This story is reprinted with permission from FC&&S Legal, the industry’s only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe.

Although the U.S. has a reputation as a litigious society, in reality judges often encourage parties to a lawsuit to settle. And when insurers defend their insureds, settling a case is a reasonable trial strategy to limit court costs and attorney fees. What happens when the plaintiffs reach an agreement with the defendant before trial not to pursue all available assets if they win? Then, when a judgment is rendered against the insured in the trial in which the insurer doesn’t participate, must the insurer provide coverage?

Case of construction defects

Glen and Marsha Hamel hired Terry Mitchell Builders, Inc., to finish building a single family home in Flower Mound, Texas, which it did in October 1995. In August 2000, the Hamels said they noticed signs of water damage in the home. They sued the builder in April 2002 for breach of implied warranty, negligence, Deceptive Trade Practices Act violations and Residential Construction Liability Act violations, alleging that the builder had failed to perform its services in a good and workmanlike manner. The Hamels also alleged that the water damage had resulted from the home’s improper construction or, alternatively, from the improper use or installation of a certain exterior stucco finish.

Great American Insurance Company insured the builder under several commercial general liability insurance policies, one of which excluded property damage “arising out of” the stucco product. The builder notified Great American of the Hamels’ suit, but Great American declined to defend the builder, citing the policy’s exterior stucco exclusion because the Hamels’ August 2000 discovery of the damage fell within that period.