casenotes
Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co.
Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., ___ S.W.3d ____, 2006 WL 1892669 (Tex. App.–Houston [14th Dist.] July 6, 2006, n.p.h.).
Take-Away Points: The “manifestation” trigger may not be as settled as we thought for simple property damage -- the “exposure” or perhaps even a “continuous” trigger might apply in some jurisdictions. “Absent” facts are not construed in the insured’s favor to trigger coverage.
Background:
This insurance coverage case arose out of a series of five construction defect suits filed against Pine Oak Builders for damages related to synthetic stucco (“Exterior Insulating and Finish System” or “EIFS”) used in their homes. Great American insured Pine Oak under CGL policies from April 5, 1993 to April 5, 2001; Mid-Continent insured Pine Oak for two more years, until April 5, 2003. The Mid-Continent policies and the last two Great American policies contained an express exclusion for property damage arising from the “EIFS hazard.” The insurers denied Pine Oak’s demand for defense and indemnity in the suits, and Pine Oak brought a declaratory action. The trial court granted the insurers’ motion for summary judgment. On appeal, the court affirmed in part and reversed and remanded in part. Slip op. at 1-2.
CGL Policies and Defective Construction:
In deciding whether the insurers had a duty to defend, the court first considered the extent to which CGL policies cover construction defects. Following its own earlier decision, the court concluded “negligent or inadvertent defective construction that results in damage to the insured’s own work and the result of which is unintended and unexpected” constitutes an accident or occurrence under the policy. Id. at 3 (citing Lennar Corp. v. Great American Ins. Co., 2006 WL 406609 (Tex. App.—Houston [14th Dist.] Feb. 23 2006, pet. filed). The court reaffirmed its position that the “business risk doctrine,” which limits coverage for damage to the insured’s own work, is incorporated not through the insuring agreement and definition of “occurrence,” but through exclusions in the policy. Id. at 3-4. The court further noted that the exception to the “your work” exclusion for work performed by sub-contractors would be rendered meaningless if defective construction were never an occurrence. Four of the five lawsuits against Pine Oak contained explicit allegations of faulty construction by a sub-contractor and thus fell within the exception. Id. at 4.
The fifth lawsuit contained no allegation of work by a subcontractor and no facts “upon which an inference could be based that subcontractors were used” in construction. Id. Pine Oak argued that the absence of any affirmative or negative statement regarding subcontractors and also the extrinsic evidence establishing the use of subcontractors required that the insurers defend. The court held that “resolv[ing] any doubt regarding coverage in favor of the insured . . . does not mean that we presume coverage in the absence of any statement in the petition creating or disavowing coverage.” Id. at 5. Thus, if the petition is silent on a fact required to create coverage under the policy, the insurer is not obligated to defend. Id. With regard to the use of extrinsic evidence, the court categorized the case law as endorsing two exceptions to the eight-corners rule: (1) the “fundamental coverage facts” exception, which does not permit evidence related to the specific alleged occurrence to determine whether the occurrence is covered; and (2) the “permissive” exception, which permits consideration of extrinsic evidence if the facts of the underlying petition, even if true, are insufficient to determine coverage. Id. at 5-6. The court followed the “majority” opinion of recent decisions and declined to adopt the “permissive” exception. Because the evidence in the fifth suit related to the specific occurrence, the court therefore held that the insurers did not have a duty to defend.
Id. at 6.
Policy Trigger:
The court next considered whether the remaining four suits alleged an occurrence within the various policy periods. The insurers argued that the “manifestation” rule applied – that a party sustains actual damage when the damage becomes “readily apparent” or “manifest” and that Pine Oak had failed to establish this date for the four suits. Id. at 6-7. In a surprising move, the court rejected application of the manifestation trigger and instead adopted the “exposure rule” for these simple property damage cases. Id. at 7 (citing Pilgrim Enterp. Inc. v. Maryland Cas. Co., 24 S.W.3d 488 (Tex. App.—Houston [1st Dist.] 2000, no pet.). Citing the policy’s definition of “occurrence,” which includes “continuous or repeated exposure to conditions,” the court conflated the definition and trigger issues with a claims-reporting requirement and concluded that applying the manifestation trigger was tantamount to rendering the policy a “claims-made” policy. Id. at 7-8. Because each of the four remaining lawsuits alleged that damage began to occur sometime between 1996 and 1997, the court held that each of the post-1995 Great American policies and the two Mid-Continent policies were potentially triggered. Id. at 9. (In fact, the court’s discussion on this point seems to indicate adoption of a “continuous” trigger rather than a simple exposure trigger.)
EIFS Exclusion:
The Mid-Continent policies and the final two years of the Great American policies contained EIFS exclusions that “broadly” precluded coverage for property damage related to EIFS and also coverage for “damage resulting from work performed on any ‘exterior component, fixture, or feature’ of a structure if EIFS is installed on any part of that structure.” Id. at 11. After examining the factual allegations of each of the lawsuits, the court concluded that all the damages were either excluded by the broad EIFS exclusion or the “your work” exclusion of the policies. Consequently, only Great American had a duty to defend under its policies issued prior to addition of the EIFS exclusion. Id. at 12. Based on this holding, the court also held that Great American’s duty to indemnify under those early policies was not yet ripe. Id. at 13-15.
Article 21.55:
The court joined its sister state courts of appeals in holding that article 21.55 does not apply to an insured’s claim for defense costs in defending a third-party liability action because such costs are not a first-party “claim” under the statute. Id. at 12-13 (citing and following analysis of TIG Ins. Co. v. Dallas Basketball, Ltd., 129 S.W.3d 232 (Tex. App.—Dallas 2004, pet. denied).
