Pine Oak Builders v. Great American Lloyds

• Citation: 292 S.W.3d 48
• Decision Date: 06 July 2006
• Docket Number: No. 14-05-00487-CV.,14-05-00487-CV.
• Parties: PINE OAK BUILDERS, INC., Appellant, v. GREAT AMERICAN LLOYDS INSURANCE COMPANY and Mid-Continent Casualty Company, Appellees.
• Court: Court of Appeals of Texas

292 S.W.3d 48

PINE OAK BUILDERS, INC., Appellant, v. GREAT AMERICAN LLOYDS INSURANCE COMPANY and Mid-Continent Casualty Company, Appellees.

No. 14-05-00487-CV.

Court of Appeals of Texas, Houston (14th Dist.).

July 6, 2006.

Rehearing Overruled August 17, 2006.

Joseph H. Pedigo, Houston, Joseph S. Yardas, Conroe, for appellant.

Christopher Lee Burke, San Antonio, for appellees.

Panel consists of Chief Justice HEDGES and Justices YATES and GUZMAN.

OPINION

ADELE HEDGES, Chief Justice.

Appellant Pine Oak Builders, Inc., builds homes. Appellees, Great American Lloyds Insurance Co. and Mid-Continent Casualty Co., sold Commercial General Liability (CGL) insurance policies to Pine Oak. Pine Oak was subsequently sued by several homeowners, who alleged damages resulting from faulty construction. Pine Oak brought the present lawsuit to enforce lawsuit defense and liability indemnification provisions in the CGL policies.¹ Pine Oak moved for summary judgment, arguing that it proved its rights to defense and indemnity as a matter of law and that it is entitled to damages under article 21.55 of the Texas Insurance Code for appellees' failure to promptly pay its defense costs. In a joint motion for summary judgment, appellees argued that the policies did not cover the plaintiffs' claims in the underlying lawsuits. The trial court denied Pine Oak's motion and granted the appellees' motion.

The issues raised on appeal include (1) whether appellees owe a duty to defend in the underlying litigations, (2) whether appellees owe a duty to indemnify in the underlying litigations, (3) whether Pine Oak is entitled to damages under article 21.55 of the Texas Insurance Code, and (4) whether Pine Oak is entitled to a prospective award of attorney's fees for its defense costs in the underlying litigations. Finding that Great American owes a duty to defend in certain of the litigations and may owe a duty to indemnify in certain of the litigations, we affirm the trial court's summary judgment in part and reverse and remand in part.

I. Background

Great American issued a succession of one-year CGL policies to Pine Oak, covering the period from April 5, 1993, to April 5, 2001. Mid-Continent issued two CGL policies to Pine Oak, covering from April 5, 2001, to April 5, 2003. Each of the policies provides that the insurer "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. [The insurer has] the right and duty to defend any `suit' seeking those damages." The policies further state that the insurance agreement applies "only if: (1) the `bodily injury' or `property damage' is caused by an `occurrence' that takes place in the `coverage territory' and (2) the `bodily injury' or `property damage' occurs during the policy period." The policies define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Property damage" is defined as "physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it."

The policies additionally contain certain exclusions. For example, the "your work" exclusion precludes coverage for "property damage" to "`your work' arising out of it or any part of it and included in the `products completed operations hazard.'" Both of the policies issued by Mid-Continent and the Great American policy beginning in April 2000 contain exclusions precluding coverage for property damage arising out of the "Exterior Insulating and Finish System hazard." The Exterior Insulating and Finish System, or "EIFS," is a synthetic-stucco type of exterior wall cladding. As explained below, most of the plaintiffs in the lawsuits underlying this coverage lawsuit allege damages relating to EIFS application on their homes. In their motion for summary judgment, appellees argued principally that the insuring language and exclusions in the policies operated to exclude coverage of the underlying lawsuits.

There are five underlying lawsuits, each brought by a homeowner who purchased a Pine Oak home either directly from the homebuilder or from a prior owner. Each home in question was built in the late 1990s. In the Sorrell lawsuit, the plaintiffs allege that either EIFS was not properly installed on their home or that use of EIFS on their home was not a proper application of the product. They further allege that the EIFS permitted water infiltration of the home every time there was a significant rainfall. They assert that the accumulation of moisture continuously caused damage and that new, independent damage occurred with each rainfall. The Fourrier plaintiffs make the same claims regarding EIFS as the Sorrell plaintiffs, but they additionally allege that (1) an inadequate chimney cap was installed, (2) insufficient grade clearance was permitted at column bases in the rear of the home, and (3) no expansion joint was installed in the second level floor line. The Glass plaintiffs allege various problems relating to the construction of a balcony in the rear of their home. Although their claims include allegations of resulting water damage, they do not make any EIFS-related claims. In the Vint lawsuit, the plaintiffs make EIFS-related claims similar to those of the Sorrell and Fourrier plaintiffs. They further allege that improper construction of the roof has caused it to sag. In the Barkley claim, the plaintiff alleges that the EIFS on his home failed and caused damages. He further alleges various other construction defects, including inadequate draining, venting, and caulking, and improper sprinkler head installation. Also in the Barkley lawsuit, two co-defendants filed cross-actions alleging that Pine Oak failed to properly construct the home.

II. Duty to Defend

In its first three issues, Pine Oak contends that the trial court erred in granting appellees' motion for summary judgment and denying Pine Oak's motion on the question of appellees' duty to defend Pine Oak in the underlying lawsuits. In their motion, appellees argued that as a matter of law they did not have a duty to defend. In its motion, Pine Oak argued that as a matter of law appellees did have a duty to defend. We utilize the normal standards of review in considering the trial court's grant of appellees' motion and denial of Pine Oak's motion. See TEX.R. CIV. P. 166a(c); Fort Worth Osteopathic Hosp., Inc. v. Reese, 148 S.W.3d 94, 99 (Tex.2004). When, as here, both parties have moved for summary judgment, each party must carry its own burden, and neither party can prevail simply because the other party failed to carry its burden of proof. Pa. Pulp & Paper Co. v. Nationwide Mut. Ins. Co., 100 S.W.3d 566, 569 (Tex.App.-Houston [14th Dist.] 2003, pet. denied).

An insurer's duty to defend is determined under the so-called "eight-corners rule" by examining the allegations in the pleadings and the language of the insurance policy. Nat'l Union Fire Ins. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997). Because the question of an insurer's duty to defend is a question of law, we conduct our review under a de novo standard. Huffhines v. State Farm Lloyds, 167 S.W.3d 493, 496 (Tex.App.-Houston [14th Dist.] 2005, no pet.). In deciding whether appellees had a duty to defend in the present case, we must determine (1) whether and under what circumstances the CGL policies cover damage caused by defective construction, (2) whether the claims in the underlying lawsuits are generally covered by the policies, (3) whether the claims in the underlying lawsuits are excluded from coverage by the EIFS exclusion contained in certain of the policies, and (4) whether the damage claimed in each lawsuit "triggered" coverage under any of the policies.

A. CGL Policies and Defective Construction

We begin by considering the language in the CGL policies. In their motion, appellees offered two compatible interpretations of the CGL policies: (1) the basic insuring agreement contained in the policies does not provide coverage for the types of events and the type of damages claimed by the plaintiffs in the underlying lawsuits, and (2) certain exclusions in the policies exclude coverage for these claims and damages.

The issue of whether CGL policies cover claims for defective construction is currently a contentious issue in Texas and nationally.² In Lennar Corp. v. Great American Insurance Co., we held, in considering a fairly similar fact pattern, that CGL policies can cover these claims under certain circumstances. No. 14-02-00860-CV, 2006 WL 406609, at *12 (Tex.App.-Houston [14th Dist.] Feb. 23, 2006, pet. filed). As mentioned above, the insuring agreement in the CGL policies provides coverage "only if: (1) the `bodily injury' or `property damage' is caused by an `occurrence' that takes place in the `coverage territory' and (2) the `bodily injury' or `property damage' occurs during the policy period." "Occurrence" is defined in the policies as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." In Lennar, we explained that Texas courts have defined "accident," which is left undefined in the policies, as including intentional acts that are negligently performed so long as the effect of the acts would not have been the intended or expected result if performance had not been negligent. Id. at *4. We then concluded that because the CGL policies define "occurrence" as "an accident," negligent or inadvertent defective construction that results in damage to the insured's own work and the result of which is unintended and unexpected can constitute an "occurrence" as defined in the policies. Id.

We additionally explained that the CGL policies generally incorporate what is known as the "business risk doctrine": the principle that an insurance policy...