Courts Divide Over Coverage for Shoddy Workmanship
A number of recent cases decided under Texas law have discussed coverage for damages resulting from shoddy workmanship. The focus of most of these cases is on whether the results of shoddy workmanship are an "accident" or an "occurrence." Interestingly, the courts have divided along state and federal lines. The federal courts have tended to find potential coverage for the consequences of shoddy workmanship, while most of the recent state court opinions have denied coverage for contractors.
Until recently, federal courts, applying Texas law, concluded that a breach of contract does not constitute an "occurrence." See Hartford Cas. Co. v. Cruse, 938 F.2d 601, 604-05 (5th Cir. 1991). In Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720 (5th Cir. 1999), and E & R Rubalcava Constr., Inc. v. Burlington Ins. Co., 2000 WL 680401 (N.D. Tex., May 25, 2000), federal courts took the position that claims against a contractor, even if asserted as breach of contract, may constitute an "occurrence" if the damage is unexpected and unintended. In Grapevine Excavation, the Fifth Circuit found a duty to defend where the lawsuit alleged that the select fill material provided and installed by the insured failed to meet specifications and caused damage to the work of the paving subcontractor. Similarly, a federal district court in First Texas Homes, Inc. v. Mid-Continent Cas. Co., 2001 WL 238112 (N.D. Tex., March 7, 2001), a duty to defend case, concluded that allegations that a house was of poor design and quality, and that the foundation was improperly designed and built, alleged a potential "occurrence." However, not every federal court opinion has come down on the side of the insured. For example, in Malone v. Scottsdale Ins. Co., 2001 WL 520939 (S.D. Tex. Feb. 1, 2001), the court, relying on recent state court opinions, held that a builder's failure to perform in accordance with the plans and specifications did not give rise to an "occurrence." The court reasoned that the builder could reasonably anticipate injury to the plaintiffs by failing to perform the construction work properly.
Recent state court opinions have tended to find for the insurer in defective construction cases, and to hold that damages resulting from shoddy work are not covered. In Hartrick v. Great American Lloyds Inc. Co., 2000 WL 1159603 (Tex. App. --Houston [1st Dist.], Aug. 17, 2000, n.w.h.), in which Thompson Coe represented the insurer, the court of appeals concluded that a failure to build according to specifications did not constitute an "occurrence." The Court also found that the injury to the house was the pitching and heaving of the foundation, which was the reasonably foreseeable result of the contractor's failure to prepare the soil, clear the land properly, and to build a house on a foundation strong enough to support the house. The court reached this conclusion despite the fact that the builder did not intend the consequences. Additionally, the court concluded resulting damage was not "property damage" within the meaning of the policy's definition. Similarly, in Devoe v. Great American Ins., 2001 WL 459748 (Tex. App. -- Austin, May 3, 2001 n.p.h.), the court, in an unpublished opinion, concluded that shoddy workmanship was not an "occurrence" and that the deficient and substandard construction of the plaintiff's home did not constitute an accident. Again, the court reached this conclusion even though the resulting poorly constructed home was unintended by the insured.
Insurance coverage for defective construction is a hotly contested issue nationwide. The inconsistencies in these cases decided under Texas law will probably result in more coverage litigation and will increase the intensity of the debate on whether and when the consequences of faulty work are covered by liability insurance.