Lamar Homes, Inc. v. Mid-Continent Cas. Co.
| Decision Date | 03 October 2005 |
| Docket Number | No. 04-51074.,04-51074. |
| Citation | 428 F.3d 193 |
| Parties | LAMAR HOMES, INC., Plaintiff-Counter-Defendant-Appellant, v. MID-CONTINENT CASUALTY COMPANY, Defendant-Counter-Claimant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Lee Howard Shidlofsky, Nickens, Keeton, Lawless, Farrell & Flack, Austin, TX, for Lamar Homes, Inc.
Jennifer Bruch Hogan, Richard Phillips Hogan, Jr., Pillsbury Winthrop Shaw Pittman, John Logan Engvall, Joseph Jonathan
Hlavinka, Engvall & Hlavinka, Houston, TX, for Mid-Continent Cas. Co.
Geoffrey Robert Unger, Gray, Cary, Ware & Freidenrich, Austin, TX, for Nat. Ass'n of Home Builders, Amicus Curiae.
Patrick J. Wielinski, Cokinos, Bosien & Young, Arlington, TX, for Am. Subcontractors Ass'n, Inc. and Am. Sucontractors Ass'n of Tx., Inc., Amici Curiae.
E. Thomas Bishop, Bishop & Hummert, Dallas, TX, for Property Cas. Insurers Ass'n of America, Amicus Curiae.
Appeal from the United States District Court for the Western District of Texas.
Before DAVIS, JONES and GARZA, Circuit Judges.
This diversity case involves important and determinative questions of Texas law as to which there is no controlling Texas Supreme Court precedent. Accordingly, we certify those unresolved questions to the Supreme Court of Texas.
I.
The style of the case in which certification is made is Lamar Homes, Inc. v. Mid-Continent Casualty Company, Case No. 04-51074 in the United States Court of Appeals for the Fifth Circuit, on appeal from the United States District Court for the Western District of Texas, Austin Division, Lamar Homes, Inc. v. Mid-Continent Casualty Company, 335 F.Supp.2d 754 (W.D.Tex.2004). Federal jurisdiction is based on diversity of citizenship.
II.
In April 1997, Vincent and Janice DiMare (the DiMares) entered into a contract to purchase a home constructed by Lamar Homes, Inc. (Lamar). In March 2003, the DiMares filed suit against Lamar and its subcontractor in Texas state court claiming that Lamar was negligent and failed to design and/or construct the foundation of the DiMares' residence in a good and workmanlike fashion in accordance with implied and express warranties.
Lamar timely forwarded the lawsuit to Mid-Continent Casualty Company (Mid-Continent) seeking defense and indemnification under a Commercial General Liability insurance policy (CGL policy) issued by Mid-Continent for a policy period of July 1, 2001 to July 1, 2002. Mid-Continent refused to defend Lamar, and Lamar filed suit against Mid-Continent in Texas state court seeking a declaration that Mid-Continent's policy covered the claim asserted against Lamar in the DiMare litigation and that Mid-Continent owed Lamar a defense in that suit. Lamar also argued that Mid-Continent's failure to tender a defense violated Texas Insurance Code Article 21.55, also known as the "Prompt Payment of Claims Statute."1 Mid-Continent removed the case to federal court.
Lamar and Mid-Continent filed cross-motions for summary judgment. At the motion hearing the parties agreed to limit the issue to whether Mid-Continent had a duty to defend Lamar in the DiMare litigation. The district court held that (1) the underlying claim for damages from construction errors essentially presented either a claim based on a breach of contract or breach of warranty; and therefore (2) Mid-Continent did not have a duty to defend under its CGL policy because such construction errors are not covered by CGL policies as a matter of law.
The district court reasoned that because the gravamen of the underlying petition sought relief for a breach of contract resulting in pure economic loss, the insurer was not obligated to provide a defense under the CGL policy.2 The court stated that "[t]he purpose of comprehensive liability insurance coverage for a builder 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."3 The court stated further that "[I]f an insurance policy were to be interpreted as providing coverage for construction deficiencies, the effect would be to `enable a contractor to receive initial payment for the work from the homeowner, then receive subsequent payment from his insurance company to repair and correct deficiencies in his own work.'"4 The court concluded that such a result would transform a liability policy into a performance bond. Thus, the court found that Mid-Continent was not obligated to provide a defense to Lamar in the underlying litigation.
III.
The CGL policy in question provides coverage for "bodily injury" or "property damage" caused by an "occurrence" that takes place within the "coverage territory." The resolution of the first issue presented to us on appeal involves the interpretation and application of the terms "occurrence" and "property damage." Under the policy, "`occurrence' means an accident, including a continuous or repeated exposure to substantially the same general harmful conditions." "Property damage" is defined under the policy as either (a) physical injury to tangible property, including all resulting loss of use of that property; or (b) loss of use of tangible property that is not physically injured.
The intermediate Texas courts of appeal are in conflict 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.
Courts which have found that construction errors do not constitute an "occurrence" conclude that a claim for bad workmanship at bottom is a claim for breach of contract, which is not covered under the policy. These courts reason that shoddy work is foreseeable by the contractor and therefore is not an accidental or unexpected loss.5
Courts that have found an "occurrence" in this circumstance reason that where the shoddy workmanship is the result of the builder's negligence rather than intentional conduct, the loss is unexpected and therefore accidental.
A number of the Texas intermediate courts of appeal decisions on this issue are collected in the margin.6 Federal district courts in Texas are also split on this question.7
The Texas intermediate courts of appeal also disagree on whether damage caused by defective workmanship constitutes "property damage" under a CGL policy. Courts finding no "property damage" in this circumstance reason that claims for the cost of repairing faulty workmanship are nothing more than claims for "pure economic loss," which are the damages that typically flow from a breach of contract. These courts, applying what has been termed the business risk doctrine, assert that a CGL policy does not insure against business risks; otherwise, there would be little difference between a CGL policy and a performance bond. These courts hold that because "pure economic loss" does not constitute damages from "physical injury to tangible property," no coverage is provided.
Other courts hold that when construction errors cause physical damage to the object of the contract, such damage constitutes property damage and is covered under the policy regardless of whether the only "tangible property" damaged was the residence itself.
A number of Texas intermediate courts of appeal decisions on this issue are collected in the margin.8 Federal district courts in Texas are also split on this question.9
Lamar contends that the line of cases holding that construction errors do not constitute an "occurrence" causing "property damage" inappropriately rely on the "business risk doctrine," and ignore 1986 amendments to the standard CGL policy. Prior to 1986, the standard CGL policy contained a broad "Your Work" exclusion excluding coverage for any property damage to the subject of the contract caused by faulty workmanship. In 1986, the standard CGL policy was amended to except from these "Your Work" exclusions damage to the subject of the contract caused by the work of a subcontractor.10 Lamar argues that given these amendments, it is inappropriate for courts to deny coverage based on the "business risk doctrine" when a general contractor requests a defense against claims arising from the work of a subcontractor. Lamar contends that many of the courts denying coverage under these circumstances either involved pre-1986 CGL policies, or the courts failed to account for these amendments to the CGL policy.
Mid-Continent contends that Lamar's argument regarding the evolution of the CGL policy and the misapplication of the "business risk doctrine" is an attempt to use policy exclusions to create coverage, which Mid-Continent argues has been rejected by Texas courts.11
The only Texas court that has addressed this issue concluded that construction errors caused by subcontractors were covered after the subcontractor exception to the "Your Work" exclusion was incorporated in the general contractor's CGL policy.12 The Texas Supreme Court has not addressed this argument.
Given the frequency this issue is litigated and the copious amount of conflicting caselaw on both sides regarding whether construction errors causing damage to the subject of the contract constitute an "occurrence" causing "property damage" under a CGL policy, we believe that this is an issue that the Texas Supreme Court should consider resolving. Indeed the parties have called our attention to the Texas Supreme Court's call for briefs on whether it should grant writs on this issue.13
This appeal also involves the...
To continue reading
Request your trial
-
Lamar Homes, Inc. v. Mid-Continent Cas. Co.
...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 an......
-
Lamar Homes, Inc. v. Mid-Continent Cas. Co.
...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 a......
-
Nautilus Ins. v. International House of Pancakes
...Article 21.55 of the Texas Insurance Code apply to a CGL insurer's breach of the duty to defend?" Lamar Homes Inc. v. Mid-Continent Casualty Co., 428 F.3d 193, 201 (5th Cir.2005). This court abstained from ruling on the parties' cross-motions for summary judgment and stayed the case pending......
-
Lennar Corp. v. Great American Ins. Co.
...the Texas Supreme Court recently accepted a certified question on this issue from the Fifth Circuit. See Lamar Homes, Inc. v. Mid-Continent Cas. Co., 428 F.3d 193 (5th Cir.2005). 1. The Carriers' The carriers cite several cases applying Texas law in support of their contention that defectiv......
-
Construction defect litigation: courts' fragmented rationales regarding coverage for contractor's faulty workmanship.
...text (noting Kvaerner Metals court reliance on courts rationale in L-J., Inc.). (118) Lamar Homes, Inc. v. Mid Continent Cas. Co., 428 F.3d 193 (5th Cir. 2005). In October 2005, the appeals court held Given the frequency this issue is litigated and the copious amount of conflicting caselaw ......