Coverage for Construction Litigation
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.
Unfortunately for the construction industry, the current Supreme Court is a very pro-insurance court. If past results are a predictor of future performance, expect the Court to come down on the side of the insurers.
In practice a pro-insurance ruling will make it difficult for a small or medium sized subcontractor to get work. Because claims for defective work by a subcontractor will no longer be covered, most general contractors will be more careful in the selection of subcontractors. The subcontractor’s ability to satisfy construction defect claims or fulfill indemnity obligations may take on an important role in the selection of subcontractors. In the past, a general contractor could expect the subcontractor’s insurance company to fulfill the sub’s indemnity obligations to the general. However, when these claims cease to be covered, the general will only be able to look to the subcontractor for indemnity. Even if a smaller sub has performed good work in the past, most general contractors will not be willing to take a chance on the smaller sub meeting its indemnity obligation in the event of a construction defect.
More on this issue to come after the Supreme Court issues it opinion, expected some time this fall.
