Insurance in the Courts (Formerly Recent Court Decisions)
Maniloff, Randy, Mayerson, Marc, Stempel, Jeffrey W., Risk Management and Insurance Review
TEXAS SUPREME COURT ISSUES IMPORTANT CONSTRUCTION DEFECT INSURANCE COVERAGE OPINION REJECTING COMMON INSURER DEFENSES AND FINDING STATE "PROMPT PAYMENT OF CLAIMS" STATUTE APPLICABLE TO GENERAL LIABILITY INSURANCE AND PAYMENT OF DEFENSE COSTS
Lamar Homes, Inc. v. Mid-Continent Casualty Co., _S.W.3d_, 50 Tex. Sup. J. 1162, 2007 Tex. LEXIS 797 (Aug. 31, 2007)
To perhaps state the obvious, construction defect litigation has been a big deal in the United States, particularly in fast-growing Sun Belt states, for well more than a decade. It was a big enough deal more than 20 years ago that the insurance industry, acting through the Insurance Services Office (ISO), amended the standard form commercial general liability (CGL) policy to include a "subcontractor exception" to the "your work" exclusion that has been a part of the CGL policy since 1966 (more on the details and application of these provisions below). The modification of the CGL form was a response to market forces. Builder-policyholders sought such coverage and were willing to pay for it, which in turn made insurers willing to offer it.
During the next two decades, the price for this broader CGL coverage for contractors has gone up substantially but in some cases insurers have continued to price the CGL product as if we were living in a pre-Leave It To Beaver era of consistently sound craftsmanship by experienced artisans taking time and pride in their work. One need not be a cynic to realize that the new world of construction risk management is one in which much housing is built by "briefcase" contractors who do not actually do the building themselves but arrange for building by subcontractors, who may vary widely in experience, skill, care, and amenability to supervision. Subcontractors in turn may be employing skilled artisans or simply picking up cheap labor on the street corner. Add to this the time and cost pressures of construction, which may prompt builders at all levels to rush projects to completion in order to pay off lenders under the not-so-watchful eyes of overworked regulators who (until the housing downturn of the past year) had little hope of keeping up with the amount of new home construction.
The upshot of all this has been a marked increase in construction defect litigation during the 1990s and the 21st century, amounting almost to a full employment act for lawyers in states like Arizona, California, Florida, Nevada, and, of course, Texas. Construction defect claims by home buyers against builders in turn prompted builders to seek defense and coverage from their CGL carriers. This in turn led to a second wave of insurance coverage litigation. Both sides can claim a good deal of success, with policyholders prevailing in many states whereas insurers have successfully resisted many construction defect claims in other states. See generally JEFFREY W. STEMPEL, STEMPEL ON INSURANCE CONTRACTS, Ch. 25 (reviewing major construction defect coverage issues and cases).
In many jurisdictions, the law in this area remains uncertain because the state's highest court has yet to decide many key issues. Until recently, Texas was such a state. But with its decision in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 50 Tex. Supp. J. 1162, 2007 Tex. LEXIS 797 (Tex. Aug. 31, 2007), the Texas Supreme Court clearly came down on the policyholder's side of several key issues in the coverage debate. Because of the sheer size of Texas and its volume of claims, the decision is important. In addition, Lamar Homes adds momentum to the policyholder cause, which appears to have been gaining in recent years. At least one of us (Stempel) regards the opinion as not only correctly decided but well reasoned in presenting a strong, succinct case in favor of coverage (at least at the duty to defend stage of construction defect litigation) for the policyholder.
Although insurer counsel (e.g., Maniloff) may have problems with some aspects of the Lamar Homes holding, we are all in agreement that the opinion is important not only because Texas is a big state but also because the Texas Supreme Court is often receptive to insurer arguments against coverage. …