Mid-Continent Casualty Company v. Daneshjou Company, Inc.

Background

In this insurance coverage dispute, the issue before this Court is whether or not a standard commercial general liability (“CGL”) insurance policy is triggered when a homeowner sues an insured builder seeking the costs to repair defects in the home the insured builder agreed to build.

Mid-Continent has moved this Court to grant final summary judgment declaring that allegations of faulty construction in a suit by a homeowner seeking the costs to repair defects in a home the insured agreed to build do not trigger the duty to defend, because controlling Fifth Circuit and state precedent indicates that they do not. Lamar Homes, Inc. (“Lamar”) has moved this Court to grant partial summary judgment declaring that the allegations in the Underlying Litigation trigger the duty to defend. This Supplemental Briefing is submitted pursuant to this Court’s April 16, 2004 order.

Seventeen years ago one of the state’s largest builders went to great lengths to establish as a matter oflaw that allegations of construction defects made by plaintiff home owners seeking repair costs from a builder only state a claim for “economic damage.” Jim Walter Homes, 711 S.W.2d at 618. A basic and elementary analysis of the pleadings in the Underlying Litigation reveals that the claims against Lamar mirror the economic damage claims made against Jim Walter Homes seventeen years ago. Even if every fact alleged by the DiMares is taken as true, the DiMares can establish that they purchased a defective house from their builder, Lamar, and are entitled to “economic damages” to repair the defects in the house. Under Texas law, “economic damage does not constitute “property damage,” as required to trigger CGL purposes.

Furthermore, to hold that allegations of construction defects made by plaintiff homeowners seeking money damages to repair defects in the home sold by their builder constitute an “occurrence” would run afoul of the Fifth Circuit’s opinions in Cruse and Federated, wherein the court explained that money damages to repair defects in the very structure that the insured agreed to build are damages that are “presumed” foreseeable as a matter of law and, thus, do not constitute an “occurrence” (defined in the policy as an “accident”).

Finally, Lamar’s reliance on the Texas Supreme Court’s opinion in Massachusetts Bonding and Insurance v. Orkin Exterminating, to support its “occurrence” argument is misplaced. Orkin did not involve money damage claims limited to repairing what the insured agreed to build or limited to re-doing the work that the insured originally agreed to perform. In other words, Orkin involved claims for damages outside the scope of the transaction, which did require evaluation of forseeability, instead of damages for repair or replacement of the very work promised, which are presumed foreseeable as a matter of law and, thus, do not constitute an “occurrence.”

Verdict Information

Lamar Is Not Entitled to Article 21.55 Damages. Lamar’s claims for alleged violations of Article 21.55 also fail as a matter of law because:

1. When an insured’s claims for defense and coverage fail as a matter of law, then claims for insurance code violations based on the same claims fail also; and
2. Article 21.55 of the Texas Insurance Code does not apply to a claim for a claim for alleged breach of the duty to defend contained in a third-party CGL insurance policy, but instead only provides relief for wrongful denial of first party insurance policy claims (i.e., health insurance or homeowners policy).

The Texas Supreme Court has held that an insured may not recover on a claim for alleged insurance code violations if the Court has determined that the claims at issue were not covered. Allstate Insurance Company v. Bonner, 51 S.W.3d 289,292 (Tex. 2001). Because Mid-Continent has established as a matter of law that Lamar’s claims for defense and coverage fail as a matter of law above, Lamar’s claims asserted pursuant to 21.55 of the Texas Insurance Code fail also.

Furthermore, Article 21.55 does not provide a cause of action or claim for relief to an insured seeking a defense (or reimbursement of defense costs) under a CGL policy, because a CGL policy is a third-party liability policy and is not a first-party insurance policy (i.e., health insurance policy, homeowner’s policy). See TIG Ins. Co. v. Dallas Basketball, Ltd., 129 S.W.3d 232, 239-240 (Tex. App. – Dallas 2004, no pet.). Instead, Article 21.55 applies only to purported wrongful denial of a first-party insurance claim for money to be paid directly to the insured or beneficiary.  A claim by an insured for defense under a CGL policy like Lamar makes here – is not a claim under a first-party policy, but rather is a common law claim for breach of contract.