Victory for the Construction Industry

Posted on September 3, 2007 by Dwayne Newton

Pending for almost two years, the Texas Supreme Court has finally issued an opinion in Lamar Homes v. Mid-Continent Insurance.  A copy of the opinion can be found here.  This case involves two important questions to the construction and insurance industries. The first is whether a construction defect can be an “occurrence” within the terms of a CGL policy when the only damage is to the building itself. The second question is whether a claim for a defense under an insurance policy is a “first party” claim sufficient to trigger the prompt payment provisions under former Article 21.55 (now codified as sections 542.051-.061) of the Texas Insurance Code. 

In a somewhat surprising opinion, the Court answered “yes” to both questions. As it relates to construction defects, the Court held these can be an “occurrence” or “accident” under the terms of the policy. This is quite a victory for the construction industry and a significant blow to the insurance industry. The trend in the insurance industry had been to resist defend many construction defect cases on the basis that there was no occurrence. With this opinion, insurers will find it difficult to deny defense obligations in most construction defect cases.

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Limiting the Duty to Defend Additional Insureds

Posted on November 22, 2006 by Dwayne Newton

In the construction and energy business sectors it is common for general contractors and operators to require their subcontractors to name them as an additional insured under the sub’s CGL policy.  Often these clauses require the subcontractor’s coverage be primary and non-contributory.  In doing so, the general contractor or operator can shift much of its insurance costs onto the subcontractor.  However, a recent opinion by the Houston Fourteenth Court of Appeals may have a major impact on general contractors and other parties that are frequently named as additional insureds. In D.R. Horton v. Markel International Insurance Company, the Houston Court of Appeals adopted a construction of the typical additional insurance clause that greatly limits an insurer’s obligation to defend these additional insured.  A link to the opinion can be found here.  www.14thcoa.courts.state.tx.us/opinions/htmlopinion.asp

The Horton opinion turns on the wording of the additional insurance clause in the CGL policy.  The clause in question limited the general contractor’s status as an additional insured to claims arising out of the subcontractor’s work.  This is a fairly typical additional insured clause in Texas.  In this instance, the petition filed by the Plaintiff did not contain language alleging that the cause of action arose in some respect out of the subcontractor’s work.   As a result, under the eight corners rule, the insurer was under no duty to defend the general contractor because the additional insured endorsement limited the general contractor’s status as an additional insured.  The Court would not consider extrinsic evidence that indicated the cause of action did, in fact, arise out of that portion of the work performed by the subcontractor.  In this instance, the general contractor was completely at the mercy of the pleadings filed by the Plaintiff.  Because the petition did not contain the magic language indicating the cause of action arose out of the subcontractor’s work, the additional insured endorsement did not apply and there was no duty to defend.  

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Coverage for Construction Litigation

Posted on September 1, 2006 by Dwayne Newton
Pending before the Texas Supreme Court is an important case that could have serious implications for the construction industry. In Lamar Homes v. Mid-Continent Casualty Company, the Supreme Court has been asked to answer a certified question posed by the 5th Circuit Court of Appeals. Specifically, the Court has been asked to address whether allegations of construction defects and loss of use of a residence against the general contractor constitute an accident or occurrence and property damage within the context of a CGL policy.

 

We are watching this case closely as it could have a profound affect on many of our clients in the construction industry. Typically, most construction cases are defended by the contractor’s CGL policy as long as there are allegations that the defective work of the contractor caused damage to “other property.” In addition, the general contractor is usually covered for defective work performed by a subcontractor. However, recently, insurers have begun taking a hard line approach to defending these cases. Many now disclaim coverage outright or file declaratory judgment actions while defending under a reservation of rights. More and more, insurers are challenging whether a construction defect is an “occurrence” under the terms of the policy.

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