Jim Johnson Homes v. Mid-Continent Casualty Co.

• Citation: 244 F.Supp.2d 706
• Decision Date: 12 February 2003
• Docket Number: No. 4:02-CV-758-A.,4:02-CV-758-A.
• Parties: JIM JOHNSON HOMES, INC., Plaintiff, v. MID-CONTINENT CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Texas

244 F.Supp.2d 706

JIM JOHNSON HOMES, INC., Plaintiff, v. MID-CONTINENT CASUALTY COMPANY, Defendant.

No. 4:02-CV-758-A.

United States District Court, N.D. Texas, Fort Worth Division.

February 12, 2003.

COPYRIGHT MATERIAL OMITTED

Mario R. Verna, Bush & Motes, Arlington, TX, for plaintiff.

Aaron Linzy Mitchell; Thompson Coe Cousins & Irons, Dallas, TX, for defendant.

MEMORANDUM OPINION and ORDER

McBRYDE, District Judge.

Before the court for consideration are a motion for partial summary judgment filed by plaintiff, Jim Johnson Homes, Inc., on November 20, 2002, and a motion for summary judgment, as amended, filed by defendant, Mid-Continent Casualty Company, on February 7, 2003. After having reviewed the motions, responses thereto, supporting briefs, supporting summary judgment evidence, relevant parts of the record in this action, and pertinent legal authorities, the court has concluded that plaintiffs motion should be denied and that defendant's should be granted.

I. Nature of the Litigation

This action is before the court based on diversity jurisdiction. Texas substantive law controls.

In its live pleading (first amended complaint), plaintiff seeks a declaratory judgment decreeing that defendant has an obligation under a liability insurance policy issued by defendant to plaintiff to defend plaintiff in mediation and arbitration proceedings (referred to collectively as the "arbitration") in which plaintiff, a home builder, has been, and continues to be, involved with a couple, Mr. and Mrs. Jeter (the "Jeters"), for whom plaintiff agreed to build a home. In addition, plaintiff seeks to recover legal expenses already incurred by it in defense in the arbitration, extracontractual damages and penalties related to the conduct of defendant in declining to provide the defense requested by plaintiff, and attorneys' fees incurred in pursuit of this action.

Defendant responded with an amended answer denying that it has, or has had, any obligation under the insurance policy to provide a defense to plaintiff in the arbitration, or that it has engaged in any conduct that would justify an award to plaintiff of attorneys' fees of any kind or any extra-contractual damages or penalties. By a counterclaim filed with its amended answer, defendant seeks a declaration that, as well as not being obligated to defend plaintiff in the arbitration, it will not be obligated to indemnify plaintiff, in whole or in part, for any arbitration award the Jeters may obtain against plaintiff.

II. The Motions for Summary Judgment

Plaintiffs motion seeks summary judgment as to all claims it asserts against defendant except its claims based on alleged violations of article 21.21 of the Texas Insurance Code. The ground of the part of its motion seeking a declaratory judgment that defendant has an obligation to defend plaintiff in the arbitration is that the "claims in the arbitration constitute an `occurrence' as required for coverage under the policy." Br. in Supp. of PL's Mot. at 2. Plaintiff reasons from that alleged fact that defendant breached the insurance policy by declining to defend. The other ground of the motion is that defendant's refusal to defend plaintiff in the arbitration constituted a violation of article 21.55 of the Texas Insurance Code, with the result that plaintiff is entitled to recover the penalties provided by that statute.

As initially filed on December 10, 2002, defendant's motion was for partial summary judgment, asking for a declaration that defendant is not obligated to defend plaintiff in the arbitration and that it has no liability to plaintiff under article 21.55, but not seeking summary adjudication as to whether it would have an obligation to indemnify plaintiff if the Jeters were to succeed in the arbitration. In a telephone conference with counsel on January 29, 2003, the court advised counsel of the court's tentative conclusion that defendant's motion for partial summary judgment should be granted, and plaintiffs denied. Pursuant to leave granted during the conference, defendant has filed its amended motion for summary judgment, seeking summary adjudication as to all claims of plaintiff, and all relief sought by defendant through its counterclaim. The grounds of defendant's motion, as amended, are that:

1. The claims made by the Jeters against plaintiff in the arbitration do not qualify for coverage under the basic insurance agreement of the insurance policy because the Jeters are not claiming "property damage," as defined in the policy, caused by an "occurrence," as defined in the policy.

2. Even if the Jeters' claims qualified for coverage under the basic insuring agreement, there would be no coverage because of certain policy exclusions, one having to do with property damage to real property on which plaintiff or any of its subcontractors is performing work, another having to do with the necessity to repair, restore, or replace a part of any property because work done on the property by or on behalf of plaintiff was incorrectly performed, and the third having to do with damage to property that has not been physically injured, arising out of inadequacies of work done by or on behalf of plaintiff or failures of plaintiff, or anyone acting on its behalf, to perform a contract in accordance with its terms.

3. Therefore, defendant has no duty to defend plaintiff in the arbitration, defendant will not be obligated to pay any award made in the arbitration, and there is no basis for plaintiffs claims for extracontractual damages and penalties.

III. A Description of the Claims Being Made by the Jeters Against Plaintiff

The arbitration is being conducted through the American Arbitration Association pursuant to a mediation and arbitration provision in the home construction contract between the Jeters and plaintiff. Mediation and arbitration were demanded by the Jeters in April 2002. They amended their demand in June 2002, and a second time in December 2002. The demand for mediation and arbitration is against plaintiff and its president, Jim Johnson ("Johnson"). The first and second amendments are essentially identical except that in the second the Jeters increased their claim for actual damages from $196,122.13 to $259,537.49. The court's description, set forth below, of the Jeters' claims is based on the contents of the second amended demand.

On January 10, 2001, the Jeters contracted with plaintiff for plaintiff to build a home for the Jeters on land they owned in Alvarado, Texas, for $779,500.00, subject to additions and deductions by change orders. Plaintiff and Johnson arranged for the preparation of the plans and drawings for the home, and they assured the Jeters that the home would be constructed with the design features desired by the Jeters.

Not long after construction began, the Jeters encountered problems with the work. They observed that the foundation was being constructed in a manner contrary to the foundation plan and the foundation engineer's directions. The foundation problems were brought to the attention of plaintiff; and, Mr. Jeter was led to believe that the problems were corrected, but later discovered that they were not properly corrected.

Other problems manifested themselves after the framing of the home began. There were numerous problems with the design of the home, as reflected by the plans and specifications plaintiff and Johnson had provided, that made it impossible to complete the framing as would be required for the home to be as specified by the Jeters. Other deficiencies were noted during the construction. No provision was made in the plans for water heaters. Plaintiff and Johnson changed interior exposed, solid-cedar beams to "boxed" beams without the Jeters' consent. The roof overhang and ceiling areas were not constructed as the Jeters expected.

The problems mentioned above, as well as others, were brought to the attention of plaintiff and Johnson in writing and otherwise. A meeting was held on July 11, 2001, for discussion of problems related to the construction. During the meeting, Mr. Jeter made known that he considered plaintiff in breach and default under its contract because it refused to construct the home as the Jeters desired. As a result of that meeting, plaintiff stopped work altogether, and abandoned the project and contract. Thereafter, plaintiff refused to perform any work under the contract unless the Jeters paid an additional $17,000.00; and, plaintiff then removed its subcontractors and materials from the job and did not return. As a consequence, plaintiff and Johnson completely failed to correct the design and construction deficiencies, and failed to take action as required to make sure deficiencies were corrected before it was too late in the construction process to do so. Accordingly, in August 2001, and pursuant to a provision in the contract, the Jeters terminated the contract because of plaintiffs material breach and default.

Before the contract was terminated, the Jeters noticed cracking in the foundation. They were told by plaintiff and Johnson that they were seeing normal shrinking cracking. Engineers hired by the Jeters discovered that the cracking was the result of the failure to properly construct the foundation. The foundation system was not constructed in accordance with the plans and specifications, or in a good and workmanlike manner. According to the engineers, the defects in the foundation rendered it unsuitable for the home that was to be constructed. As a result, the entire foundation, as well as the partial framing that has been constructed on it, must be demolished so that the foundation can be rebuilt. The defects in the foundation cannot be repaired or corrected.

After arbitration commenced, the Jeters discovered that a representation made by plaintiff that the piers and foundation of the home would be designed and inspected by a registered engineer was false. No such inspection occurred.

The Jeters described their...