INSURER OWES DUTY TO RESPOND TO LOSS INVOLVING CONSTRUCTION DEFECTS

Commercial General Liability	Occurrence
Construction Defect	Property Damage

Vincent and Janice DiMare sued Lamar Homes, Inc. (Lamar), the general contractor that built their home several years earlier. The DiMares alleged damages caused by defects in the home’s foundation.

Lamar was insured under a Commercial General Liability Policy from Mid-Continent Casualty Company (Mid-Continent). Upon receiving notice of the DiMares’ suit from Lamar, the insurer declined their request for defending the claim. Lamar and Mid-Continent filed cross motions for summary judgement. The original court ruled in the insurer’s favor, agreeing that the company did not have a duty to defend the contractor for damage to Lamar’s own product due to its own construction errors. Lamar appealed.

The appellate court sought input from the state’s Supreme Court, seeking answers to the following:

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?

On question 1. the high court concluded that because a contractor’s intent is an issue that is resolved via court action and since the term “occurrence” and “accident” do not make a distinction between damage to first party or third party property; then it is only the common CGL exclusion/exception regarding work done by a subcontractor on behalf of an insured that contains that distinction. The rest of the policy only refers to whether a fortuitous event caused property damage. So the answer is yes.

On question 2.court stated that, per the policy’s language, property damage means damage to, or loss of use of, tangible property and therefore the damage to the foundation of the DiMares’ residence qualified as property damage. So the answer is yes.

Because it had concluded the answers to both 1 and 2 were yes, the court sought to address whether the situation was subject to Texas’ prompt payment statute. The court held that the law was applicable to parties seeking to recover their own losses and that the obligation of having to handle defense costs qualified as a claim by a first party. In light of their examination, the high court answered in the affirmative for all three questions submitted by the appellate court.

Lamar homes, Inc., Petitioner v. Mid-Continent Casualty Company, Respondent. SPCTTX, No. 05-0832. Decided August 31, 2007.

http://www.Supreme.courts.state.tx.us/historical/2007/aug/050832.htm (downloaded June 4, 2008)