In recent years, the “property damage” and “occurrence” issues in the context of construction defect claims have been widely litigated. A number of states have conflicting case law, causing confusion for insureds and insurers alike across the country. Over the last few years, state supreme courts have weighed in on the issues several times. Most recently, the Supreme Court of Texas addressed these issues in its much anticipated opinion in Lamar Homes v. Mid-Continent Casualty Company, 50 Tex. Sup. J. 1162, 2007 Tex. LEXIS 797 ( Tex. Aug. 31, 2007).
The author writes:
"On August 31, 2007, in a 6-3 opinion, the Supreme Court of Texas “conclude[d] that allegations of unintended construction defects may constitute an ‘accident’ or ‘occurrence’ under the CGL policy and that allegations of damage to, or loss of use of, the home itself may also constitute ‘property damage’ sufficient to trigger the duty to defend under a CGL policy.” Addressing the third certified question, the court said, “We furtherconclude that the prompt-payment statute, formerly article 21.55, and now codified as sections 542.051–.061 of the Texas Insurance Code, may be applied when an insurer wrongfully refuses to promptly pay a defense benefit owed to the insured.”
The author goes on to explain that "the Court rejected Mid-Continent’s three main arguments against coverage. First, the Court dismissed Mid-Continent’s claim that a CGL policy’s purpose is to protect the insured from tort liability, not claims for defective performance under a contract. Second,
Texas ’ high court brushed aside Mid-Continent’s belief that defective work cannot be an “occurrence” because it is not accidental or, in other words, that a general contractor should expect that faulty workmanship will result in damage to the project itself. Finally, the Court refused Mid-Continent’s argument that extending CGL coverage to a general contractor for damage to the project itself transforms a CGL policy into a performance bond."
The author goes on to discuss the court’s decision in detail and also points out the salient points of the dissent, in which Justice Brister, joined by Justes Hecht and Willet, refused to read the clear terms of the CGL policy.
The author concludes that “Although most “property damage” and “occurrence” cases like Lamar Homes arose in the context of residential construction, the Court’s holdings are in no way limited to the residential construction defect context . . . At bottom, the clear difference between the majority opinion and Justice Brister’s dissent is that the former applied the policy as written, while the latter relied on extraneous legal theories such as the economic loss rule and the business risk rationale, largely ignoring the actual policy language.”
Shidlofsky finally points out that "the Court acknowledged that it has similar issues pending in six separate petitions for review, and posits that it will be interesting to see whether the Court uses these other pending cases to further clarify its stance on the “property damage” and “occurrence” issues or whether it will simply issue one-page opinions that follow form to Lamar Homes. Stay tuned for further details.”