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Sembera v Texas Mutual Insurance Company

January 29, 2009 – Case Report


Sembera Security Systems, Inc. v. Texas Mutual Insurance Company,  No. 11-07-00310-CV (Tex. App. –  Houston [1st Dist.] 2009)


This case stands for the proposition that you had better be careful about what you stipulate to at trial. 


This case sets out quite a few facts.  As reported by the 1st Houston Court of Appeals, Sembera Security Systems Inc. (“Sembera”),  was engaged in installing home-security alarms in master-planned residential communities and providing alarm-monitoring services to residential customers in the Houston area. In 1998, Sembera and En-Touch Systems, Inc. (“En-Touch”), a telecommunications provider, entered into a “Security Services Agreement” (the “Agreement”) for a five-year term. Pursuant to the Agreement, Sembera was to provide alarm-monitoring services to customers generated by En Touch, En-Touch would handle the invoicing of those customers, and the parties would split the profits. As part of the Agreement, Sembera agreed to maintain workers’ compensation insurance.   


Sembera obtained workers’ compensation insurance from Texas Mutual Insurance Company (“TMIC”).  Sembera was required to pay an estimated initial premium at the beginning of the Policy term and then to pay a final premium at the end of the term. After being notified to provide additional information and failing to do so, TMIC invoiced Sembera for additional premium.  Sembera did not pay the additional premium.   TMIC cancelled the policy and issued a refund to Sembera and Sembera accepted the refund.  Days later, Sembera’s insurance agent submitted the additional payroll information to TMIC and requested that the policy be retroactively reinstated which TMIC did.


TMIC invoiced Sembera for repayment of the premium that had been refunded. Sembera did not repay.  TMIC issued a second Notice of Cancellation based on Sembera’s failure to repay.   Sembera did not respond. On May 17, 2000, TMIC cancelled the Policy and refunded $602 to Sembera in unearned premium. Sembera accepted and deposited the $602, and did not seek reinstatement of the Policy.


In late May 2000, En-Touch notified Sembera that Sembera was in default of the Agreement because its workers’ compensation coverage had been cancelled. Sembera’s insurance agent issued  a certificate of insurance to En-Touch, erroneously representing that Sembera had coverage in place when it did not. En-Touch later discovered that the certificate of insurance was not valid and, on October 18, 2000, En-Touch notified Sembera that it was immediately terminating the Agreement.   En-Touch and Sembera ultimately settled their dispute. Sembera contends that it was forced to sell off certain accounts to En-Touch for $405,000—an amount well below their fair market value.


In May 2001, Sembera filed suit against its insurance agent alleging, inter alia, negligent misrepresentation, fraud, and breach of contract. Two years later, on May 9, 2003, the insurance agent filed a third-party petition against TMIC for contribution and indemnity. On September 15, 2003, Sembera asserted a breach of contract claim directly against TMIC. Sembera alleged that TMIC’s cancellation constituted a breach of the Policy contract and that such cancellation caused Sembera to sustain lost profits when En-Touch terminated the Agreement for failure to maintain insurance.


Subsequently, Sembera and the insurance agent settled their dispute, with the insurance agent paying Sembera $200,000.  Sembera moved forward with its breach of contract claim against TMIC.  Both parties filed cross-motions for summary judgment concerning whether TMIC breached the Policy by cancelling coverage.


Sembera contended that the express terms of the Policy provided for premium to be collected at only two points in time: at the beginning and at the end of the Policy Period. Sembera contended that TMIC improperly attempted to collect additional premium during the Policy period and that TMIC’s cancellation of Sembera’s coverage for failure to pay the additional premium constituted a breach of contract.


TMIC contended that, pursuant to the express terms of the Policy, TMIC was permitted to cancel Sembera’s coverage for non-payment of premium when, after requisite notice, Sembera failed to return the refunded premium.  The Policy included an amendatory endorsement (the “Endorsement”) that adds certain notice requirements imposed by statute.  The Endorsement provides, in relevant part, as follows:


We [TMIC] may cancel this policy. We [TMIC] may decline to renew it. We [TMIC] must give you written notice of cancellation . . . . Notice of cancellation or nonrenewal must be sent to you not later than the 30th day before the date on which the cancellation or nonrenewal become effective, except that we may send the notice not later than the 10th day before the day on which the cancellation or nonrenewal becomes effective if we cancel or do not renew because of . . . [f]ailure to pay a premium when payment is due. . . .  


As part of the written stipulations entered in the trial court, the parties stipulated that the Policy language was unambiguous.


On December 26, 2005, the trial court granted summary judgment in favor of Sembera on Sembera’s breach of contract claim and denied TMIC’s motion for summary judgment on same.


The issue of damages was tried to a jury. The jury found that Sembera had sustained $1,710,433 in past lost profits from its loss of the En-Touch Agreement and $1,082,926 in future lost profits. In addition, the jury awarded attorney’s fees of $187,500 for trial, $75,000 for an appeal to the 1st District Court of Appeals, and $50,000 for an appeal to the Texas Supreme Court.


After certain deductions by the trial court, both parties appealed. TMIC contended that its cancellation of Sembera’s Policy did not constitute a breach of contract because the Policy provided for cancellation for non-payment of premium.


The Court of Appeals held that it is a basic premise of contract interpretation that unambiguous contracts are construed as a matter of law.  The Court further held that when a contract is unambiguous, “the court must enforce the contract as written.” 


The Court found that under the express terms of the Endorsement to the Policy, which became “effective on the inception of the Policy,” TMIC was permitted to cancel the Policy for failure to pay a premium when due.  The Court of Appeals reversed the trial court.


If you wish to read the opinion you may find it (hopefully) through the following link:



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