Lamar Homes, Inc. v. Mid-Continent Cas. Co.

• Decision Date: 31 August 2007
• Docket Number: No. 05-0832.,05-0832.
• Citation: 242 S.W.3d 1
• Parties: LAMAR HOMES, INC., Petitioner, v. MID-CONTINENT CASUALTY COMPANY, Respondent.
• Court: Texas Supreme Court

242 S.W.3d 1

LAMAR HOMES, INC., Petitioner, v. MID-CONTINENT CASUALTY COMPANY, Respondent.

No. 05-0832.

Supreme Court of Texas.

Argued February 14, 2006.

Decided August 31, 2007.

Rehearing Denied December 14, 2007.

Lee H. Shidlofsky, Visser Shidlofsky LLP, Austin, TX, for Appellant.

John Engvall Jr., J. Jonathan Hlavinka, Engvall & Hlavinka, LLP, Jennifer Bruch Hogan, Richard P. Hogan Jr. and Matthew E. Coveler, Hogan & Hogan, L.L.P., Houston, TX, for Appellee.

E. Thomas Bishop, Bishop & Hummert, P.C., Dallas, Wade Caven Crosnoe, Thompson Coe Cousins & Irons, L.L.P., Austin, Patrick J. Wielinski, Cokinos Bosien & Young, Arlington, Jennifer Anne Lloyd, DLA Piper Rudnick Gray Cary US LLP, Austin, Charles J. Pignuolo, Law Office of Charles J. Pignuolo, Houston, James Perry Dyer, Texas Ass'n of Builders, Austin, John C. Tollefson, Tollefson Bradley Ball & Mitchell, LLP, Micah Ethan Skidmore, Haynes and Boone, L.L.P., Dallas, Richard Detrick Villa, Hughes & Luce, L.L.P., Austin, Levon G. Hovnatanian, Martin Disiere Jefferson & Wisdom L.L.P., Kevin D. Jewell, Chamberlain, Hrdlicka, white, Williams & Martin, Houston, Michael A. Ysasaga, Maxwell, Wagner & Ysasaga, P.C., Fort Worth, for Amicus Curiae.

Justice MEDINA delivered the opinion of the Court, in which Chief Justice JEFFERSON, Justice O'NEILL, Justice WAINWRIGHT, Justice GREEN, and Justice JOHNSON joined.

This case comes to us on certified questions from the United States Court of Appeals for the Fifth Circuit asking whether an insurer under a commercial general liability ("CGL") policy has a duty to defend its insured, a homebuilder, against a homebuyer's claims of defective construction. The Fifth Circuit has certified three questions for our consideration:

1. When a homebuyer sues his general contractor for construction defects and alleges only damage to or loss of use of the home itself, do such allegations allege an "accident" or "occurrence" sufficient to trigger the duty to defend or indemnify under a CGL policy?

2. When a homebuyer sues his general contractor for construction defects and alleges only damage to or loss of use of the home itself, do such allegations allege "property damage" sufficient to trigger the duty to defend or indemnify under a CGL policy?

3. If the answers to certified questions 1 and 2 are answered in the affirmative, does Article 21.55 of the Texas Insurance Code apply, to a CGL insurer's breach of the duty to defend?

428 F.3d 193, 200-01 (5th Cir.2005). We conclude that allegations of unintended construction defects may constitute an "accident" or "occurrence" under the CGL policy and that allegations of damage to or loss of use of the home itself may also constitute "property damage" sufficient to trigger the duty to defend under a CGL policy. Accordingly, as to the duty to defend, we answer the first two questions yes. We do not reach the duty to indemnify, however, as that duty is not triggered by allegations but rather by proof at trial. We further conclude that former article 21.55 (recodified as sections 542.051—.061 of the Texas Insurance Code) does apply to an insurer's breach of the duty to defend and accordingly answer the third question, yes.

I

Vincent and Janice DiMare purchased a new home from Lamar Homes, Inc. and several years later encountered problems that they attributed to defects in their foundation. The DiMares sued Lamar and its subcontractor complaining about these defects. Lamar forwarded the lawsuit to Mid—Continent Casualty Company seeking a defense and indemnification under a commercial general liability or. CGL insurance policy. Mid—Continent refused to defend, prompting Lamar to seek a declaration of its rights under the CGL policy. Lamar also sought recovery under article 21.55 of the Texas Insurance Code.

On cross motions, the federal district court granted summary judgment for Mid— Continent, concluding it had no duty to defend Lamar for construction errors that harmed only Lamar's own product. Lamar Homes, Inc. v. Mid-Continent Cas. Co., 335 F.Supp.2d 754 (W.D.Tex.2004). The court reasoned that the purpose of a CGL policy is "to protect the insured from liability resulting from property damage (or bodily injury) caused by the insured's product, but not for the replacement or repair of that product." Id. at 759. Noting disagreement among Texas courts about the application of the CGL policy under these circumstances, the Fifth Circuit has asked us to resolve the conflict.

II

The first two certified questions focus on the meaning of the terms "occurrence" and "property damage" in the CGL policy. The CGL policy is a standard form developed by the Insurance Services Office, Inc. ("ISO")¹ and is used throughout the United States. See 2 JEFFREY W. STEMPEL, STEMPEL ON INSURANCE CONTRACTS § 14.01 (3d ed.2007). The meaning of these terms and their application to cases involving defective construction should therefore be the same in Texas as in the other states, but unfortunately there is no consensus on the policy's meaning under the circumstances posed here. Several courts have concluded that the CGL policy provides coverage for faulty workmanship that injures the work of the general contractor.² Other courts have concluded that coverage is not provided under these circumstances.³ As the Fifth Circuit points out even within Texas, intermediate courts of appeals disagree "on the application of these clauses in a CGL policy when the insured contractor is sued by a building owner for damage arising from shoddy construction of the building." 428 F.3d at 196.

At present, we have similar issues pending in six separate petitions for review involving CGL policies. See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., ___ S.W.3d ___, 2006 WL 1892669 (Tex.App.-Houston [14th Dist.] 2006, pet. pending) (holding that defective construction can constitute an occurrence and be the cause of property damage); Summit Custom Homes, Inc. v. Great Am. Lloyds Ins. Co., 202 S.W.3d 823 (Tex.App.-Dallas 2006, pet. pending); Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651 (Tex.App.-Houston [14th Dist.] 2006, pet. pending) (same); Grimes Constr., Inc. v. Great Am. Lloyds Ins. Co., 188 S.W.3d 805 (Tex.App.-Fort Worth 2006, pet. pending) (holding that defective construction that causes damage only to the contractor's own work is not an occurrence of property damage and thus does not invoke the duty to defend); Archon Inv., Inc. v. Great Am. Lloyds Ins. Co. 174 S.W.3d 334 (Tex.App.-Houston [1st Dist.] 2005, pet. pending) (holding that allegations of defective work by a subcontractor causing damage to insured contractor's project invokes insurer's duty to defend); Gehan Homes, Ltd. v. Employers Mut Cas. Co., 146 S.W.3d 833 (Tex.App.-Dallas 2004, pet. pending) (same).

III

The CGL policy provides that the insurance carrier "will pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies" and will "defend the insured against any `suit' seeking those damages." The policy further provides that the "insurance applies to `bodily injury' and `property damage' only if: (1) the `bodily injury' or `property damage' is caused by an `occurrence' that takes place in the `coverage territory.'"⁴ Consequently, the carrier's duty to defend is triggered by a claim for "property damage" or "bodily injury" caused by an "occurrence."

The policy defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Property damage" is defined as "[p]hysical injury to tangible property, including all resulting loss of use of that property."⁵

The first two questions ask whether defective construction or faulty workmanship that injures only a general contractor's own work (the home) constitute an "occurrence" or "property damage" under the CGL policy. Although certified as separate questions, the two are connected because both focus on the same property damage limitation, the home. Moreover, the CGL's insuring agreement ties the two concepts together by covering only those occurrences that cause property damage or bodily injury.

The insurance carrier maintains that, the CGL policy does not cover defective construction that injures only the work of the general contractor for a number of reasons. First, the carrier argues that a CGL policy's purpose is to protect the insured from tort liability, not claims of defective performance under a contract. Although the plaintiffs allege negligence, the carrier submits that their claim against its insured is actually in contract because the economic-loss rule dictates that all damages arising from defective work constitute economic damages for breach of contract rather than property damage. The carrier further contends that defective work cannot be an "occurrence" because it is not accidental. In this regard, the carrier submits that a general contractor should expect that faulty workmanship will result in damage to the project itself, and that if an injury is expected, it is not accidental. Finally, the carrier contends that extending CGL coverage under these circumstances transforms liability insurance into a performance bond.

The federal district court agreed with these arguments, concluding that an injury to the insured contractor's own work (the home) should not be considered an occurrence of property damage because the cost to correct faulty workmanship is an economic loss that a CGL policy should not cover.⁶ The district court further reasoned that defective construction could be an occurrence, but only when the defect caused bodily injury or damaged the property of a third party. Because the plaintiffs here did not allege that a third party's property had been damaged, the court concluded the duty to defend had not been triggered under the CGL policy.

IV

We begin with the question whether defective construction or,...