Construction Defects, Occurrence, and Property Damage Issues Addressed by Texas Supreme Court

In a long awaited opinion, the Texas Supreme Court has answered certified questions from the United States Court of Appeals for the Fifth Circuit dealing with a claim based on construction defects and possible liability coverage for that claim. The certified questions were as follows: 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; and, 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? The case is Lamar Homes, Inc. v. Mid-Continent Casualty Company, 2007 WL 2459193 ( Tex. ). Note that this case has not been released for publication in the permanent law reports as of this writing; this means the decision is still subject to revision or withdrawal until so released.

The facts of the case are these.

The DiMares purchased a new home from Lamar Homes , and several years later, encountered problems that the DiMares attributed to defects in the foundation of the house. The DiMares sued Lamar and its subcontractor complaining about these defects; Lamar forwarded the lawsuit to its insurer, Mid-Continent Casualty. The insurer refused to defend and Lamar sought a declaratory judgment as to its rights under the general liability policy. The U.S. District Court granted summary judgment to Mid-Continent, concluding that the insurer had no duty to defend Lamar for construction errors that harmed only Lamar's own product. That court reasoned that the purpose of a CGL policy was to protect the insured from liability resulting from property damage caused by the insured's product, but not for the replacement or repair of that product. But, noting disagreement among Texas courts about the application of the CGL policy under these circumstances, the U.S. Court certified questions to the Texas Supreme Court in order to clarify the issue.

The Texas court noted that the certified questions focused on the meaning of the terms “occurrence” and “property damage” in the CGL policy. In discussing these issues, the court listed court rulings from several states that concluded that the CGL policy does provide coverage for faulty workmanship that injures the work of the general contractor, and also listed rulings from other courts that found no coverage.

As for the meaning of occurrence, the court said that it recognized the point that an occurrence is simply an unexpected consequence of an insured's act, even if due to negligence or faulty work. In other words, a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result, that is, the result would have been different had the deliberate act been performed correctly. In this case, no one was alleging that Lamar intended or expected its work or its subcontractor's work to damage the DiMares' house. The damage resulted from the unexpected, unforeseen, and undesigned happening or consequence of the insured's negligent behavior. Therefore, the answer to the first certified question was yes, the allegations in this case do allege an occurrence sufficient to trigger the duty to defend.

The court then turned to the second question pertaining to whether defective construction or faulty workmanship damaging only the general contractor's work was property damage as defined in the CGL policy. The definition in the policy states that property damage is physical injury to tangible property, including all resulting loss of use of that property. On the face of it, the definition does not eliminate the general contractor's work since the home and its component parts are clearly tangible property. And, the complaint of the DiMares alleged actual physical injury to the home, such as cracking sheetrock and stone veneer. Therefore, the definition of property damage was met and this was sufficient to trigger the insurer's duty to defend.

It should be noted that this decision by the Texas Supreme Court did not address the duty to indemnify, only the duty to defend. The court held that the duty to indemnify would be decided by proof at a trial.

Faulty Product Decision Based on Maryland Law

The named insured, Metro Ready-Mix, was covered by a general liability policy issued by OneBeacon Insurance Company. OneBeacon sought a declaratory judgment that it was not required to cover Metro for losses incurred as a result of a defective product supplied by Metro to a contractor. The trial court granted summary judgment to OneBeacon and this appeal followed.

The appeals court noted that Metro supplied grout for use on a parking garage construction job in Baltimore, Maryland . This grout

was defective and did not provide enough strength to achieve its purpose. As a result of the defective grout, the contractor was required to take remedial steps, including demolishing certain portions of the new construction and installing new pilings with new grout. This led to lawsuits among the parties involved and when Metro Ready-Mix notified its insurer of the claims, OneBeacon refused to provide coverage. Metro settled its dispute with the contractor and no actual payment was made. Still, OneBeacon filed a declaratory judgment seeking a declaration that Metro was not entitled to coverage. The trial court found for the insurer and said there was no occurrence under the terms of the policy because any damage caused by the defective grout did not constitute an accident.

In the appeal, the court found that, under Maryland law, there is an occurrence under a general liability policy only upon the happening of an accident, and Maryland case law provides that an accident occurs when the resulting damage takes place without the insured's actual foresight or expectation. In this situation, there was no accident or occurrence because the demolishing of the construction was not accidental. This damage was not unforeseen as the term has been interpreted with respect to CGL policies under Maryland law because, just as a company must be presumed to foresee that it will be forced to pay for any defects in its own property, the company must also foresee that it will be forced to pay for incidental costs that are incurred in remedying those defects.

The ruling of the trial court was affirmed.

This case is OneBeacon Insurance Company v. Metro Ready-Mix, Incorporated, 2007 WL 2031613 (C.A.4 Maryland ). This decision is a slip copy and not selected for publication in the Federal Reporter.

Homeowners Exclusions Not Applicable to Insured's Claims

An appeals court in Kentucky reviewed a homeowners policy and found the exclusions used by the insurer to deny coverage were not applicable to the claims of the insured. The case is Reynolds v. Travelers Indemnity Company of America, 2007 WL 2340642 (Ky.App.). Note that at the time of this writing, the opinion is not final and is not to be cited as authority in any court of Kentucky.

The Reynolds bought a home in 1994. In 2002, the Reynolds attempted to correct a drainage problem at this address. The project required excavation around the perimeter of the house but the work did not go well. The Reynolds decided to move to a new address but kept the house where the work was being done for possible future rental prospects. The household appliances remained in place, the utilities remained operational, and a lawn service was retained to tend to weekly and seasonal yard duties. In 2003, the Reynolds returned from a vacation and visited the house. They discovered that all of the appliances had been stolen and the water line leading to the refrigerator's icemaker had been severed. As a result, the kitchen floor had been flooded with water and the water had leaked onto the basement ceiling which had collapsed. Also, mold was now present in the house. The damages totaled more than $86,000.

The Reynolds submitted a claim to the insurer but the claim was denied. The Reynolds filed an action for declaration of rights. Both parties filed motions for summary judgment and the trial court found in favor of the insurer. This appeal followed.

The appeals court noted that the insurer denied coverage based on four exclusions: loss caused by theft in or to a dwelling under construction; loss caused by vandalism and malicious mischief if the dwelling has been vacant more than 30 consecutive days; continuous or repeated seepage of leakage of water over a period of time; and loss caused by mold. The court then reviewed each exclusion in relation to the facts of the loss.

The finding pertaining to the theft exclusion was that it applied only to dwellings under construction. The court said that the exclusion did not apply after the construction of the house has been completed. In this case, the perimeter of the Reynolds' house was being excavated, but the dwelling itself was not under construction. Therefore, this exclusion did not apply.

The vandalism and malicious mischief exclusion applied only when the house has been vacant for more than 30 days. Now, while this house had been vacant for more than this time period, the loss was not caused by vandalism or malicious mischief as those terms are commonly understood. The loss in this case was plainly caused by the theft of the refrigerator. So, this exclusion did not apply.

The court said that the water exclusion on the policy applied to leakage or seepage over a period of time, weeks, months, or years.

The Reynolds contended that there was no proof that the water leaked for a period of time that included weeks; they contended that the water leaked for a period of time less than fourteen days. Travelers contended the terms “period of time” and “weeks” refer to separate and discrete spans of time. The court found the exclusionary language to be ambiguous and that Travelers' construction of the language was not the only plausible and reasonable interpretation. The language of the exclusion could cause an ordinary person to believe that a loss caused by the continuous or repeated leakage of water from a household appliance is not covered if and only if the leakage has occurred over a period of time that may be comprised of weeks, months, or years. The Reynolds presented evidence tending to show that the theft occurred less than two weeks before it was discovered. Thus, the exception to coverage did not encompass the facts and circumstances of the loss at issue before this court.

Finally, the court reviewed the mold exclusion. The mold developed as a direct result of the theft of the refrigerator, the court said, and this makes the mold part and parcel of the covered theft loss. The court said that it was satisfied that the costs associated with the removal of the mold were covered by the policy.

The judgment of the trial court was reversed and remanded for entry of judgment in favor of the Reynolds.

Owned Vehicle Exclusion, the Meaning of Occupying, and the Vehicle Orientation Test

This case from the Supreme Court of New Hampshire dealt with the issue of whether the insured was occupying his motorcycle at the time of his injuries. The case is Miller v. Amica Mutual Insurance Company, 2007 WL 2416356 (N.H.). This opinion has not yet been released for publication in the permanent law reports. Until released, the opinion is subject to revision or withdrawal.

The decedent in this case was the victim of a hit-and-run accident. He was riding his motorcycle when he got caught in a rut in the roadway and thrown off the motorcycle. As he was lying in the roadway, he was hit by an oncoming vehicle which then fled the scene. The decedent did have an auto policy with Amica Mutual but the motorcycle was not insured under this policy.

The auto policy provided uninsured motorist coverage for the decedent but there was an exclusion on the policy for any injuries sustained by an insured while occupying any motor vehicle owned by the insured which is not insured for this coverage under the policy; occupying was defined as in, upon, getting in, on, out, or off a vehicle. The insurer denied UM coverage, saying the insured was occupying the motorcycle by definition. When the claim ended up before a court, the trial court ruled in favor of the insured decedent. The insurer appealed.

The New Hampshire Supreme Court said that the issue here was simply whether the insured was occupying the motorcycle for the purposes of the owned vehicle exclusion in the policy. Amica contended that the decedent was occupying the motorcycle because he had not reached a place of safety and had not severed his connection to the motorcycle. The decedent's estate countered that the plain meaning of occupying and the terms of the definition do not describe someone who has been thrown forty feet from his vehicle and is lying in the roadway for a period of time before being struck by another vehicle.

The insurer wanted the court to apply the vehicle orientation test. This test requires that a claimant be engaged in an activity essential to the use of the vehicle when the accident occurs. Under this test, occupying may include the process of moving away from the vehicle to a place of safety. The court found this idea unimpressive. In this case, the court said that the decedent had been ejected from his motorcycle and was lying in the middle of a highway forty feet away; furthermore, the court went on, the decedent was lying in the roadway for thirty to ninety seconds before he was hit. So, he was not in, upon, getting in, on, or off the motorcycle in order to satisfy any interpretation of the word “occupying”.

The court noted that if Amica had wished to exclude from coverage injuries arising out of the use of any motor vehicle not insured under the policy, it could have worded the policy exclusion to that effect. It did not do so, instead using the “while occupying” language. Therefore, the ruling of the trial court was affirmed.

Additional Insured Endorsement and Completed Operations Coverage

The controlling question in this case before the Colorado Appeals Court was whether an additional insured endorsement limiting the additional insured's coverage to ongoing operations includes completed operations or completed work coverage. The case is Weitz Company v. Mid-Century Insurance Company, 2007 WL 2264634 (Colo.App.). Note that this opinion has not as yet been released for publication in the permanent law reports.

Weitz, a general contractor, hired a subcontractor to install plumbing, heating, and air conditioning systems in a building project. The subcontractor was required by contract to list Weitz as an additional insured using ISO form CG 20 10 10 93, and to continue this coverage for at least two years following final payment in connection with this project. The subcontractor bought a general liability policy insuring it for completed operations, and included in this policy was the additional insured endorsement CG 20 10 10 93. This endorsement stated that the general contractor was an additional insured, but only with respect to liability arising out of ongoing operations.

Approximately two years after completion of the work, the property owner filed an action against the general contractor alleging construction defects. The subcontractor was not named in the lawsuit and was not added to it. This lawsuit was settled, and then

Weitz commenced a proceeding against the subcontractor and its insurer, Mid-Century, alleging breach of contract, bad faith breach of insurance contract, and deceptive trade practices. Mid-Century filed a motion for summary judgment asserting that there was no coverage because the additional insured endorsement was limited to ongoing operations. The trial court granted this motion and this appeal followed.

The appeals court acknowledged that Weitz was an additional insured under the subcontractor's general liability policy; but, the court also said that the policy was unambiguous as to the extent of the coverage. The term “ongoing operations” used in conjunction with “only” in the additional insured endorsement limits the coverage provided to Weitz. The court disagreed with the general contractor's assertion that ongoing operations used in the endorsement to limit coverage had the same meaning as completed operations used elsewhere in the general liability policy. The ruling of the trial court was affirmed.

Note that ISO has revised CG 20 10 since the 1993 edition to strengthen the point that the coverage for the additional insured is meant solely for ongoing operations.