when a party misses a discovery event (e.g., an agreed inspection) without substantial justification.
Rule 54(d) Costs: “Other than attorney’s fees,” costs are presumptively awarded to the prevailing party unless the court states reasons to deny them.

Conclusion

Wright v. ASI Lloyds clarifies that homeowner policies’ governmental-action exclusions bar coverage for municipal demolitions absent an ongoing fire; appraisal cannot rescue a denied-coverage dispute; inadvertent discovery failures still trigger Rule 37(d) sanctions; and prevailing insurers are presumptively entitled to costs. The decision serves as a guidepost for insurers drafting exclusions, policyholders evaluating appraisal rights, and practitioners navigating discovery-sanction and cost-award motions.