Construction Defects
Commercial Liability
Lamar Homes Inc. v. Mid-Continent Cas. Co.,
No. 05-0832 (Tex. Aug 31,2007)

Homebuilder sued for construction defects entitled to coverage.

On certified questions, the Texas Supreme Court ruled a homebuilder is entitled to a defense in an action for construction defects errors. Moreover, the Texas Prompt Payment Statute applies when an insurer breaches its duty to defend its insured.

Vincent and Janice DiMare purchased a new home from Lamar Homes Inc. and several years later encountered problems that they attributed to defects in their foundation. The DiMares sued Lamar and its subcontractor. Lamar forwarded the suit to Mid-Continent Casualty Co., seeking a defense and indemnification under a commercial general liability (CGL) insurance policy.

Mid-Continent refused to defend, prompting Lamar to seek a declaration of its rights under the CGL policy. Lamar also sought recovery under the Prompt article 21.55 of the Texas Insurance Code.

On cross motions, the federal district court granted summary judgment for Mid-Continent, finding it had no duty to defend Lamar for construction errors that harmed only Lamar's own product. The court reasoned the purpose of a CGL policy is to protect the insured from liability resulting from property damage (or bodily injury) caused by the insured's product, but not for the replacement or repair of that product. Noting disagreement among Texas courts about the application of the CGL policy under these circumstances, the fifth Circuit asked the Texas Supreme Court to resolve the conflict.

The supreme court found allegations of unintended construction defects may constitute an "accident" or "occurrence" under a 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.

The supreme court further concluded that the Prompt-Payment Statute, formerly article 21.55, and now codified as 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.

Texas Insurance Law & Litigation Alert
October 31, 2007