Summary
rejecting argument that damage to home itself does not constitute "property damage" under CGL policy
Summary of this case from Lamar Homes, Inc. v. Mid-Continent Cas. Co.Opinion
CIVIL ACTION H-02-3166
September 8, 2003
MEMORANDUM AND ORDER
Pending before the court is Plaintiff Luxury Living, Inc.'s ("Luxury") Motion for Summary Judgment (#13) and Defendant Mid-Continent Casualty Company's ("Mid-Continent") Motion for Partial Summary Judgment (#14). Having reviewed the pending motions, the submissions of the-parties, the pleadings, and the applicable law, the court is of the opinion that Luxury's Motion for Summary Judgment should be granted and Mid-Continent's Motion for Partial Summary Judgment should be denied.
I. Background
Luxury, a custom home builder incorporated in Texas with its principal place of business in Harris County, Texas, purchased Commercial General Liability Policy Number 04-GL-000027343 (the "Policy"), effective March 1, 2000, to March 1, 2001, from Mid-Continent, an insurance company organized under the laws of Oklahoma with its principal place of business in Tulsa, Oklahoma. Luxury, with the assistance of subcontractors, constructed a single family residence for Milton and Adele Ward ("the Wards") in Seabrook, Texas, pursuant to a New Home Earnest Money Contract dated February 21, 1997. The Wards closed on the home on March 21, 1997. Subsequently, on or about June 1, 2000, the Wards began experiencing "substantial problems concerning the House." According to the Wards' First Amended Petition in a case styled Milton Ward and Adele Ward v. Luxury Living, Inc., Cause No. 2002-11238, pending in the 280th Judicial District Court of Harris County, Texas, the house suffered "significant areas of water penetration around doors, windows, and other locations, including a large accumulation of water in the crawl space under the House." The water penetration allegedly resulted in cosmetic damage and caused portions of the house to rot and become infested with fungus. Additionally, the Wards asserted that there were "numerous individual defects in the House, including building code violations. . . ." The Wards demanded that Luxury rectify the problems with the house, but they found Luxury's proposal to correct the defects to be inadequate.
On June 1, 2000, the Wards sent a demand letter pursuant to the Texas Residential Construction Liability Act ("RCLA") listing the following ten categories of alleged defects:
A. The Exterior Insulation Finish System ("EIFS") was installed incorrectly and the quality of the materials used was unacceptable.
B. The visible deflection of the balcony horizontal support beams appeared to be significant and was likely to deteriorate with age and gravity effects. Water would not drain to the front of the balcony as it should.
C. The wooden window trim was deteriorated in many places reflecting inappropriate material and/or poor finishing.
D. Crawl space ventilation is inadequate.
E. The folding stairs were missing fasteners which attach them to the framing of the house. There are 2 head brackets and 2 side brackets which have pre-drilled holes for a 16d nail or a long screw.
F. Insulation was too close to some of the recessed light fixtures as viewed from the attic.
G. One water heater was over 20 feet from the attic access, which is noncompliant with current codes.
H. The exhaust fan vent pipe by the farthest water heater had a small hole in it.
I. The upstairs floor squeaked in places indicating lack of proper fastening.
J. There was no visible loop in the dishwasher drain hose.
After the Wards first notified Luxury of their claims, the house purportedly "continued to severely deteriorate." On August 17, 2001, Peter de la Mora ("De la Mora") of P.E. Service, Inc., performed an engineering inspection of the structure. De la Mora noted, "among other things, that the deck and balcony on the House were falling off and should be immediately removed to minimize further damage." On September 21, 2001, during the removal of the deck, "it was discovered that the deck had been built over a pit containing water and rubble." In order to prepare the area for a future deck and to eliminate any safety concerns, a sand fill was applied to the pit and the area was leveled off. De la Mora issued a report of his findings from the inspection on November 7, 2001. According to the Wards, "[b]ased on this report, the primary problem with the House can be characterized as an inability to keep external moisture from penetrating the structure and then causing decay and mold growth." The report noted the following:
A. The exterior insulation finish system (EIFS) has sustained damage from water intrusion. Water intrusion through the EIFS has been more prevalent through the wood trim surrounding the windows. However, other areas of water penetration occur at the roof/wall flashings and at trim bands. The main reason for water intrusion is the defective installation of the windows on the House. The wood trim around the windows is not sealed. Furthermore, it cannot be sealed as installed. Water seeps in around the windows, and "gets trapped within the EIFS, producing a wet condition conducive to mold growth and deterioration of the wall sheathing." In fact, a moisture meter survey indicated wet areas under the windows, with greater than 20% moisture.
B. The rear decks have been damaged from water intrusion due to inadequate waterproofing when the decks were built. The lower deck has completely collapsed from structural failure due to rot damage to the wood framing. The upper deck shows signs of decay and should be taken down before it also collapses.
C. Moisture retention has caused mold growth in various areas of the House. Visible mold growth was observed on the gypsum board sheathing under the windows, where the EIFS had been cut out to provide access to the sheathing. No mold growth was observed in the gypsum board sheathing at areas inspected that are not associated with window leakage. Visible mold growth was also detected in the master bathroom due to leakage from an improperly sealed shower door.
D. The crawlspace does not have adequate ventilation. In addition, surface water can enter the crawlspace and pond. This combination of water in the crawlspace and inadequate ventilation produces a humid atmosphere in the crawlspace, which is conducive to mold growth and decay of the wood structure.
On March 4, 2002, the Wards filed their Original Petition against Luxury in the 280th Judicial District Court of Harris County, Texas. On December 26, 2002, the Wards filed their First Amended Petition, which remains the operable pleading in the Wards' action against Luxury still pending in state court. The First Amended Petition includes claims for negligence, negligent misrepresentation, violations of RCLA, breach of express warranty, breach of implied warranty of merchantability, breach of implied warranty of good and workmanlike construction, breach of warranty of habitability, violations of the Texas Deceptive Trade Practices Act, and fraud. In essence, the Wards allege that they have sustained physical injury to their tangible property and have suffered a resulting loss of use of their home. Specifically, the Wards contend that the house has "sustained injuries requiring repair, replacement and/or remediation."
On April 2, 2002, Luxury tendered the Original Petition to Mid-Continent requesting a defense and indemnity. On May 2, 2002, Mid-Continent denied coverage for the underlying lawsuit. On August 14, 2002, Luxury received a letter reiterating the denial of coverage based on the: "(1) 'occurrence' requirement; (ii) the 'property damage' requirement; (iii) the 'expected or intended injury' exclusion; (iv) exclusion J5; (v) exclusion J6; (vi) exclusion L; (vii) exclusion m; (viii) exclusion n; and (ix) an Exterior Insulation and Finish System Endorsement."
In response, Luxury filed this action in federal district court on August 22, 2002, seeking a declaratory judgment and damages arising out of Mid-Continent's breach of its contractual duty to defend Luxury "pursuant to the terms and conditions of the commercial general liability policy that Mid-Continent issued to Luxury Living." On September 16, 2002, Luxury filed Plaintiff's First Amended Complaint, which Mid-Continent answered on October 4, 2002. Luxury subsequently tendered the Wards' First Amended Petition to Mid-Continent requesting a defense. Mid-Continent refused and continues to refuse to provide a defense to Luxury, alleging that the claims asserted by the Wards against Luxury are not covered by the Policy.
On January 16, 2003, Luxury filed its Motion for Summary Judgment and Supporting Brief on Defendant's Duty to Defend and its Violation of Article 21.55 of the Texas Insurance Code. Mid-Continent filed its Motion for Partial Summary Judgment and Supporting Brief on January 17, 2003. Luxury contends that, by refusing to provide a defense, Mid-Continent is breaching its contractual obligations under the Policy. Luxury also points out that the underlying lawsuit is still pending and that it continues to incur attorneys' fees in that case as well as in this action against Mid-Continent. Luxury seeks a ruling as a matter of law that Mid-Continent must provide Luxury with a defense against the allegations asserted by the Wards, reimburse Luxury for its reasonable defense costs to date, pay Luxury 18% interest on such defense costs pursuant to Article 21.55 of the Texas Insurance Code, and reimburse Luxury for its attorneys' fees incurred to date in this action.
Mid-Continent, on the other hand, maintains that it has no duty to defend Luxury in the underlying lawsuit. Mid-Continent argues that it is entitled to summary judgment because the Wards' factual allegations in the underlying lawsuit do not assert claims covered by the Policy. Additionally, Mid-Continent notes that the Policy contains an exclusion "precluding coverage for all property damage arising out of the insured's work where EIFS has been placed on a structure." Finally, Mid-Continent claims that Luxury cannot recover under Article 21.55 of the Texas Insurance Code because its denial of a defense to Luxury is correct and, in any event, the statute does not apply to third-party claims such as the Wards' claim against Luxury. II.
II. Analysis
A. Summary Judgment Standard
Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c). The party seeking summary judgment bears the initial burden of informing the court of the basis for its motion and identifying those portions of the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Martinez v. Schlumberger, Ltd., 338 F.3d 407, 411 (5th Cir. 2003); Terrebonne Parish Sch. Ed. v. Mobil Oil Corp., 310 F.3d 870, 877 (5th Cir. 2002); Colson v. Grohman, 174 F.3d 498, 506 (5th Cir. 1999); Marshall v. East Carroll Parish Hosp. Serv. Dist., 134 F.3d 319, 321 (5th Cir. 1998). Where a defendant moves for summary judgment on the basis of an affirmative defense and, thus, bears the ultimate burden of persuasion, "it must adduce evidence to support each element of its defenses and demonstrate the lack of any genuine issue of material fact with regard thereto." Rushing v. Kansas City S. Ry. Co., 185 F.3d 496, 505 (5th Cir. 1999), cert. denied, 528 U.S. 1160 (2000) (citing Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1074 (5th Cir.), cert. denied, 522 U.S. 915 (1997)); see Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986).
"A fact is ' material' "if it ' might affect the outcome of the suit under governing law.'" Bazan v. Hidalgo County, 246 F.3d 481, 489 (5th Cir. 2001) (emphasis in original) (quoting Anderson, 477 U.S. at 248); see Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466, 471 (5th Cir. 2001); Merritt-Campbell, Inc. v. RxP Prods., Inc., 164 F.3d 957, 961 (5th Cir. 1999); Burgos v. Southwestern Bell Tel. Co., 20 F.3d 633, 635 (5th Cir. 1994). "An issue is ' genuine' if it is real and substantial, as opposed to merely formal, pretended, or a sham." Bazan, 246 F.3d at 489 (emphasis in original). Thus, a genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248; accord Harken Exploration Co., 261 F.3d at 471; Merritt-Campbell, Inc., 164 F.3d at 961. The moving party, however, need not negate the elements of the nonmovant's case. See Wallace v. Texas Tech Univ., 80 F.3d 1042, 1047 (5th Cir. 1996) (citing Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994)).
Once a proper motion has been made, the nonmoving party may not rest upon mere allegations or denials in the pleadings but must present affirmative evidence, setting forth specific facts, to show the existence of a genuine issue for trial. See Celotex Corp., 477 U.S. at 322-23; Anderson, 477 U.S. at 257; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86 (1986); Rushing, 185 F.3d at 505; Colson, 174 F.3d at 506; Marshall, 134 F.3d at 321-22; Wallace, 80 F.3d at 1047; Little, 37 F.3d at 1075. "[T]he court must review the record 'taken as a whole.'" Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000) (quoting Matsushita Elec. Indus. Co., 475 U.S. at 587). All the evidence must be viewed "in the light most favorable to the non-moving party without weighing the evidence, assessing its probative value, or resolving any factual disputes." Williams v. Time Warner Operation, Inc., 98 F.3d 179, 181 (5th Cir. 1996); see Reeves, 530 U.S. at 150; Brown v. City of Houston, 337 F.3d 539, 540 (5th Cir. 2003); Harken Exploration Co., 261 F.3d at 471; Daniels v. City of Arlington, 246 F.3d 500, 502 (5th Cir.), cert. denied, 534 U.S. 951 (2001); Colson, 174 F.3d at 506; Marshall, 134 F.3d at 321. The evidence of the non-movant is to be believed, with all justifiable inferences drawn and all reasonable doubts resolved in his favor. See Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49 n. 5 (1990); Anderson, 477 U.S. at 255; Martinez, 338 F.3d at 411; Harken Exploration Co., 261 F.3d at 471; Christopher Vill. Ltd. P'ship v. Retsinas, 190 F.3d 310, 314 (5th Cir. 1999); Merritt-Campbell, Inc., 164 F.3d at 961; Samuel v. Holmes, 138 F.3d 173, 176 (5th Cir. 1998); Marshall, 134 F.3d at 321. The evidence is construed "in favor of the nonmoving party, however, only when an actual controversy exists, that is, when both parties have submitted evidence of contradictory facts." Olabisiomotosho v. City of Houston, 185 F.3d 521, 525 (5th Cir. 1999); accord Little, 37 F.3d at 1075 (citing Lujan v. National Wildlife Fed'n, 497 U.S. 871, 888 (1990)).
Furthermore, " 'only reasonable inferences can be drawn from the evidence in favor of the nonmoving party.'" Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 469 n. 14 (1992) (emphasis in original) (quoting H.L. Hoyden Co. of N. Y., Inc. v. Siemens Med. Sys., Inc., 879 F.2d 1005, 1012 (2d Cir. 1989)). "If the [nonmoving party's] theory is . . . senseless, no reasonable jury could find in its favor, and summary judgment should be granted." Id. at 468-69. The nonmovant's burden is not satisfied by "some metaphysical doubt as to material facts," conclusory allegations, unsubstantiated assertions, speculation, the mere existence of some alleged factual dispute, or "only a scintilla of evidence." Little, 37 F.3d at 1075; see Anderson, 477 U.S. at 247-48; Hart v. O'Brien, 127 F.3d 424, 435 (5th Cir. 1997), cert. denied, 525 U.S. 1103 (1999); Wallace, 80 F.3d at 1047; Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1429 (5th Cir. 1996) (citing Forsyth v. Barr, 19 F.3d 1527, 1533 (5th Cir.), cert. denied, 513 U.S. 871 (1994)). " Unsubstantiated assertions, improbable inferences, and unsupported speculation are not sufficient to defeat a motion for summary judgment." Brown, 337 F.3d at 540; see Bridgmon v. Array Sys. Corp., 325 F.3d 572, 577 (5th Cir. 2003); Hugh Symons Group, plc v. Motorola, Inc., 292 F.3d 466, 468 (5th Cir.), cert. denied, 537 U.S. 950 (2002). Summary judgment is mandated if the nonmovant fails to make a showing sufficient to establish the existence of an element essential to its case on which it bears the burden of proof at trial. See Nebraska v. Wyoming, 507 U.S. 584, 590 (1993); Celotex Corp., 477 U.S. at 322; Wenner v. Texas Lottery Comm'n, 123 F.3d 321, 324 (5th Cir. 1997), cert. denied, 523 U.S. 1073 (1998). "In such a situation, there can be 'no genuine issue as to any material fact' since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex Corp., 477 U.S. at 322-23.
B. Interpretation of Insurance Policies
"Insurance policies are contracts." Harken Exploration Co., 261 F.3d at 471 n. 3 (citing Arnica Mut. Ins. Co. v. Moak, 55 F.3d 1093, 1095 (5th Cir. 1995)). As with other contracts, a federal court, sitting in diversity in Texas, applies Texas law in the interpretation of insurance policies. See id. (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-79 (1938)); H.E. Butt Grocery Co. v. National Union Fire Ins. Co. of Pittsburgh, 150 F.3d 526, 529 (5th Cir. 1998); see also Hamilton v. Segue Software, Inc., 232 F.3d 473, 477 (5th Cir. 2000). Under Texas law, the interpretation of insurance policies is governed by the same rules that apply to the interpretation of other contracts. See St. Paul Guardian Ins. Co. v. Centrum GS Ltd., 283 F.3d 709, 713 (5th Cir. 2002); Schneider Nat'l Transp. v. Ford Motor Co., 280 F.3d 532, 537 (5th Cir. 2002); Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487, 491 (5th Cir. 2000); American States Ins. Co. v. Bailey, 133 F.3d 363, 369 (5th Cir. 1998); Canutillo Indep. Sch. Dist. v. National Union Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996); Balandran v. Safeco Ins. Co. of Am., 972 S.W.2d 738, 740-41 (Tex. 1998); Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997). "'The interpretation of an insurance policy is a question of law.'" St. Paul Guardian Life Ins. Co., 283 F.3d at 713 (quoting New York Life Ins. Co. v. Travelers Ins. Co., 92 F.3d 336, 338 (5th Cir. 1996)).
When construing the provisions of a policy, the insurance contract is considered as a whole, with each part to be given effect. See Balandran, 972 S.W.2d at 741; Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994); Royal Indem. Co. v. Marshall, 388 S.W.2d 176, 180 (Tex. 1965); Tumlinson v. St. Paul Ins. Co., 786 S.W.2d 406, 408 (Tex.App.-Houston [1st Dist.] 1990, writ denied). Specific provisions in the policy control over general statements of coverage. See Forbau, 876 S.W.2d at 133; see also 3 ARTHUR L. CORBIN, CORBIN ON CONTRACTS §§ 545-54 (1960). Similarly, "[e]ndorsements control over conflicting general policy language." Westchester Fire Ins. v. Heddington Ins. Ltd., 883 F. Supp. 158, 165 (S.D. Tex. 1995), aff'd, 84 F.3d 432 (5th Cir. 1996) (citing Mutual Life Ins. Co. v. Daddy$ Money, Inc., 646 S.W.2d 255, 259 (Tex.App.-Dallas 1982, writ ref'd n.r.e.)). The terms used in an insurance contract are given their ordinary and generally accepted meaning, unless the policy shows the words were meant in a technical or different sense. See Canutillo Indep. Sch. Dist., 99 F.3d at 700; Security Mut. Cas. Co. v. Johnson, 584 S.W.2d 703, 704 (Tex. 1979); Tri County Serv. Co. v. Nationwide Mut. Ins. Co., 873 S.W.2d 719, 721 (Tex.App.-San Antonio 1993, writ denied).
The burden is generally on the insured to show that a claim asserted against it by a third party is potentially within the coverage of the insurance policy. See Harken Exploration Co., 261 F.3d at 471; Guaranty Nat'l Ins. Co. v. Vie Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998); Canutillo Indep. Sch. Dist., 99 F.3d at 701; New York Life Ins. Co., 92 F.3d at 339; Sentry Ins. v. R.J. Weber Co., 2 F.3d 554, 556 (5th Cir. 1993); see also TEX. INS. CODE ANN. art. 21.58(b) (West 2003). The insured initially has the burden to plead and prove that the benefits sought are covered by the insurance policy at issue. See Harken Exploration Co., 261 F.3d at 471; Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720, 722 (5th Cir. 1999); Western Alliance Ins. Co. v. Northern Ins. Co., 176 F.3d 825, 831 (5th Cir. 1999); Vic Mfg. Co., 143 F.3d at 193; Data Specialties, Inc. v. Transcontinental Ins. Co., 125 F.3d 909, 911 (5th Cir. 1997). The insurer, however, bears the burden of establishing that one of the policy's limitations or exclusions constitutes an avoidance or affirmative defense to coverage. See Harken Exploration Co., 261 F.3d at 471; Federated Mut. Ins. Co., 197 F.3d at 722; Vic Mfg. Co., 143 F.3d at 193; Bailey, 133 F.3d at 364; Canutillo Indep. Sch. Dist., 99 F.3d at 701; Sentry Ins., 2 F.3d at 556; see also TEX. INS. CODE ANN. art. 21.58(b). The Texas Insurance Code provides:
In any suit to recover under a contract of insurance, the insurer has the burden of proof as to any avoidance or affirmative defense that must be affirmatively pleaded under the Texas Rules of Civil Procedure. Any language of exclusion in the policy and any exception to coverage claimed by the insurer constitutes an avoidance or an affirmative defense.
TEX. INS. CODE ANN. art. 21.58(b). Once the insurer demonstrates that an exclusion arguably applies, the burden then shifts back to the insured to show that the claim does not fall within the exclusion or that it comes within an exception to the exclusion. See Harken Exploration Co., 261 F.3d at 471; Federated Mut. Ins. Co., 197 F.3d at 723; Vic Mfg. Co., 143 F.3d at 193; Telepak v. United Servs. Auto. Ass'n, 887 S.W.2d 506, 507-08 (Tex.App.-San Antonio 1994, writ denied); Britt v. Cambridge Mut. Ins. Co., 717 S.W.2d 476, 482 (Tex.App.-San Antonio 1986, writ ref'd n.r.e.).
"Under Texas law, the maxims of contract interpretation regarding insurance policies operate squarely in favor of the insured." Lubbock County Hosp. Dist. v. National Union Fire Ins. Co., 143 F.3d 239, 242 (5th Cir. 1998) (citing National Union Fire Ins. Co v. Kasler Corp., 906 F.2d 196, 198 (5th Cir. 1990)); accord St. Paul Guardian Ins. Co., 283 F.3d at 713; Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761, 769 (5th Cir. 1999); Acceptance Ins. Co. v. Lifecare Corp., 89 S.W.3d 773, 781 (Tex.App.-Corpus Christi 2002, no pet.). "'If multiple interpretations [of the policy] are reasonable, [the court] must construe the [policy] against the insurer.'" Harken Exploration Co., 261 F.3d at 475 (quoting St. Paul Fire Marine Ins. v. Green Tree Corp., 249 F.3d 389, 392 (5th Cir. 2001)).
The policy of construing language in an insurance policy strictly against the insurer and in favor of the insured is "especially strong when the court is dealing with exceptions and words of limitation." Blaylock v. American Guarantee Bank Liab. Ins. Co., 632 S.W.2d 719, 721 (Tex. 1982); see St. Paul Guardian Ins. Co., 283 F.3d at 713; Travelers Indem. Co., 166 F.3d at 769; Western Heritage Ins. Co. v. Magic Years Learning Ctrs. Child Care, Inc., 45 F.3d 85, 88 (5th Cir. 1995); National Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991). Hence, in Texas, "[e]xceptions and limitations in an insurance policy are strictly construed against the insurer." Bailey, 133 F.3d at 369 (citing Kelly Assocs., Ltd. v. Aetna Cas. Sur. Co., 681 S.W.2d 593, 596 (Tex. 1984)); accord State Farm Fire Cas. Ins. Co. v. Keegan, 209 F.3d 767, 769 (5th Cir. 2000); Canutillo Indep. Sch. Dist., 99 F.3d at 701; Hudson Energy Co., 811 S.W.2d at 555 (citing Ramsay v. Maryland Am. Gen. Ins. Co., 533 S.W.2d 344, 349 (Tex. 1976); Continental Cas. Co. v. Warren, 254 S.W.2d 762, 763 (Tex. 1953)). In fact, unlike a coverage clause, when the interpretation of an exclusionary clause is at issue, "courts will adopt the insured's construction of an insurance policy exclusion, whenever it is reasonable, even when '"the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties' intent."'" Utica Nat'l Ins. Co. of Tex. v. American Indem. Co., No. 02-0090, 2003 WL 21468776, at *3 (Tex. June 26, 2003) (quoting Balandran, 972 S.W.2d at 741) (quoting Hudson Energy Co., 811 S.W.2d at 555)).
It is against this legal backdrop that the court must determine whether Mid-Continent has breached a duty to defend its policy holder, Luxury, against the Wards' claims asserted in the state court action.
C. Duty to Defend
An insurer has a duty to defend a policyholder in actions brought by a third party who asserts claims potentially covered by the insurance policy. See St. Paul Guardian Ins. Co., 283 F.3d at 712; Harken Exploration Co., 261 F.3d at 471; Gulf States Ins. Co. v. Alamo Carriage Serv., 22 F.3d 88, 90 (5th Cir. 1994); Cowan, 945 S.W.2d at 821; National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). In Texas, when determining an insurer's duty to defend an insured, the court follows the "eight corners" or "complaint allegation" rule. See St. Paul Guardian Ins. Co., 283 F.3d at 713; Vic Mfg. Co., 143 F.3d at 193; Bailey, 133 F.3d at 369; Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389, 393 (5th Cir. 1995); Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141. Under this rule, an insurer's duty to defend is determined by examining "the allegations in the most recent petition and the language of the insurance policy." Harken Exploration Co., 261 F.3d at 471; accord St. Paul Guardian Ins. Co., 283 F.3d at 713; Bailey, 133 F.3d at 369; see Gulf States Ins. Co., 22 F.3d at 90; Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141. "The duty to defend arises when a third party sues the insured on allegations that, if taken as true, potentially state a cause of action within the terms of the policy." St. Paul Guardian Ins. Co., 283 F.3d at 713 (quoting Houston Petroleum Co. v. Highlands Ins. Co., 830 S.W.2d 153, 155 (Tex.App.-Houston [1st Dist.] 1990, writ denied)); accord Harken Exploration Co., 261 F.3d at 471 (citing Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141). If the complaint is unclear or ambiguous, or there is doubt whether an allegation states a cause of action within the coverage of a liability policy, the complaint is construed liberally in favor of the insured and any doubt is resolved in favor of potential coverage. See Harken Exploration Co., 261 F.3d at 471; Continental Sav. Ass'n v. United States Fid. Guar. Co., 762 F.2d 1239, 1243-44 (5th Cir.), amended on other grounds on reh'g, 768 F.2d 89 (1985); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119 (5th Cir. 1983). "
'In reviewing the underlying pleadings, the court must focus on the factual allegations that show the origin of the damages rather than on the legal theories alleged.'" Bailey, 133 F.3d at 369 (quoting Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141); accord Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997). The court must ascertain whether the facts, as alleged, fall within the policy's coverage. See Houston Petroleum Co., 830 S.W.2d at 155. In making this assessment, the court may not consider the truth or falsity of the allegations in the underlying pleadings. See Vic Mfg. Co., 143 F.3d at 193; Enserch Corp. v. Shand Morahan Co., 952 F.2d 1485, 1492 (5th Cir. 1992); Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973). Instead, all the facts alleged in the third party's complaint are assumed to be true. See St. Paul Guardian Ins. Co., 283 F.3d at 713; Houston Petroleum Co., 830 S.W.2d at 155. Moreover, the insurance company's duty to defend is not affected by extrinsic evidence, including facts learned before, during, or after the suit. See American Alliance Ins. Co. v. Frito-Lay, Inc., 788 S.W.2d 152, 154 (Tex.App.-Dallas 1990, writ dism'd). Even if the allegations in the third party's complaint are known or discovered to be untrue, an insurer that has contracted to defend must do so. See Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 24 (Tex. 1965).
The duty to defend does not arise, however, until a complaint alleging a potentially covered claim is tendered to the insurer. See Lafarge Corp., 61 F.3d at 400 (citing Members Ins. Co. v. Branscum, 803 S.W.2d 462, 466-67 (Tex.App.-Dallas 1991, no writ)). The most recently amended complaint provided to the insurer is examined to ascertain the existence of such duty. See Harken Exploration Co., 261 F.3d at 471; Vic Mfg. Co., 143 F.3d at 194; Canutillo Indep. Sch. Dist., 99 F.3d at 701. An insurer is obligated to defend an insured as long as the complaint alleges at least one cause of action within the scope of the policy. See Lafarge Corp., 61 F.3d at 393; Rhodes, 719 F.2d at 119. "If the complaint alleges multiple claims or claims in the alternative, some of which fall within the coverage of the policy and some of which do not, the duty to defend arises if at least one of the claims is facially within the policy's coverage." Lafarge Corp., 61 F.3d at 393; see Federated Mut. Ins. Co., 197 F.3d at 726. "'If coverage exists for any portion of a suit, the insurer must defend the insured in the entire suit.'" St. Paul Guardian Ins. Co., 283 F.3d at 714 (quoting St. Paul Fire Marine Cas. Ins. Co., 249 F.3d at 391); accord Harken Exploration Co., 261 F.3d at 474. Moreover, the duty to defend is owed by each insurer whose policy is potentially implicated and remains absolute until the insurer proves that its policy covers no remaining claims. See Gulf Chem. Metallurgical Corp. v. Associated Metals Minerals Corp., 1 F.3d 365, 372 (5th Cir. 1993).
If a plaintiff's complaint does not allege facts within the scope of policy coverage, an insurer has no legal obligation to defend the insured against the plaintiff's claims. See Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141; American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 848 (Tex. 1994); Fidelity Guar. Ins. Underwriters, Inc. v. McManus, 633 S.W.2d 787, 788 (Tex. 1982). An insurer also does not have a duty to defend when the complaint makes allegations which, if proven, would place the plaintiff's claim within an exclusion from coverage. See Gulf States Ins. Co., 22 F.3d at 90; Puckett v. United States Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984); McManus, 633 S.W.2d at 788; Holmes v. Employers Cas. Co., 699 S.W.2d 339, 340 (Tex.App.-Houston [1st Dist.] 1985, writ ref'd n.r.e.). The insurer is entitled to rely on the plaintiff's allegations in determining whether the facts are within the coverage of the policy. See McManus, 633 S.W.2d at 788. While the plaintiff's allegations are to be construed liberally, if the complaint alleges only facts that are not within the scope of policy coverage or that are excluded by the terms of the policy, the insurer is not required to defend. See Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141; Garcia, 876 S.W.2d at 848; McManus, 633 S.W.2d at 788.
D. The Insurance Policy at Issue
The Policy issued by Mid-Continent to Luxury is a commercial general liability policy effective for the period March 1, 2000, to March 1, 2001. The Commercial General Liability Coverage Form, Section I, entitled "Coverages," contains "Coverage A," which addresses "Bodily Injury and Property Damage Liability," "Coverage B," which involves "Personal and Advertising Injury Liability," and "Coverage C," which deals with "Medical Payments." Paragraph 1 of Coverage A, sub-section (a), pertains to the "Insuring Agreement" and states in part:
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply.
Sub-section (b) of Paragraph 1 limits the scope of coverage:
This insurance applies to "bodily injury" and "property damage" only if:
(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory"; and
(2) The "bodily injury" or "property damage" occurs during the policy period.
Section V of the Policy, entitled " Definitions," defines the relevant terms. " Bodily injury " is defined as "bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time." "Coverage Territory" means "the United States of America." "Occurrence" is described as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Property damage" is defined as:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it.
Paragraph 2 of Coverage A of the Policy lists a number of exclusions from coverage. The relevant exclusions include:
a. Expected or intended injury
j. Damage to Property
"Bodily injury" or "property damage" expected or intended from the standpoint of the insured. This exclusion does not apply to "bodily injury" resulting from the use of reasonable force to protect persons or property.
"Property damage" to:
(1) Property you own, rent, or occupy;
(2) Premises you sell, give away or abandon, if the "property damage' arises out of any part of those premises;
(3) Property loaned to you;
(4) Personal property in the care, custody or control of the insured;
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations.
(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.
Paragraph (2) of this exclusion does not apply if the premises are "your work" and were never occupied, rented or held for rental by you.
Paragraphs (3), (4), (5), and (6) of this exclusion do not apply to liability assumed under a sidetrack agreement.
Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard."
k. Damage to Your Product
I. Damage to Your Work
"Property damage" to "your product" arising out of it or any part of it.
"Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
The "Products-completed operations hazard" is explained in pertinent part in Section V:
a. includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:
(1) Products that are still in your physical possession; or
(2) Work that has not yet been completed or abandoned. However, "your work" will be deemed completed at the earliest of the following times:
(a) When all of the work called for in your contract has been completed.
Work that may need service, maintenance, correction, repair, or replacement, but which is otherwise complete, will be treated as complete.
The term "Your work" is defined in Section V to mean:
a. Work or operations performed by you or on your behalf; and
b. Materials, parts or equipment furnished in connection with such work or operations.
"Your work" includes:
a. Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work"; and
b. The providing of or failure to provide warnings or instructions.
Additionally, the Policy contains an EIFS endorsement specifically excluding from coverage '"Property damage' arising out of the 'Exterior Insulation and Finish System Hazard
[EIFS]." The Policy defines EIFS as:
[T]he design, manufacture, construction, fabrication, preparation, installation, application, maintenance or repair, including remodeling, service, correction, or replacement of an "exterior insulation and finish system" (commonly referred to as synthetic stucco) or any part thereof, or any substantially similar system or any part thereof, including the application or use of conditioners, primers, accessories, flashings, coatings, caulkings or sealant in connection with such a system when performed by you or;
Any work or operations with respect to any exterior component, fixture or feature of any structure if an "exterior insulation and finish system" is used on any part of that structure by you or on your behalf.
"Exterior Insulation and Finish System" means:
a.) a rigid or semi-rigid insulation board made of expanded polystyrene or other materials, and
b.) the adhesive and/or mechanical fasteners used to attach the insulation board to the substrate, and
c.) a reinforced base coat, and
d.) a finish coat providing surface texture and color.
Insurance provided by this endorsement does not apply if "your work" was completed more than 365 days prior to the date of the "occurrence."
E. Scope of Coverage
Mid-Continent asserts that Luxury seeks defense costs and indemnity in the underlying lawsuit "because Luxury Living incorrectly built the house, it is of shoddy quality and is deteriorating." Mid-Continent argues that it has no duty to defend Luxury under these circumstances because the liability policy is not a performance bond meant to guarantee that the insured did the job correctly. According to Mid-Continent, "the risk that the insured's workmanship will prove to be substandard and must be repaired or replaced is a 'business risk' and not a risk to be covered by a standard liability insurance policy." Any other interpretation, contends Mid-Continent, would transform a liability insurance policy into a performance bond and would force an insurer to guarantee the insured's work. In short, Mid-Continent maintains that the damages the Wards sustained to their home fall outside the scope of coverage of the Policy.
Luxury responds that the scope of coverage under a commercial general liability policy can only be understood by considering the Policy as a whole. According to Luxury, "[t]he insuring agreement grants broad coverage in the insuring agreement for 'property damage' caused by an 'occurrence.'" The Policy then continues to define the scope of coverage with specified exclusions. Thus, Luxury contends that the language of the Policy, when considered with its construction-specific exclusions and exceptions, belies Mid-Continent's position. Luxury argues that Mid-Continent's contention that damages to the home itself fall outside the insuring agreement renders the various construction-related exclusions mere surplusage-a violation of well-settled contract interpretation principles.
In examining the Policy, the "Insuring Agreement" contains the modifying phrase "to which this insurance applies." See T.C. Bateson Constr. Co. v. Lumbermens Mut. Cas. Co., 784 S.W.2d 692, 699 (Tex.App.-Houston [14th Dist.] 1989, writ denied). "This phrase underscores the basic notion that the premium paid by the insured does not buy coverage for all property damage but only for that type of damage provided for in the policy." Id. Any limitations on the types of damages covered are set forth in the exclusion clauses of the Policy, which are "meant to be read with the insuring agreement, independently of every other exclusion." Id. In light of the Wards' allegations, the court must look to the Policy in order to determine what damages are covered and whether any exclusions apply.
Under the Policy, Mid-Continent promises to pay the amount it becomes obligated to pay as damages because of property damage covered by the Policy. The Policy provides that the insurance applies to "property damage" caused by an "occurrence" that takes place in the "coverage territory." Taking into account the potential for one cause of action falling within the scope of coverage in the Policy, the initial inquiry in assessing Mid-Continent's duty to defend is whether the damages alleged by the Wards in the underlying lawsuit against Luxury constitute an "occurrence" as defined by the Policy. An "Occurrence" is defined in the Policy as "an accident."
1. "Occurrence"
Luxury argues that the Wards' petition includes "a garden-variety negligence claim that contains factual allegations of damages which were undesigned and unexpected by Luxury Living" and which "amount to an 'accident' and are therefore an 'occurrence' as a matter of law." Luxury further argues that the Wards' claims under the RCLA and DTPA are also sufficient to give rise to a duty to defend.
Mid-Continent maintains that the Wards' allegations are "nothing other than a claim for harm to the very house built by Luxury Living caused by its shoddy construction job" and substandard work. Mid-Continent asserts that Luxury fails to meet the definition of an "occurrence" under the Policy because "harm to the insured's own work caused by the insured's failure to do his job properly is not covered by liability insurance." See Federated Mut. Ins. Co. 197 F.3d at 725; see also Hartford Cas. Co. v. Cruse, 938 F.2d 601, 604-05 (5th Cir. 1991); ER Rubalcava Constr. v. Burlington Ins. Co., 147 F. Supp.2d 523, 526-27 (N.D. Tex. 2001); Acceptance Ins. Co. v. Newport Classic Homes Inc., No. Civ. A.3:99-CV-2010BC, 2001 WL 1478791, at *4 (N.D. Tex. Nov. 19, 2001). In addition, Mid-Continent cites cases where the failure to adhere to construction specifications was found not to constitute an "occurrence." See Malone v. Scottsdale Ins. Co., 147 F. Supp.2d 623, 627 (S.D. Tex. 2001); Hartrick v. Great American Lloyds Ins. Co., 62 S.W.3d 270, 277-78 (Tex.App.-Houston [1st Dist] 2001, no pet.); Devoe v. Great American Ins. Co., 50 S.W.3d 567, 571 (Tex.App.-Austin 2000, no pet.).
"The Texas Supreme Court has not articulated a hard and fast rule for when an accident occurs." Harken Exploration Co., 261 F.3d at 472 (citing Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d 153, 155 (Tex. 1999)). In Mid-Century Ins. Co., the Court held that an injury caused "by voluntary and intentional conduct is not an accident just because 'the result or injury may have been unexpected, unforeseen, and unintended . . . '"[although,] "the mere fact that 'an actor intended to engage in the conduct that gave rise to the injury' does not mean that the injury was not accidental." 997 S.W.2d at 155. "It is reasonably clear that an accident has two elements: 1) an action and 2) that action's effect-that is, the resulting damage." Harken Exploration Co., 261 F.3d at 472 (citing Mid-Century Ins. Co., 997 S.W.2d at 155). "There are also two factors that influence both elements: a) an intent or design factor and b) an expectability or foreseeability factor." Id. (citing Mid-Century Ins. Co., 997 S.W.2d at 155).
"Direct (as opposed to consequential) damages that naturally follow from a breach of contract are conclusively presumed to have been in the contemplation of the parties and may therefore constitute expected or intended damages. A comprehensive general liability policy does not cover this cost of doing business." Cruse, 938 F.2d at 604. "But 'an occurrence takes place where the resulting injury or damage was unexpected and unintended, regardless of whether the policyholder's acts were intentional.'" Id. (quoting Dayton Indep. Sch. Dist. v. Nat'l Gypsum Co., 682 F. Supp. 1403, 1408 (E.D. Tex. 1998), rev'd on other grounds sub nom. W.R. Grace Co. v. Continental Cas. Co., 896 F.2d 865 (5th Cir. 1990)). "[D]etermining whether an injury is accidental inquires into both the insured's intent and the reasonably foreseeable effect, or consequences, of the insured's conduct." Hartrick, 62 S.W.3d at 277 (emphasis in original) (citing Mid-Century, 997 S.W.2d at 155).
"There are two lines of Texas cases construing the definition of 'occurrence' for the purpose of insurance coverage." Federated Mut. Ins. Co., 197 F.3d at 723. The first line of cases derives from the Texas Supreme Court's decision in Argonaut Southwest Ins. Co. v. Maupin. See id. at 723-24 (citing Maupin, 500 S.W.2d at 635). The Maupin line of cases "pertains to coverage of claims against an insured for damage caused by its alleged intentional torts." Id. at 723 (emphasis in original). Maupin has been relied upon to deny insurance defense and coverage based on commission of an intentional tort by an insured. See id. "According to this body of law, damage that is the natural result of voluntary and intentional acts is deemed not to have been caused by an occurrence, no matter how unexpected, unforeseen, and unintended that damage may be." Id. at 723 (emphasis in original); see Harken Exploration Co., 261 F.3d at 472.
Another line of case law stems from the Texas Supreme Court's decision in Massachusetts Bonding Ins. Co. v. Orkin Exterminating Co. See Federated Mut. Ins. Co., 197 F.3d at 724 (citing Orkin Exterminating Co., 416 S.W.2d 396, 400 (Tex. 1967)). The Orkin line of cases addresses "cases involving claims against an insured for damage arising out of his alleged negligence . . . Id. (emphasis in original); see Great Am. Ins. Co. v. Calli Homes, Inc., 236 F. Supp.2d 693, 699 (S.D. Tex. 2002). "Following Orkin, both state and federal courts in Texas have interpreted the terms 'accident' and 'occurrence' to include damage that is the 'unexpected, unforeseen or undesigned happening or consequence' of an insured's negligent behavior." Federated Mut. Ins. Co., 197 F.3d at 725 (citing Lafarge Corp., 61 F.3d at 395; Cruse, 938 F.2d at 604-05; Travelers Ins. Co. v. Valentine, 578 S.W.2d 501, 503 (Tex.Civ.App.-Texarkana 1979, no writ); Employers Cos. Co. v. Brown-McKee, Inc., 430 S.W.2d 21, 24 (Tex.Civ.App.-Tyler 1968, writ ref'd n.r.e.)); see also Calli Homes, Inc., 236 F. Supp.2d at 699. "Many of these cases have involved claims for damage caused by an insured's defective performance or faulty workmanship." Federated Mut. Ins. Co., 197 F.3d at 725.
The Fifth Circuit harmonized the two lines of cases in Federated Mut. Ins. Co.:
We perceive a clearly reconcilable dichotomy, not a tension, resulting from the distinction between the Maupin and Orkin lines of Texas cases: In the former, the damage-causing acts of the tortfeasor are either actually or legally deemed to be intentionally harmful; in the latter, the acts that are performed intentionally are not intended to cause harm but do so as the result of negligent performance of those acts. As in the instant case, both types of tortious acts frequently occur in the performance of a contract; the difference lies in the way that the obligor performs. An obligor who intends his performance to result in damage-or, one who commits an act that is legally deemed to constitute an intentional tort-is a Maupin tortfeasor. On the other hand, an obligor who intends his performance to be correct, but who negligently falls short of the appropriate standard and causes unintentional damage, is an Orkin tortfeasor.Id. at 729-30; see Harken Exploration Co., 261 F.3d at 472. In Federated Mut. Ins. Co., the Fifth Circuit concluded that construction defect claims arising from alleged negligent work constituted an "occurrence," triggering coverage under the policy and giving rise to a duty to defend absent an applicable policy exclusion. See id. at 726. In Calli Homes, Inc., "the court follow[ed] the Federated decision in the Fifth Circuit, as well as similar cases in other courts holding that construction defect claims arising from negligent work allege an 'occurrence,' leaving the coverage to be determined by construction-specific exclusions in the policy." 236 F. Supp.2d at 700 (citing Federated Mutual Ins. Co., 197 F.3d at 726); see Signature Dev. Cos. Inc. v. Royal Ins. Co. of Am., 230 F.3d 1215 (10th Cir. 2000); Stonehenge Eng'g Corp. v. Employers Ins. of Wausau, 201 F.3d 296 (4th Cir. 2000); First Tex. Homes, Inc. v. Mid-Continent Cas. Co., No. 3-00-CV-1048-BD, 2001 WL 238112, at *2 (N.D. Tex. Mar. 2001), aff'd, 32 Fed. Appx. 127, No. 01-10467, 2002 WL 334705 (5th Cir. Feb. 19, 2002).
Conversely, "[c]ourts have held that allegations of failure to comply with design or engineering specifications, as opposed to general allegations of negligent workmanship, are not accidental but intentional, and produce foreseeable injury." Calli Homes, Inc., 236 F. Supp.2d at 698; see also Cruse, 938 F.2d at 604-05 ("A builder who fails to abide by the specifications of a contract, for example by substituting a weaker building material, may by that breach produce expected property damage to his or her work, and may thus fail to show a covered occurrence"); Acceptance Ins. Co., 2001 WL 1478791, at *3 (citing Malone, 147 F. Supp.2d at 627-28 (no occurrence where underlying petition alleged that insurer "failed to construct the improvements in accordance with the architects's plans and specifications which . . . were approved by the City")). In contrast, "[i]n cases involving faulty home construction, courts have found that injury-producing conduct constituted an accident, and thus an occurrence, where the underlying complaint contained broad allegations of negligence, i.e., that the insured failed to construct the home in 'a good and workmanlike manner.'" Acceptance Ins. Co., 2001 WL 1478791, at *3 (citing First Tex. Homes, Inc., 2001 WL 238112, at *3).
Thus, under controlling authority, Mid-Continent's assertion that the Wards' allegations do not fall within the scope of a commercial general liability insurance policy and should be considered a business risk/economic loss to be borne by Luxury must be rejected. Following the reasoning set forth in Federated Mut. Ins. Co. and Calli Homes, Inc., the court finds that the underlying lawsuit against Luxury contains general allegations of negligence, rendering the damages to the Wards' residence an "accident," thus constituting an "occurrence" within the scope of the Policy.
2. "Property Damage"
In addition to the presence of an "occurrence," the Policy requires that for an "occurrence" to be covered, it must result in "bodily injury" or "property damage." The Policy defines "property damage" as:
Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.
Mid-Continent claims the Wards' petition does not contain allegations of "property damage" under the Policy. Mid-Continent argues that the physical problems with the Wards' house are incidental to the true nature of the claim, i.e., that the Wards did not get the benefit of their bargain from the transaction with Luxury. Luxury points out that the underlying petition alleges "physical injury to the home and/or component parts of the home and resulting in loss of use of the home." Luxury also notes that the petition asserts that the home "has experienced severe deterioration." Further, Luxury contends that the "loss of use" claim in the underlying suit "falls squarely within the definition of 'property damage.'"
After reviewing the Wards' First Amended Petition and the language of the Policy, the court concludes that under the "eight corners rule," the underlying petition clearly alleges "property damage" attributable to an "occurrence" under the terms of the Policy. Therefore, in the absence of an applicable exclusion, the allegations set forth in the underlying lawsuit are sufficient to give rise to a duty to defend on the part of Mid-Continent.
3. Exclusions
a. EIFS Exclusion
Mid-Continent contends that the EIFS exclusion bars coverage because all the harm to the house alleged by the Wards stems from water penetration or deterioration, which necessarily relates to and arises out of defects in the exterior of the house. Mid-Continent supports its argument by emphasizing that the EIFS exclusion precludes coverage for any damage arising out of not only the EIFS exterior of the house, but any work or operations with respect to any exterior component, fixture, or feature, whether done by Luxury or a subcontractor.
In response, Luxury argues that the EIFS exclusion does not negate the potential for coverage. Relying on Calli Homes, Inc., Luxury maintains that "because the underlying petition includes allegations that go beyond the installation of the synthetic stucco product, as to which [the insurer] does not assert an exclusion, the duty to defend is triggered." 236 F. Supp.2d at 703. Luxury further asserts that a reasonable insured would not construe the EIFS exclusion as applying to damages stemming from components that are wholly unrelated to the EIFS ( e.g., windows, doors, crawl space, etc.)
The case at bar is analogous to Calli Homes, Inc., with respect to the EIFS exclusion. In that case, "the underlying plaintiffs allege[d] that the negligence in construction and supervision extended 'far more than mere improper installation of EIFS,' to a 'myriad of conditions reflective of negligent construction of the Residence' that has caused 'collateral damage to structural, mechanical and electrical components of the Residence." Id. Here, while the EIFS exclusion clearly excludes coverage for some of the alleged construction defects (i.e., allegations that the EIFS was installed incorrectly and that the quality of the materials used was unacceptable), many of the nine other alleged construction defects do not involve "any work or operations with respect to any exterior component, fixture or feature of any structure" (e.g., inadequate crawl space ventilation, improper fastening of folding stairs, incorrect placement of the water heater, defects in the dishwasher drain hose). As in Calli Homes, Inc., "[b]ecause the underlying petition includes allegations that go beyond the installation of the synthetic stucco product, as to which [the defendant] does not assert an exclusion, the duty to defend is triggered." Id. Thus, some of the claims are not excluded by the EIFS exclusion and still fall within Mid-Continent's policy coverage such that a duty to defend may attach. See Lafarge Corp., 61 F.3d at 393.
b. "Damage to Property" and "Damage to Your Work" Exclusions
In the case at bar, Mid-Continent advances three other exclusions set forth in the Policy in an effort to defeat coverage. The first exclusion, j(5), concerning property damage "on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the 'property damage' arises out of those operations," does not apply because, "[g]iving the exclusion its plain meaning, the use of the present tense indicates that the exclusion applies to circumstances where the contractor or subcontractors are currently working on the project." CU Lloyd's of Tex. v. Main Street Homes, Inc., 79 S.W.3d 687, 696 (Tex.App.-Austin 2002, no pet. h.) (emphasis in original). The Wards first claimed damage to the house in 2000, three years after closing. "Words such as "working," "are," "performing," and "arising" are not used to extend the policy exclusion to a home purchased after construction is complete." Id.
Likewise, exclusion j(6), concerning property damage to any "particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it" does not exclude coverage. The exception to the j(6) exclusion states that "this exclusion does not apply to 'property damage' included in the 'products-completed operations hazard.'" The "products-completed operations hazard" exception to this exclusion renders the exclusion inapplicable. The underlying lawsuit clearly includes allegations that Luxury's work was "incorrectly performed" resulting in the need for restoration, repair, or replacement. Nevertheless, the property damage to the Wards' home is, by definition, part of the "products-completed operations hazard," as Luxury no longer owns or rents the Wards' residence and the work done on the house has long been completed. Thus, exclusion j(6) of the Policy does not preclude coverage.
The third proffered exclusion, (1), concerns "Property damage" to "your work" "arising out of it or any part of it and included in the 'products-completed operations hazard.'" The claims alleged by the Wards constitute "property damage" to Luxury's "work," which are included in the "products-completed operations hazard." This exclusion, however, does not apply "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." According to Luxury, "[d]amage to a subcontractor's work is covered (whether it arises out of the insured contractor's work or any subcontractor's work), as is damage to the insured contractor's work arising out of a subcontractor's work." Mid-Continent, on the other hand, contends that "only damage to the insured's work is involved in this case, [therefore] no 'occurrence' is present." Here, contrary to Mid-Continent's contention, it is apparent from the face of the First Amended Petition that the Wards' causes of action concern work performed, at least in part, by subcontractors.
As in Calli Homes, Inc., where the homebuilder and the subcontractors were all alleged to have caused damage to a house, the underlying petition in this case alleges under the negligence count that "Luxury Living, itself and/or by and through its subcontractors, breached this duty [ordinary care], proximately resulting in physical injury to the House and/or component parts of the House and resulting in loss of use of the House." "A plain reading of this exclusion in light of the underlying pleadings demonstrates that the subcontractor exception applies and the exclusion does not preclude [the defendant's] duty to defend." CU Lloyd's of Tex., 79 S.W.3d at 698.
Therefore, none of the exclusions addressed by the parties applies in this situation to bar all claims asserted by the Wards. The parties do not explicitly brief the exclusion for "Expected or intended injury," although it appears to be subsumed within the discussion of the presence of an "occurrence." In any event, there is no evidence before the court indicating that Luxury, the insured, intended or expected property damage to befall the Wards.
Consequently, applying the "eight corners" or "complaint allegation" rule and construing the Wards' First Amended Petition liberally, it appears that at least one of the causes of action asserted-negligence-falls within the scope of the Policy, that property damage is involved, and that no exclusion to coverage applies, thus triggering Mid-Continent's duty to defend Luxury in the underlying lawsuit. As in Calli Homes, Inc., the Wards' negligence claims "allege[ ] an occurrence giving rise to the duty to defend." 236 F. Supp.2d at 702. Accordingly, summary judgment is warranted in favor of Luxury on this issue.
G. Article 21.55 of the Texas Insurance Code
Luxury also asserts that it is entitled to damages under Article 21.55 of the Texas Insurance Code. Mid-Continent rejects that notion under the premise that Article 21.55 applies only to first-party claims and not, as in this case, to third-party claims.
Article 21.55 of the Texas Insurance Code "requires the prompt payment or resolution of claims according to a defined timetable." DeLeon v. Lloyd's London, Certain Underwriters, 259 F.3d 344, 354 (5th Cir. 2001). The Fifth Circuit has recognized that "'[t]he purpose of the statutory deadline contained in Article 21.55 is to guarantee the prompt payment of claims made pursuant to policies of insurance; not to create a statutory windfall for one party or the other.'" Id. (quoting Daugherty v. American Motorists Ins. Co., 974 S.W.2d 796, 798 (Tex.App.-Houston [14th Dist.] 1998, no pet.)). The statute provides a number of steps that must be taken by insurers when considering a policyholder's claim. See TEX. INS. CODE ANN. art. 21.55 §§ 2-5 (West 2003).
Pursuant to Article 21.55, not later than the fifteenth day after receipt of notice of a claim, the insurer must acknowledge receipt of the claim, commence an investigation of the claim, and request from the claimant all items, statements, and forms that the insurer reasonably believes at that time will be required from the claimant. See id. at § 2(a). The insurer then must notify the claimant in writing of the acceptance or rejection of the claim not later than the fifteenth business day after the date the insurer receives all items, statements, and forms required by the insurer, in order to secure final proof of loss. See id. at § 3(a). If the insurer rejects the claim, the notice must state the reasons for the rejection. See id. at § 3(c). Under Article 21.55, § 3(f):
Except as otherwise provided, if an insurer delays payment of a claim following its receipt of all items, statements, and forms reasonably requested and required, as provided under Section 2 of this article, for a period exceeding the period specified in other applicable statutes or, in the absence of any other specified period, for more than 60 days, the insurer shall pay damages and other items as provided for in Section 6 of this article.Id. at § 3(f).
Under Section 6 of the statute, if an insurer fails to comply with any of the requirements of Article 21.55, penalty interest at 18% per annum is recoverable as damages, plus reasonable attorney's fees. See Wellisch v. United Servs. Auto. Ass'n, 75 S.W.3d 53, 57 (Tex.App.-San Antonio 2002, pet. denied); Dunn v. Southern Farm Bureau Cas. Ins. Co., 991 S.W.2d 467, 471 (Tex.App.-Tyler 1999, pet. denied) (citing Mid-Century Ins. Co. of Tex. v. Barclay, 880 S.W.2d 807, 811-12 (Tex.App.-Austin 1994, writ denied)). Section 6 of Article 21.55 provides:
In all cases where a claim is made pursuant to a policy of insurance and the insurer liable therefor is not in compliance with the requirements of this article, such insurer shall be liable to pay the holder of the policy, or the beneficiary making a claim under the policy, in addition to the amount of the claim, 18 percent per annum of the amount of such claim as damages, together with reasonable attorney fees. If suit is filed, such attorney fees shall be taxed as part of the costs in the case.
TEX. INS. CODE ANN. art. 21.55, § 6.
To prevail under Article 21.55, the insured must establish: " (1) a claim under an insurance policy (2) for which the insurer is liable and (3) that the insurer has not followed one or more sections of Article 21.55 with respect to the claim." Wellisch, 75 S.W.3d at 57 n. 2 (citing Allstate Ins. Co. v. Banner, 51 S.W.3d 289, 291 (Tex. 2001), modified on other grounds, 2001 WL 1412951, at *1 (Tex. June 21, 2001)). "A wrongful rejection of a claim may be considered a delay in payment for purposes of the 60-day rule and statutory damages. More specifically, if an insurer fails to pay a claim, it runs the risk of incurring this 18 percent statutory fee and reasonable attorneys' fees." Higginbotham v. State Farm Mut. Auto. Ins. Co., 103 F.3d 456, 461 (5th Cir. 1997); accord E R Rubalcava Constr., Inc., 148 F. Supp.2d at 750; Teate v. Mutual Life Ins. Co. of New York, 965 F. Supp. 891, 893 (E.D. Tex. 1997); Cater v. United Servs. Auto. Ass'n, 27 S.W.3d 81, 84 (Tex.App.-San Antonio 2000, pet. denied); Oram v. State Farm Lloyds, 977 S.W.2d 163, 167 (Tex.App.-Austin 1998, no pet.).
A "Claim" is defined in the statute as "a first party claim made by an insured or a policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract that must be paid by the insurer directly to the insured or beneficiary." TEX. INS. CODE ANN. art. 21.55, § 1(3). The statute, however, does not define "first party." The question, therefore, is whether Luxury's claim is a "first party claim," as that phrase is used in the statute.
While not unanimous on the subject, most courts in Texas have concluded that a "claim for the duty to defend is a first party claim asserted against [the insurer] under Article 21.55 of the Texas Insurance Code, and the statutory penalty will apply to such sums." Mt. Hawley Ins. Co. v. Steve Roberts Custom Builders, Inc., 215 F. Supp.2d 783, 794 (E.D. Tex. 2002); accord Westport Ins. Corp. v. Atchley, Russell, Waldrop Hlavinka, L.L.P., 261 F. Supp.2d 601, 632 n. 19 (E.D. Tex. 2003); E R Rubalcava Constr., Inc., 148 F. Supp.2d at 750; Ryland Group, Inc. v. Travelers Indem. Co. of III., No. Civ. A-00-CA-233 JRN, 2000 WL 33544086, at *12 (W.D. Tex. Oct. 25, 2000); Oram, 977 S.W.2d at 167. In Ryland Group, Inc., the court reasoned that "while Ryland's claim for defense costs may not be what is traditionally thought of as a first party claim, the claim does fit within the definition of 'claim' contained in Article 21.55." 2000 WL 33544086, at *12.
Here, Mid-Continent has refused to provide a defense or pay defense costs incurred by Luxury. Therefore, in line with the weight of authority, Mid-Continent is required to provide a defense to Luxury in the underlying lawsuit from this date forward, and Luxury is entitled to reimbursement for its defense costs incurred to date, the statutory penalty under Article 21.55 on such defense costs, as well as reasonable attorneys' fees incurred in this action. See E R Rubalcava Constr., Inc., 148 F. Supp.2d at 750.
III. Conclusion
Mid-Continent has a duty to defend Luxury and to reimburse Luxury for its reasonable defense costs to date in the underlying lawsuit, including the statutory penalty under Article 21.55 of the Texas Insurance Code, along with reasonable attorneys' fees in this action. There exist no outstanding issues of material fact, and Luxury is entitled to judgment as a matter of law. Accordingly, Luxury's motion for summary judgment is granted, and Mid-Continent's motion for partial summary judgment is denied.