Summit Custom Homes, Inc. v. GREAT AMERICAN LLOYDS INSURANCE …

• Decision Date: 18 July 2006
• Docket Number: No. 05,05
• Citation: 202 S.W.3d 823
• Parties: SUMMIT CUSTOM HOMES, INC., Appellant, v. GREAT AMERICAN LLOYDS INSURANCE COMPANY AND MID-CONTINENT CASUALTY COMPANY, Appellees.
• Court: Texas Court of Appeals

202 S.W.3d 823

SUMMIT CUSTOM HOMES, INC., Appellant, v. GREAT AMERICAN LLOYDS INSURANCE COMPANY AND MID-CONTINENT CASUALTY COMPANY, Appellees.

No. 05-05-00851-CV.

Court of Appeals of Texas, Fifth District, Dallas.

Opinion Filed July 18, 2006.

Before Justices WRIGHT, MOSELEY, and LANG.

OPINION

Opinion By Justice WRIGHT.

Summit Custom Homes, Inc. appeals the summary judgment granted in favor of Great American Lloyds Insurance Company and Mid-Continent Casualty Company (collectively the Insurers) and the denial of its summary judgment motion. In three issues, Summit argues that the trial court erred in granting the summary judgment because (1) the Insurers had a duty to defend, (2) the Insurers had a duty to indemnify, and (3) Summit was entitled to an eighteen percent penalty and reasonable attorneys' fees under Texas Insurance Code Article 21.55. We affirm in part and reverse in part.

Factual and Procedural Background

Summit is a custom home builder. Great American issued Commercial General Liability ("CGL") polices to Summit from January 15, 1996 through January 15, 2000, and Mid-Continent issued similar CGL policies to Summit from January 15, 2000 to January 15, 2005.

In 1996, Summit and Stephen and Helen Lazarus signed an agreement for the construction of a residence. Summit completed the Lazaruses' home that same year. In May 2003, the Lazaruses filed suit against STO Corp., Don's Building Supply Inc., and William Anderson complaining about construction defects in their home. They asserted claims for negligence, breach of warranty, and breach of contract claiming there were defects in the exterior finishing of the home, referred to as an "Exterior Insulating and Finishing System" or "EIFS." They further argued that the EIFS was defective and sought to have it removed and replaced. Although Summit built the home in 1996, the Lazaruses pleaded the discovery rule because EIFS-related problems were "inherently undiscoverable in that defects in EIFS are latent."

STO filed a third party petition alleging any liability it owed to the Lazaruses arose from Summit's conduct. In response to STO's claims, Summit filed a claim with both Great American and Mid-Continent; however, the Insurers denied any duty to defend or indemnity. The Lazaruses then filed a Fourth Amended Petition adding Summit as a direct defendant in their suit.

Summit later sued the Insurers, seeking a declaration that both had breached their duties to defend against the suit. Thereafter, Summit filed a motion for partial summary judgment arguing that the underlying pleadings alleged "property damage" from an "occurrence" under the policies at issue. Mid-Continent and Great American also filed a joint motion for summary judgment arguing that STO failed to allege any facts triggering coverage under the policies. After a hearing, the trial court granted Mid-Continent and Great American's motion for summary judgment and denied Summit's motion. This appeal followed.

Standard of Review

The standard of review in summary judgment is well-established. Tex. R. Civ. P. 166(c); W. Inv., Inc. v. Urena, 162 S.W.3d 547, 550 (Tex. 2005). When, as here, both sides move for summary judgment and the trial court grants one motion and denies the other, we review both sides' summary judgment evidence, determine all questions presented, and render the judgment the trial court should have rendered.FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000).

When the trial court does not specify the basis for its ruling, it is the appellant's burden on appeal to show that each of the independent grounds asserted in support of summary judgment is insufficient to support the judgment. See Star-Telegram, Inc. v. Doe, 915 S.W.2d 471, 473 (Tex. 1995)

; Caldwell v. Curioni, 125 S.W.3d 784, 789 (Tex. App.-Dallas 2004, pet. denied). And, when the trial court's order granting summary judgment does not specify the grounds upon which it was granted, we will affirm the judgment if any of the theories advanced are meritorious. Carr v. Brasher, 776 S.W.2d 567, 567 (Tex. 1989).

Discussion

In its first issue, Summit contends the trial court erred in granting the Insurers' joint motion for summary judgment because the Insurers had a duty to defend them against the Lazaruses' claims. The duty to defend arises when a third party sues the insured on allegations that, if taken as true, potentially state a cause of action within the terms of the policy. Houston Petroleum Co. v. Highlands Ins. Co., 830 S.W.2d 153, 155 (Tex. App.-Houston [1st Dist.] 1990, writ denied). The duty to defend the lawsuit is determined by the allegations in the underlying pleadings, in light of the policy provisions, and without reference to the truth or falsity of the allegations. Am. Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 847-48 (Tex. 1994); Gehan Homes, Ltd. v. Employers Mut. Cas. Co., 146 S.W.3d 833, 838 (Tex. App.-Dallas 2004, no pet.). This is sometimes referred to as the "eight corners" rule. Nat'l Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). In construing the allegations of the underlying suit, the pleadings are strictly construed against the insurer, and any doubt is resolved in favor of coverage. Pro-Tech Coatings, Inc. v. Union Standard Ins. Co., 897 S.W.2d 885, 887 (Tex. App.-Dallas 1995, no writ). In considering the allegations to determine whether a liability insurer is obligated under its policy to defend, we liberally interpret the meaning of those allegations. Gehan Homes, Ltd., 146 S.W.3d at 838.

Because the terms of the policy dictate whether the Insurers had a duty to defend, we must first determine which policy is at issue in this case. In Dorchester Development Corp. v. Safeco Insurance Co., the issue before this Court was whether coverage existed for property damage resulting from workmanship performed during the policy period when the property damage did not manifest until after the policy period. Dorchester Dev. Corp. v. Safeco Ins. Co., 737 S.W.2d 380, 383 (Tex. App.-Dallas 1987, no writ). We held that "no liability exists on the part of the insurer unless the property damage manifests itself, or becomes apparent, during the policy period." Id. If such damages are not manifested during the policy period, then there is no "occurrence" during the policy period. Id.; see also State Farm & Cas. Co. v. Rodriguez, 88 S.W.3d 313, 323 (Tex. App.-San Antonio 2002, pet. denied)

(relying on Dorchester and holding that "property loss occurs when the injury or damages is manifested").

The First District Court of Appeals, however, has rejected the manifestation rule and applied the occurrence rule, expressly refusing to follow this Court's holding in Dorchester. Pilgrim Enter., Inc. v. Maryland Cas. Co., 24 S.W.3d 488 (Tex. App.-Houston [1st Dist.] 2000, no pet.). In Pilgrim, the court held that an injury did not actually have to be discovered or manifested within the policy period to trigger coverage under the policy. Id. at 497.

Here, Summit encourages this Court to revisit its holding in Dorchester and apply the occurrence rule to the underlying facts of this case. We decline Summit's invitation.

Great American Policies

Great American provided continuous coverage to Summit from 1996 to 2000. Unlike the later policies provided by Mid-Continent, Great American's policies did not contain a specific EIFS exclusion. Summit contends that the policy provided by Great American in 1996 required it to provide a defense against the Lazarus suit because the only date alleged for the "occurrence" and "property damage" is 1996. Great American argues that because the Lazaruses pleaded the discovery rule, any property loss manifested later than 1996; therefore, the 1996 policy is inapplicable.

Despite Summit's argument to the contrary, the underlying pleadings do not establish that damage manifested in 1996. The Lazarus petition, filed in May 2003, claimed that during the construction of their home in 1996, EIFS was applied as an exterior veneer system to the home. STO's third party petition likewise acknowledges that the suit was filed in May 2003. The Lazaruses further argue that they suffered a reduction in property value, extensive damage to the home, and the need to substantially retrofit or replace the EIFS. The petition also contends that long term water penetration and retention would result in rot damage to the wooden structural elements of the house. However, missing from their factual allegations is any concrete reference to actual damages that occurred in 1996. Summit's counsel stated during oral argument that there were "no specific allegations that damages occurred in 1996, just allegations that since the house was constructed, damages have occurred." In addition to the failure to plead factual allegations of any damage manifesting in 1996, the Lazarus petition specifically invokes the discovery rule for their claims. It states the following:

Each and every claim made by the Plaintiffs herein is subject to the discovery rule because the defects of which Plaintiffs complain were latent and/or otherwise undiscoverable. The defects cause damage within the wall cavity which is not readily apparent to one examining the exterior of the EIFS surface. As a result, the named Plaintiffs would not, in the exercise of reasonable diligence, immediately perceive, or discover the defects complained of herein.

Thus, applying the "eight corners" rule, although the underlying pleadings state Summit constructed the home in 1996, it contains no allegations of actual damage during 1996. However, Great American failed to establish as a matter of law that damages did not manifest sometime in 1996, 1997, 1998, 1999, or 2000. See Gehan Homes, Ltd., 146 S.W.3d at, 846 (holding that insurers failed to establish as a matter of law that there was no allegation of a potential occurrence within the policy coverage period when the insureds...