Victory for the Construction Industry
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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.
