Must a Homeowner’s Carrier Defend Everything?

The scope of the “business pursuits” exclusion may soon be clarified by the Texas Supreme Court. On July 2, 2004, the court granted Allstate's petition for review of Hallman v. Allstate Insurance Company, 114 S.W.3d 656 (Tex. App.-Dallas, 2003, pet. granted), to address the applicability of the “business pursuits” exclusion, as well as what constitutes an “occurrence” under a homeowners policy.

Hallman owned property in Kaufman County, Texas that she leased to certain companies to mine for limestone. Neighboring property owners sued Hallman and others for damages arising from the blasting and transporting of limestone. Hallman tendered the claim to Allstate, under her homeowners policy, requesting that Allstate defend and indemnify her in the mining litigation. Allstate agreed to defend Hallman under reservation of rights but then filed a declaratory action suit seeking a determination of its rights under the insurance policy. Hallman filed a counter-claim for declaratory judgment on the defense and indemnity issues.

Allstate moved for summary judgment asserting that the allegations in the underlying lawsuit did not state a claim for “bodily injury” or “property damage” caused by an “occurrence” as defined in the policy. Further, Allstate contended that, even if coverage were triggered, coverage was barred by the business pursuits exclusion. Hallman, on cross motion for partial summary judgment, contended she was entitled to a defense because the underlying allegations constitute an “occurrence.” The trial court granted Allstate's motion and denied Hallman's motion, and Hallman appealed.

The Dallas Court of Appeals first took up the issue of duty to defend. It noted the long-standing principle that the duty to defend is determined solely from the allegations in the third-party's complaints in light of the policy provisions and without reference to the truth or falsity of the allegations. Hallman at 660. The Allstate policy defined occurrence as “an accident, including exposure to conditions, which results in bodily injury of property damage during the policy period.” Hallman at 660.

The court reasoned that an “accident” has two elements: 1) An action; and 2) that action's effect, that is the resulting damage. Harken Exploration Co. v. Sphere Drake Ins. Plc, 261 F.3d 466, 472 (5th Cir. 2001). Two factors influence both elements: 1) intent or design; and 2) “expectability” or foreseeability.

The court opined that “(t)here is not an accident when the action is intentionally taken and performed in such a manner that it is an intentional tort, regardless of whether the effect was unintended or unexpected.” Hallman at 660. However, “there is an accident when the action is taken intentionally but is performed negligently and the effect is not what would have been intended or expected had the deliberate action been performed non-negligently.” Id.

The court then focused on the allegations in the underlying lawsuit. The court noted that, even though the lawsuit alleged Hallman acted intentionally by leasing her property to the mining companies, the claimants also alleged that Hallman knew or should have known that the mining companies failed to follow normal blasting procedures and failed to prevent dust from escaping into the atmosphere while the stone was transported, thus causing injury to the neighbors. The underlying plaintiffs alleged that Hallman “should have prevented her property from being used in a manner that was harmful to Plaintiffs.” Hallman at 661.

The court then concluded “thus, the allegations are that Hallman negligently leased her property.” Ibid. “The intentional act on Hallman's part was to lease her property for mining purposes. The allegations are that the lease was performed negligently. But the effect of the lease, that is the alleged damage to neighboring property from blasting and dust, was not the intended result had the lease been performed non-negligently.” Hallman at 661. The court noted “the focus is on whether the effect is intended or expected, not whether the negligent performance is intended or expected.” Ibid. “Here, an occurrence is stated because the deliberately taken action, leasing Hallman's property, was allegedly performed negligently and the alleged damage to neighbors' property and person was not the intended or expected results if the lease had been performed non-negligently.” Hallman at 662. Thus, the Court of Appeals held that the trial court erred in granting summary judgment for Allstate on that ground.

The court then turned to address Allstate's allegation that even if an occurrence was stated, coverage was barred by the business pursuits exclusion. Hallman contended that by its own terms, the business pursuits exclusion did not apply to her claim. The policies provide that coverage for personal liability does not apply to bodily injury or property damage arising out of or in connection with “a business engaged in by an insured,” but this exclusion does not apply to activities which were ordinarily incidental to non-business pursuits.

The policy defined business as “trade, profession or occupation.” The Dallas Court of Appeals purportedly gave the words their “plain and ordinary meaning.” The court held “a trade is the business practiced or work engaged in regularly for gainful employment, or livelihood. An 'occupation' is the principle business of one's life, a means of earning a living. A 'profession' is a calling that requires specialized knowledge and training, often in historical, scientific or scholarly principles that are fundamental to the skills and methods needed. The common thread among these definitions is an activity which is regularly engaged in and the idea that a livelihood or means of earning a living is the motive for undertaking the activity.” Hallman at 662.

The Dallas Court of Appeals then focused on the petition which alleged that Hallman entered into one lease agreement in 1995 regarding the mining operations. The court concluded that the petition did not allege that Hallman regularly engaged in leasing her property as her livelihood or means of earning her living, that Hallman's principle business was leasing property or that Hallman had specialized knowledge or training in leasing property. “Thus, we cannot conclude by construing the language of the policy and the petition, that the petition alleges facts that come within the definition of the business pursuits exclusion.” Hallman at 662.

The court then held “because the business pursuits exclusion does not apply to the allegation in the underlying lawsuit, the trial court erred in granting summary judgment for Allstate on this ground.” The court held that the “allegations presented a potential to lead to a covered loss,” and therefore Allstate had a duty to defend. Hallman at 663.

On petition for review to the Supreme Court, Allstate argues that Hallman's actions in entering into the lease were voluntary and intentional. The damages alleged by the underlying plaintiffs, sloughing and sliding of their land and cracks in the foundations and walls of their homes as well as the release of large amounts of dust particles were all natural and probable consequences of the mining operations, and not an “accident.” Thus, no “occurrence” has taken place under the policy.

Allstate further argues, with regard to the “business pursuits” exclusion, that Hallman was regularly and continuously involved in permitting the mining operation on her property as the operation had been ongoing for a number of years, and the lease was a perpetual lease. The lease had been renewed and the commercial mining rights had been assigned from one mining company to the next. Moreover, Hallman was seeking coverage under not one, but five, different Allstate policies.

A profit motive is also present based upon the terms of the lease and the ordinary meaning of “lease,” including the payment to Hallman of recurring monthly royalties.

Oral arguments were scheduled October 20, 2004. The Texas Supreme Court should provide further guidance on what constitutes an occurrence under a homeowner's policy as well as both the validity and applicability of the business pursuits exclusion.