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Yet More Confusion: Another Appellate Opinion Addressing Faulty Workmanship as an 'Occurrence'

August 12, 2002

The Austin Court of Appeals recently distinguished its prior holding in Devoe v. Great Am. Ins., 50 S.W.3d 567 (Tex. App.-Austin 2001, no pet.), and held that an “occurrence” under a commercial general liability policy was potentially present in a claim involving faulty workmanship. See CU Lloyds of Texas v. Main Street Homes, Inc., 2002 WL 1289874 (Tex. App.-Austin June 13, 2002).

In Main Street, the insured was a general contractor responsible for construction of residences in two subdivisions. The insured hired Professional Design Group ("PDG") to design the foundations for the homes. The Holidays purchased one of the homes, subsequently observed structural defects, and then sued the insured. The Holidays' petition contended that the insured received warnings that the foundations in their subdivision were inappropriate for the subdivision's soil conditions, and that the insured ignored the warnings and proceeded with construction. The Holidays asserted claims for violations of the DTPA, fraud, breach of implied warranty, negligence, and fraudulent conveyance.

In the second subdivision, the insured subcontracted with PDG and another foundation engineering firm for the design and construction of the residential foundations. Several of the homeowners in the second subdivision also filed suit against the insured, alleging that the insured and the foundation subcontractors relied on an inaccurate soil survey that resulted in deficient foundation designs that they knew were destined to fail. These homeowners sought relief solely under the Texas Residential Construction Liability Act. The insured's two liability carriers denied a defense, in part, based upon their position that no "occurrence" was stated. The insured then sought declaratory relief. The trial court entered judgment that the carriers owed a duty to defend, from which the carriers appealed. The court of appeals affirmed.

In its opinion, the court of appeals quoted the Texas Supreme Court's guidelines on determining whether an insured's conduct constitutes an accident, including the test set forth in Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d 153,155 (Tex. 1999). That is, an injury is not accidental when, from the viewpoint of the insured, the injury is the natural and probable consequence of the action that produced the injury. However, the court also stated that "if intentionally performed acts are not intended to cause harm, but do so because of negligent performance, a duty to defend arises," citing Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720, 729 (5th Cir. 1999).

Although acknowledging the Texas Supreme Court's test, the court nevertheless found that the allegations against the insured in the first lawsuit stated an "occurrence." The court held that an "occurrence" existed, despite the fact that the first lawsuit's petition alleged that both a construction superintendent and concrete contractor informed the insured that the foundation designs "were totally inappropriate" for the soil conditions and that the construction superintendent had the soil tested, revealing a higher plasticity index. The court simply found that it was unnecessary to determine whether the petition alleged an intentional tort because the petition included allegations of negligence.

The court also found that the second lawsuit's petition stated an "occurrence," even though it alleged that the insured knew that a post-construction test revealed a significantly higher plasticity index than the maximum for which the foundation plans had accounted. In this instance, the court found that an "occurrence" was stated because the petition failed to allege that the insured intentionally designed the foundations to fail. The court dismissed the insurer's argument that Hartrick v. Great Am. Lloyds Ins. Co., 62 S.W.3d 270 (Tex. App.-Houston [1st Dist.] 2001, no pet.) applied, stating that Hartrick was a duty to indemnify case rather than a duty to defend case. Finally, the court distinguished its prior opinion in Devoe, stating that in that case the underlying plaintiffs had not alleged any event that could be construed as an accident, but merely alleged improper and defective workmanship and the failure to complete the home on time. The court somehow concluded that the Devoe allegations differed from the Main Street allegations because the Main Street allegations are not restricted to shoddy workmanship.

The Main Street court appeared to completely ignore the facts alleged that would lead to the conclusion that no accident was present. That is, the homeowners specifically alleged that the insured was informed that the design of the foundations was insufficient, yet proceeded to incorporate that faulty design in their construction. Such conduct on the part of the insured seems necessarily intentional. Moreover, applying the Texas Supreme Court's test (an injury is not accidental when, from the viewpoint of the insured, the injury is the natural and probable consequence of the action that produced the injury) also leads to the conclusion that no "occurrence" was stated. The damage to the foundations was the natural and probable consequence of the insured's proceeding forward with building them using a design that it knew to be defective. Main Street adds to the uncertainty that exists in both the state and federal courts in Texas on issues of insurance coverage for construction defects.