United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
For the Fifth Circuit October 3, 2005
Charles R. Fulbruge III
Clerk
No. 04-51074
LAMAR HOMES, INC.
Plaintiff-Counter-Defendant-Appellant,
VERSUS
MID CONTINENT CASUALTY COMPANY,
Defendant-Counter-Claimant-Appellee.
Appeal from the United States District Court
For the Western District of Texas
_______________________________________________
Before DAVIS, JONES and GARZA, Circuit Judges.
PER CURIAM:
This diversity case involves important and determinative
questions of Texas law as to which there is no controlling Texas
Supreme Court precedent. Accordingly, we certify those unresolved
questions to the Supreme Court of Texas.
CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS FOR
THE FIFTH CIRCUIT TO THE SUPREME COURT OF TEXAS, PURSUANT
TO TEXAS CONSTITUTION ARTICLE 5, § 3-C AND RULE 58 OF THE
TEXAS RULES OF APPELLATE PROCEDURE.
1
TO THE SUPREME COURT OF TEXAS AND THE HONORABLE JUSTICES THEREOF:
I.
STYLE OF THE CASE
The style of the case in which certification is made is Lamar
Homes, Inc. v. Mid-Continent Casualty Company, Case No. 04-51074 in
the United States Court of Appeals for the Fifth Circuit, on appeal
from the United States District Court for the Western District of
Texas, Austin Division, Lamar Homes, Inc. v. Mid-Continent Casualty
Company, 335 F.Supp.2d 754 (W.D. Tex. 2004). Federal jurisdiction
is based on diversity of citizenship.
II.
STATEMENT OF THE CASE AND BACKGROUND
In April 1997, Vincent and Janice DiMare (the DiMares) entered
into a contract to purchase a home constructed by Lamar Homes, Inc.
(Lamar). In March 2003, the DiMares filed suit against Lamar and
its subcontractor in Texas state court claiming that Lamar was
negligent and failed to design and/or construct the foundation of
the DiMares’ residence in a good and workmanlike fashion in
accordance with implied and express warranties.
Lamar timely forwarded the lawsuit to Mid-Continent Casualty
Company (Mid-Continent) seeking defense and indemnification under
a Commercial General Liability insurance policy (CGL policy) issued
by Mid-Continent for a policy period of July 1, 2001 to July 1,
2
2002. Mid-Continent refused to defend Lamar, and Lamar filed suit
against Mid-Continent in Texas state court seeking a declaration
that Mid-Continent’s policy covered the claim asserted against
Lamar in the DiMare litigation and that Mid-Continent owed Lamar a
defense in that suit. Lamar also argued that Mid-Continent’s
failure to tender a defense violated Texas Insurance Code Article
21.55, also known as the “Prompt Payment of Claims Statute.”1 Mid-
Continent removed the case to federal court.
Lamar and Mid-Continent filed cross-motions for summary
judgment. At the motion hearing the parties agreed to limit the
issue to whether Mid-Continent had a duty to defend Lamar in the
DiMare litigation. The district court held that (1) the underlying
claim for damages from construction errors essentially presented
either a claim based on a breach of contract or breach of warranty;
and therefore (2) Mid-Continent did not have a duty to defend under
its CGL policy because such construction errors are not covered by
CGL policies as a matter of law.
The district court reasoned that because the gravamen of the
underlying petition sought relief for a breach of contract
resulting in pure economic loss, the insurer was not obligated to
provide a defense under the CGL policy.2 The court stated that
1
TEX. INS. CODE ANN. ART. 21.55 (Vernon 2000) (current version at TEX. INS. CODE
ANN. § 542.051-542.061).
2
The district court found that this result was mandated by the Texas
Supreme Court’s decision in Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex.
1986). In Jim Walter Homes, the court held that a homeowner could not recover
3
“[t]he purpose of comprehensive liability insurance coverage for a
builder 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.”3 The court
stated further that “[I]f an insurance policy were to be
interpreted as providing coverage for construction deficiencies,
the effect would be to ‘enable a contractor to receive initial
payment for the work from the homeowner, then receive subsequent
payment from his insurance company to repair and correct
deficiencies in his own work.’”4 The court concluded that such a
result would transform a liability policy into a performance bond.
Thus, the court found that Mid-Continent was not obligated to
provide a defense to Lamar in the underlying litigation.
III.
RELEVANT AUTHORITIES
A. “Occurrence” and “Property Damage” under the CGL policy
The CGL policy in question provides coverage for “bodily
injury” or “property damage” caused by an “occurrence” that takes
place within the “coverage territory.” The resolution of the first
punitive damages against a builder because the substance of the homeowner’s claim
was a breach of contract causing purely economic loss. Id. at 618. The district
court was persuaded that, in Jim Walter Homes, “the Texas Supreme Court intended
that the underlying petition be examined to determine if the cause of action
sounds in contract or tort....[i]f contract, there is no occurrence or accident.”
District Court Opinion at 9.
3
District Court Opinion at 7.
4
Id. at 7-8.
4
issue presented to us on appeal involves the interpretation and
application of the terms “occurrence” and “property damage.” Under
the policy, “‘occurrence’ means an accident, including a continuous
or repeated exposure to substantially the same general harmful
conditions.” “Property damage” is defined under the policy as
either (a) physical injury to tangible property, including all
resulting loss of use of that property; or (b) loss of use of
tangible property that is not physically injured.
The intermediate Texas courts of appeal are in conflict on the
application of these clauses in a CGL policy when the insured
contractor is sued by a building owner for damage arising from
shoddy construction of the building.
Courts which have found that construction errors do not
constitute an “occurrence” conclude that a claim for bad
workmanship at bottom is a claim for breach of contract, which is
not covered under the policy. These courts reason that shoddy work
is foreseeable by the contractor and therefore is not an accidental
or unexpected loss.5
Courts that have found an “occurrence” in this circumstance
reason that where the shoddy workmanship is the result of the
builder’s negligence rather than intentional conduct, the loss is
5
The policy does not define the term “accident,” but the Texas Supreme
Court has held that an injury is accidental for purposes of coverage under a CGL
policy if “[it is] not the natural and probable consequence of the action or
occurrence which produced the injury...if the injury could not reasonably be
anticipated by [the] insured, or would not ordinarily follow from the action or
occurrence which caused the injury.” Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d
153, 155 (Tex. 1999).
5
unexpected and therefore accidental.
A number of the Texas intermediate courts of appeal decisions
on this issue are collected in the margin.6 Federal district
courts in Texas are also split on this question.7
6
Texas intermediate courts of appeal finding that damages resulting from
construction errors do not constitute an “occurrence” under a CGL policy include
Hartrick v. Great American Lloyds Ins. Co., 62 S.W.3d 270 (Tex. App.-Houston [1st
Dist.] 2001, no pet.) (builder’s breach of implied warranty in preparing the soil
and constructing a foundation was not an “accident” and therefore not an
“occurrence” under the policy); Devoe v. Great American Ins., 50 S.W.3d 567 (Tex.
App. Austin 2001, no pet.) (claims by homeowner of substandard construction
resulted from intentional and voluntary acts of the insured, and therefore did
not constitute and “accident” or “occurrence” under the policy).
Texas intermediate courts of appeal finding that damages resulting from
construction errors do constitute an “occurrence” under a CGL policy include
Lennar Corp. v. Great American Ins. Co., 2005 WL 1324833 (Tex. App.-Houston [14th
Dist.] 2005, no pet.) (construction errors causing water damage to homes
constituted an “occurrence” under CGL policy); Gehan Homes, Ltd. v. Employers
Mutual Cas. Co., 146 S.W.3d 833 (Tex. App.–Dallas 2004, pet. filed) (damages to
home resulting from insured home builder’s negligence are an “occurrence” under
a CGL policy); CU Lloyd’s of Texas v. Main Street Homes, Inc., 79 S.W.3d 687
(Tex. App.-Austin 2002, no pet.) (homeowner’s claims of improperly designed
foundation are an “occurrence” under the policy).
7
Federal district courts finding that damages resulting from construction
errors do not constitute an “occurrence” under a CGL policy include MidArc, Inc.
v. Mid-Continent Cas. Co., 2004 WL 1125588 (W.D. Tex. 2004) (builder’s failure
to properly grade and landscape property causing flooding not an “occurrence”);
Tealwood Construction, Inc. v. Scottsdale Ins. Co., 2003 WL 22790856 (N.D. Tex.
2003) (claims against contractor for damage to siding of home do not constitute
an “occurrence” under CGL policy); Jim Johnson Homes, Inc. v. Mid-Continent Cas.
Co., 244 F.Supp.2d 706 (N.D. Tex. 2003) (construction errors causing damage to
the subject of the contract arose from voluntary and intentional work by the
insured, and therefore do not constitute an “accident” or “occurrence” under the
policy); Malone v. Scottsdale Ins. Co., 147 F.Supp.2d 623 (S.D. Tex. 2001)
(insured’s faulty workmanship does not constitute an “accident” or “occurrence”
under CGL policy); Acceptance Ins. Co. v. Newport Classic Homes, Inc., 2001 WL
1478791 (N.D. Tex. 2001) (damage to home from insured’s failure to construct home
in good and workmanlike manner and in compliance with building code does not
constitute “occurrence” under policy).
Federal district courts finding that damages resulting from construction
errors do constitute an “occurrence” under a CGL policy include Luxury Living,
Inc. v. Mid-Continent Cas. Co., 2003 WL 22116202 (S.D. Tex. 2003) (construction
errors causing water damage to home do constitute an “occurrence” under the
policy); Great American Ins. Co. v. Calli Homes, Inc., 236 F.Supp.2d 693 (S.D.
Tex. 2002) (damage to home from negligent construction constitutes an
“occurrence” under CGL policy); First Texas Homes, Inc. v. Mid-Continent Cas.
Co., 2001 WL 238112 (N.D. Tex. 2001) (foundation problems of home resulting from
insured’s failure to perform in good and workmanlike manner constitutes
6
The Texas intermediate courts of appeal also disagree on
whether damage caused by defective workmanship constitutes
“property damage” under a CGL policy. Courts finding no “property
damage” in this circumstance reason that claims for the cost of
repairing faulty workmanship are nothing more than claims for “pure
economic loss,” which are the damages that typically flow from a
breach of contract. These courts, applying what has been termed the
business risk doctrine, assert that a CGL policy does not insure
against business risks; otherwise, there would be little difference
between a CGL policy and a performance bond. These courts hold that
because “pure economic loss” does not constitute damages from
“physical injury to tangible property,” no coverage is provided.
Other courts hold that when construction errors cause physical
damage to the object of the contract, such damage constitutes
property damage and is covered under the policy regardless of
whether the only “tangible property” damaged was the residence
itself.
A number of Texas intermediate courts of appeal decisions on
this issue are collected in the margin.8 Federal district courts
“occurrence” under CGL policy).
8
Texas intermediate courts of appeal holding that damages resulting from
construction errors do not constitute “property damage” under a CGL policy
include Great American Lloyd’s Ins. Co. v. Mittlestadt, 109 S.W.3d 784 (Tex.
App.-Fort Worth 2003, no pet.) (damage to home from construction errors was
economic loss that does not constitute “property damage” under a CGL policy).
Texas intermediate courts of appeal finding that damages resulting from
7
in Texas are also split on this question.9
Lamar contends that the line of cases holding that
construction errors do not constitute an “occurrence” causing
“property damage”
inappropriately rely on the “business risk doctrine,” and ignore
1986 amendments to the standard CGL policy. Prior to 1986, the
standard CGL policy contained a broad “Your Work” exclusion
excluding coverage for any property damage to the subject of the
contract caused by faulty workmanship. In 1986, the standard CGL
policy was amended to except from these “Your Work” exclusions
damage to the subject of the contract caused by the work of a
subcontractor.10 Lamar argues that given these amendments, it is
construction errors do constitute “property damage” under a CGL policy include
Lennar Corp. v. Great American Ins. Co., 2005 WL 1324833 (Tex. App.-Houston [14th
Dist.] 2005, no pet.) (homeowners’ water damages from construction errors
constitute “property damage” under CGL policy); Gehan Homes, Ltd. v. Employers
Mutual Cas. Co., 146 S.W.3d 833 (Tex. App.-Dallas 2004, pet. filed) (construction
errors causing damage to home falls under “loss of use” provision in CGL
definition of property damage).
9
At least one federal district court in Texas concludes that damages
resulting from construction errors do not constitute “property damage” under a
CGL policy include Jim Johnson Homes, Inc. v. Mid-Continent Cas. Co., 244
F.Supp.2d 706 (N.D. Tex. 2003) (damages to home from construction errors are
economic losses from a breach of warranty, and therefore do not constitute
“property damage” under CGL policy).
At least two federal district courts in Texas that conclude damages
resulting from construction errors do constitute “property damage” under a CGL
policy include Mid-Continent Cas. Co. v. JHP Development, Inc., 2005 WL 1123759
(W.D. Tex. 2005) (water damage to home caused by faulty workmanship constitutes
“property damage” under CGL policy); Luxury Living, Inc. v. Mid-Continent Cas.
Co., 2003 WL 22116202 (S.D. Tex. 2003) (rejecting argument that damage to home
itself does not constitute “property damage” under CGL policy).
10
The CGL policy at issue in this case contains a standard “Your Work”
exclusion that provides:
l. Damage to Your Work
8
inappropriate for courts to deny coverage based on the “business
risk doctrine” when a general contractor requests a defense against
claims arising from the work of a subcontractor. Lamar contends
that many of the courts denying coverage under these circumstances
either involved pre-1986 CGL policies, or the courts failed to
account for these amendments to the CGL policy.
Mid-Continent contends that Lamar’s argument regarding the
evolution of the CGL policy and the misapplication of the “business
risk doctrine” is an attempt to use policy exclusions to create
coverage, which Mid-Continent argues has been rejected by Texas
courts.11
The only Texas court that has addressed this issue concluded
that construction errors caused by subcontractors were covered
after the subcontractor exception to the “Your Work” exclusion was
incorporated in the general contractor’s CGL policy.12 The Texas
“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. (Emphasis added).
11
See State Farm Fire & Cas. Co. v. Volding, 426 S.W.2d 907, 909 (Tex. Civ.
App.-Dallas 1968, writ ref’d n.r.e.) (“an exclusionary clause...can never be said
to create coverage where none existed before.”).
12
See Lennar Corp. v. Great American Ins. Co., 2005 WL 1324833, * 11 (Tex.
App.-Houston [14th Dist.] 2005) (“[w]e based [the] principle [that defective
construction cannot constitute an ‘occurrence’] solely on the ‘business risk’
exclusions, particularly the ‘your work’ exclusion ...we interpreted the ‘your
work’ exclusion in the earlier version of the CGL policy, which did not contain
a subcontractor exception.... Therefore, the principle we recited in [prior
cases denying coverage for construction errors caused by subcontractors] has been
modified.”).
9
Supreme Court has not addressed this argument.
Given the frequency this issue is litigated and the copious
amount of conflicting caselaw on both sides regarding whether
construction errors causing damage to the subject of the contract
constitute an “occurrence” causing “property damage” under a CGL
policy, we believe that this is an issue that the Texas Supreme
Court should consider resolving. Indeed the parties have called
our attention to the Texas Supreme Court’s call for briefs on
whether it should grant writs on this issue.13
B. Article 21.55 of the Texas Insurance Code and the Duty to
Defend
This appeal also involves the issue of whether an insured may
seek the remedies available under Article 21.55 of the Texas
Insurance Code when an insurance company refuses to defend the
insured against claims that trigger coverage under a CGL policy.
Article 21.55 provides deadlines for the insurance company to
decide whether to accept or reject claims from the insured.14 An
insurer that fails to comply with the statutory deadlines is liable
13
See Gehan Homes, Ltd. v. Employers Mutual Casualty Co., 146 S.W.3d 833
(Tex. App. - Dallas 2004, pet. filed).
14
TEX. INS. CODE ANN. ART. 21.55 § 2 (a) (current version at Tex. Ins. Code
Ann. § 542.055 (a)) (“an insurer shall, not later than the 15th day after receipt
of notice of a claim...(1) acknowledge receipt of the claim; (2) commence any
investigation of the claim; and (3) request from the claimant all items,
statements, and forms that the insurer reasonably believes, at the time, will be
required from the claimant.”; TEX. INS. CODE ANN. ART. 21.55 § 3(a) (current version
at TEX. INS. CODE ANN. § 542.056 (a)) (“an insurer shall notify a claimant in
writing of the acceptance or rejection of the claim not later than the 15th
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.”).
10
to pay the insured, in addition to the amount of the claim, 18
percent of the amount of the claim plus attorney’s fees.15
The main issue here is whether an insured seeking legal
defense from the insurance company under the policy asserts a
“claim” under the statute. Article 21.55 defines a “claim” as a
“first party claim made by an insured or a policyholder under an
insurance policy or contract...that must be paid by the insurer
directly to the insured or beneficiary.”16 Courts concluding that
the statute does not apply to requests for defense reason that such
requests are third party claims and not first party claims, and
that a request for defense is not a request for payment under the
statute.17 Courts finding that the statute does apply to requests
for defense reason that such requests are first party claims
because, as the named insured, the claimant seeking a defense is
asserting a first party claim under the policy.18 Because the
15
TEX. INS. CODE ANN. ART. 21.55 § 6 (current version at TEX. INS. CODE ANN. §
542.60) (“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...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.”).
16
TEX. INS. CODE ANN. ART. 21.55 § 1 (3) (current version at TEX. INS. CODE ANN.
§ 542.056).
17
TIG Ins. Co. v. Dallas Basketball, Ltd.,129 S.W.3d 232 (Tex. App. -
Dallas 2004).
18
Northern County Mutual Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004).
Two Federal District Courts in Texas have addressed this issue and agree with
Davalos that requests for a defense under an insurance policy does constitute a
“first party claim” under Article 21.55. See Rx.com, Inc. v. Hartford Fire Iins.
Co., 364 F.Supp. 2d 609 (S.D. Tex. 2005); Housing Authority of City of Dallas v.
Northland Ins. Co., 333 F.Supp. 2d 595 (N.D. Tex. 2004).
11
district court found that the underlying claims did not trigger a
duty to defend in this case, the court did not reach this issue.
IV.
QUESTIONS CERTIFIED
Because the frequently litigated issues discussed above are
matters of Texas law on which there are conflicting rulings by both
the Texas intermediate courts of appeal and Federal district courts
in Texas with no ruling from the Texas Supreme Court, we
respectfully request that the Texas Supreme Court address and
answer the questions we certify below.
1.
When a homebuyer sues his general contractor for
construction defects and alleges only damage to or loss
of use of the home itself, do such allegations allege an
“accident” or “occurrence” sufficient to trigger the duty
to defend or indemnify under a CGL policy?
2.
When a homebuyer sues his general contractor for
construction defects and alleges only damage to or loss
of use of the home itself, do such allegations allege
“property damage” sufficient to trigger the duty to
defend or indemnify under a CGL policy?
3.
If the answers to certified questions 1 and 2 are
answered in the affirmative, does Article 21.55 of the
Texas Insurance Code apply to a CGL insurer’s breach of
the duty to defend?
V.
CONCLUSION
12
We disclaim any intent that the Texas Supreme Court confine
its reply to the precise form or scope of the legal questions we
certify. The answer provided by the Texas Supreme Court will
answer the issues on appeal in this case. We transfer to the Texas
Supreme Court the record and appellate briefs in this case with our
certification.
QUESTIONS CERTIFIED TO THE TEXAS SUPREME COURT.
13