Texas Supreme Court Issues Landmark Ruling in Construction Defect Case

September 10, 2007

In a long-anticipated ruling, the Texas Supreme Court on Aug. 31, 2007, drew several conclusions concerning what constitutes an occurrence and/or property damage under the general liability policy with regard to claims of defective construction.

In its consideration of Lamar Homes Inc. v. Mid-Continent Cas. Co. (05-0832), the Court also ruled that the Texas prompt payment statute applies to an insurer's breach of the duty to defend.

Responding to several questions certified to it by the United States Court of Appeals for the Fifth Circuit, the Texas Supreme Court concluded concluded "that allegations of unintended construction defects may constitute an 'accident' or 'occurrence' under a CGL policy and that allegations of damage to, or loss of use of, the home itself may also constitute 'property damage' sufficient to trigger the duty to defend under a CGL policy."

The Court also concluded that the Texas Legislature did not intend to limit the Texas Prompt Payment Statute to "first-party insurance, but rather intended that it apply to claims personal to the insured ('a first-party claim')." The prompt payment statute, the Court said, imposes penalties "when an insurer wrongfully refuses to promptly pay a defense benefit owed to the insured."

Expect further analysis of this landmark decision in the Sept. 24, 2007, issue of Insurance Journal - South Central edition.

Sources: The Supreme Court of Texas, www.supreme.courts.state.tx.us; Goldberg Segalla LLP, www.goldbergsegalla.com/