The Fifth Circuit recently certified important questions to the Texas Supreme Court, in Lamar Homes v. Mid Continent Casualty Company, 2005 WL 2432029 (5th Cir. Tex., Oct. 3, 2005), regarding whether allegations of faulty workmanship constitute an “occurrence” or could result in “property damage.” On February 14, 2006, the Texas Supreme Court heard oral arguments in this case. Now, carriers and policyholders alike wait with bated breath as the issue is decided once and for all.
In the Lamar Homes case, Vincent and Janice DiMare alleged that Lamar Homes was negligent and failed to design and/or construct the foundation of their home in a good and workmanlike fashion in accordance with implied and express warranties. During the oral arguments, the court asked questions geared towards clarifying the “accident” definition in faulty workmanship cases. Lamar Homes argues that it is the unintended and unexpected damage that results from the faulty workmanship that is the “accident.” For example, if there is a claim alleging only that a contractor improperly installed windows, then there is no property damage and no accident. If, however, the claim alleges that the improperly installed windows leaked, causing water damage, then the resulting damage from the water intrusion is the unexpected and unintended result of the faulty workmanship, and thus, the “accident.”
Mid Continent, on the other hand, contends that there was no “accident” in this faulty workmanship case because the resulting damage to Lamar Homes’ work is the natural, probable and foreseeable result of failing to construct a building properly. More specifically, Mid Continent contends that the natural, probable and foreseeable result of negligently constructing a foundation is cracks and water intrusion, and thus, cannot constitute an “accident.” The court repeatedly commented on how it found it difficult to imagine how building a foundation improperly or breaching a contract, for example, could be an accident.
Moreover, the court was concerned about the effect of adopting Lamar Homes’ position on the contractual responsibility of general contractors. Specifically, the court was concerned that if general contractors were provided coverage for faulty workmanship arising out of work performed by subcontractors, then the general contractors may be less concerned about following specifications or may be less inclined to expend the proper resources to ensure adequate supervision of subcontractors because the CGL policy would cover any mistakes. The court also pointed out that lawyers, doctors and other professionals are required to carry professional liability and general liability insurance coverage, and asked why a CGL carrier should be responsible for professional mistakes of general contractors. The court asked whether it was Lamar Homes’ intent when it purchased the CGL policy to have someone else pay for it if it built a defective house. Lamar Homes responded affirmatively, provided that the work was performed by a subcontractor.
In addition, the court asked questions regarding the intent of the subcontractor exception to exclusion (1)—Damage to Your Work. The court pointed out that surely the CGL policy intended to cover some types of “accidents,” otherwise, the exception to the exclusion would be meaningless. Mid Continent responded by providing examples of the types of “accidents” the exception to the exclusion was intended to cover. For example, if someone is called out to a completed home to perform warranty work and after completing the work, flicks a match causing the home to burn down, this is an “accident” contemplated by the CGL policy. Another example is if a tree falls on a house while it is being built, this is an “accident” contemplated by the CGL policy. Mid Continent stated that ISO’s creation of the CG 2294 further supports the proposition that CGL policies are not intended to cover allegations of faulty workmanship. Specifically, Mid Continent pointed out that the form was created to try to reverse the effect of many courts’ interpretations of the subcontractor’s exception—that the exception creates coverage under the policy that never existed.
Lastly, the court engaged in a discussion about the dichotomy between contract and tort claims and negligent and intentional tort claims. Mid Continent urged the court to follow its previous holdings Farmers Texas County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997) and Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex. 1997), where the Texas Supreme Court held that the focus is on the factual allegations rather than the legal theories asserted when determining an insurer’s duty to defend. In this case, while the plaintiffs allege negligence, Mid Continent argued that the plaintiff only has a claim for breach of contract because the duties and damages arise under a contract. As a result, Mid Continent argued that like damages flowing from an intentional tort are not accidental damages, damages from a breach of contract are not accidental damages. The court commented that it thought Mid Continent’s intentional tort argument extended too far and wondered why, if the answer was so clear, the Fifth Circuit certified these questions to the court?
At this time, we do not know when the court will issue an opinion in this case. We cannot predict how the court might rule based on the questions asked during the oral arguments. Regardless of whether the court adopts Lamar Homes’ or Mid Continent’s position or comes down somewhere in the middle, the court’s opinion will undoubtedly have a significant impact on both general contractors and CGL carriers.