Court Finds Allegation of Negligent Construction Defect is an “Occurrence”

In Gehan Homes, Ltd. v. Employers Mutual Casualty Company, 146 S.W.3d 833 (Tex. App. – Dallas 2004, pet. filed January 5, 2005), the court found that a builder’s alleged negligence which results in damage to a house constitutes an “occurrence” because the relevant inquiry is not whether the insured damaged his own work, but whether the resulting damage was unexpected and unintended. Homeowners complained of faulty design and construction of their home built by Gehan Homes. In addition to claims the home was not as represented, not of proper quality, and was not built in a good and workmanlike manner, the homeowners alleged Gehan Homes was negligent in relying on the developer’s general soil analysis and in failing to obtain an accurate soil analysis on which to base a foundation design. The homeowners sued Gehan Homes for negligence and malice, breach of contract, breach of warranty, violations of the DTPA, and fraud. In turn, Gehan Homes’ general liability insurers, Employers and Great American, sought a declaratory judgment that they had no duty to defend or indemnify Gehan Homes against the homeowners’ underlying claims. The trial court granted both insurers’ summary judgment motions, holding that the insurers did not have any duty to defend or indemnify Gehan Homes in the underlying lawsuit. However, in a strained application of the “eight corners” rule and the definition of “occurrence” to construction defect allegations, the Dallas Court of Appeals agreed with Gehan Homes that the insurers failed to establish they had no duty to defend as a matter of law and remanded the case to the trial court.

In reviewing the duty to defend under Texas law, the Court first outlined a host of cases often cited in connection with the “eight corners” rule. See, e.g., National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997) (“The duty to defend is determined by the allegations in the underlying pleadings and the language of the insurance policy.”); Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633, 635 (Tex. 1973) (“The allegations should be considered in light of the policy provisions without reference to their truth or falsity and without reference to what the parties know or believe to be the true facts.”). Having set the stage, the court then proceeded to enunciate the commonly cited CGL insuring agreement language, noting that “to trigger the duty to defend, the Larsons’ underlying claims must be for ‘property damage’ or ‘bodily injury’ caused by an ‘occurrence.’” Gehan Homes, at 839. At the core of the appeal was a disagreement as to the meaning of the term “occurrence,” a word defined in the policies as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Specifically, the parties disagreed about what constitutes an “accident” giving rise to an “occurrence” in connection with an improperly built home.

In addressing this pivotal issue, the court focused its attention on two lines of cases defining the term “occurrence” evolving out of the Texas Supreme Court’s holdings in Argonaut, and Massachusetts Bonding & Ins. Co. v. Orkin Exterminating Co., 416 S.W.2d 396 (Tex. 1967). The court characterized Maupin as pertaining to coverage of claims against an insured for damage caused by its alleged intentional torts. (Under Maupin and its progeny, there is no “occurrence” triggering coverage because the conduct alleged is intentional.) Conversely, in Orkin, the term “accident” was construed to include “negligent acts of the insured causing damage which is undesigned and unexpected.” Id. at 40.