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.

The second question answered by the Court will have even broader implications than the first. In finding that the duty to defend an insured is a first party claim, the Court held that the prompt payment provisions of sections 542.051-.06 apply to a failure or delay in defending an insured. As a result, an insurer that fails to timely defend its insured is liable for the costs incurred in the defense, 18% interest per year and attorneys fees. An insurer who guesses wrong on the duty to defend will now face a significant penalty. An insurer can avoid this risk by defending the questionable claims under a reservation of rights and simultaneously filing a declaratory judgment action. 

Even though the Court ruled against the insurer in this case, don’t think that the Court is becoming more consumer oriented. This is still a very conservative, pro-insurer Court. However, in this instance, the Court was torn between the construction industry and the insurance industry. Historically, it has treated both very well and can be expected to do the same in the future.  

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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.  

This is an important opinion because it greatly limits the obligation of an insurance company to defend an additional insured under a CGL policy.  It is a rare case in which the plaintiff will make allegations that his cause of action against a general contractor or owner arises out of the work performed by a subcontractor.  In the personal injury context, this often arises when an employee of the named insured is injured and sues the general contractor or owner to recover for that injury.  Any claims against the employer are barred under the Worker’s Compensation Act.  As a result, the plaintiff has no incentive to allege that the cause of action arose of the negligence of his employer.  To the contrary, the plaintiff would typically allege that the cause of action arose solely from the general contractor’s acts.  Under this opinion, even if the general contractor was named as an additional insured, the insurer would have no obligation to defend it because the express allegations in the petition did not implicate the plaintiff’s employer.  General contractors, owners and oilfield operators will need to take a hard look at this case and the implications it has on their contractual provisions.  In the same way, insurers will need to look at their duty to defend these cases with much more scrutiny that has generally been applied in the past.  More often than not, they may now have a good basis for refusing to defend an additional insured under the typical additional insured endorsement.

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