428 F.3d 193 | 5th Cir. | 2005
This diversity case involves important and determinative questions of Texas law as to which there is no controlling Texas Supreme Court precedent. Accordingly, we certify those unresolved questions to the Supreme Court of Texas.
CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT TO THE SUPREME COURT OF TEXAS, PURSUANT TO TEXAS CONSTITUTION ARTICLE 5, § 3-C AND RULE 58 OF THE TEXAS RULES OF APPELLATE PROCEDURE.
TO THE SUPREME COURT OF TEXAS AND THE HONORABLE JUSTICES THEREOF:
I.
STYLE OF THE CASE
The style of the case in which certification is made is Lamar Homes, Inc. v. Mid Continent Casualty Company, Case No. 04-51074 in the United States Court of Appeals for the Fifth Circuit, on appeal from the United States District Court for the Western District of Texas, Austin Division, Lamar Homes, Inc. v. Mid-Continent Casualty Company, 335 F.Supp.2d 754 (W.D.Tex.2004). Federal jurisdiction is based on diversity of citizenship.
II.
STATEMENT OF THE CASE AND BACKGROUND
In April 1997, Vincent and Janice Di-Mare (the DiMares) entered into a contract to purchase a home constructed by Lamar Homes, Inc. (Lamar). In March 2003, the DiMares filed suit against Lamar and its subcontractor in Texas state court claiming that Lamar was negligent and failed to design and/or construct the foundation of the DiMares’ residence in a good and workmanlike fashion in accordance with implied and express warranties.
Lamar timely forwarded the lawsuit to Mid-Continent Casualty Company (Mid-Continent) seeking defense and indemnification under a Commercial General Liability insurance policy (CGL policy) issued by Mid-Continent for a policy period of-July 1, 2001 to July 1, 2002. Mid-Continent refused to defend Lamar, and Lamar filed suit against Mid-Continent in Texas state court seeking a declaration that Mid-Continent’s policy covered the claim asserted against Lamar in the DiMare litigation and that Mid-Continent owed Lamar a defense in that suit. Lamar also argued that Mid-Continent’s failure to tender a defense violated Texas Insurance Code Article 21.55, also known as the “Prompt Payment of Claims Statute.”
The district court reasoned that because the gravamen of the underlying petition sought relief for a breach of contract resulting in pure economic loss, the insurer was not obligated to provide a defense under the CGL policy.
III.
RELEVANT AUTHORITIES
A. “Occurrence’’ and “Property Damage” under the CGL policy
The CGL policy in question provides coverage for “bodily injury” or “property damage” caused by an “occurrence” that takes place within the “coverage territory.” The resolution of the first issue presented to us on appeal involves the interpretation and application of the terms “occurrence” and “property damage.” Under the policy, “ ‘occurrence’ means an accident, including a continuous or repeated exposure to substantially the same general harmful conditions.” “Property damage” is defined under the policy as either (a) physical injury to tangible property, including all resulting loss of use of that property; or (b) loss of use of tangible property that is not physically injured.
The intermediate Texas courts of appeal are in conflict on the application of these clauses in a CGL policy when the insured contractor is sued by a building owner for damage arising from shoddy construction of the building.
Courts which have found that construction errors do not constitute an “occurrence” conclude that a claim for bad workmanship at bottom is a claim for
Courts that have found an “occurrence” in this circumstance reason that where the shoddy workmanship is the result of the builder’s negligence rather than intentional conduct, the loss is unexpected and therefore accidental.
A number of the Texas intermediate courts of appeal decisions on this issue are collected in the margin.
Other courts hold that when construction errors cause physical damage to the object of the contract, such damage eonsti-tutes property damage and is covered under the policy regardless of whether the only “tangible property” damaged was the residence itself.
A number of Texas intermediate courts of appeal decisions on this issue are collected in the margin.
Lamar contends that the line of cases holding that construction errors do not constitute an “occurrence” causing “property damage” inappropriately rely on the “business risk doctrine,” and ignore 1986 amendments to the standard CGL policy. Prior to 1986, the standard CGL policy contained a broad “Your Work” exclusion excluding coverage for any property damage to the subject of the contract caused by faulty workmanship. In 1986, the standard CGL policy was amended to except from these ‘Tour Work” exclusions damage to the subject of the contract caused
Mid-Continent contends that Lamar’s argument regarding the evolution of the CGL policy and the misapplication of the “business risk doctrine” is an attempt to use policy exclusions to create coverage, which Mid-Continent argues has been rejected by Texas courts.
The only Texas court that has addressed this issue concluded that construction errors caused by subcontractors were covered after the subcontractor exception to the ‘Tour Work” exclusion was incorporated in the general contractor’s CGL policy.
Given the frequency this issue is litigated and the copious amount of conflicting caselaw on both sides regarding whether construction errors causing damage to the subject of the contract constitute an “occurrence” causing “property damage” under a CGL policy! we believe that this is an issue that the Texas Supreme Court should consider resolving. Indeed the parties have called our attention to the Texas Supreme Court’s call for briefs on whether it should grant writs on this issue.
B. Article 21.55 of the Texas Insurance Code and the Duty to Defend
This appeal also involves the issue of whether an insured may seek the remedies available under Article 21.55 of the Texas Insurance Code when an insurance company refuses to defend the insured against claims that trigger coverage under a CGL policy. Article 21.55 provides deadlines for the insurance company to decide whether to accept or reject claims from the insured.
The main issue here is whether an insured seeking legal defense from the insurance company under the policy asserts a “claim” under the statute. Article 21.55 defines a “claim” as a “first party claim made by an insured or a policyholder under an insurance policy or contract ... that must be paid by the insurer directly to the insured or beneficiary.”
IV.
QUESTIONS CERTIFIED
Because the frequently litigated issues discussed above are matters of Texas law on which there are conflicting rulings by both the Texas intermediate courts of appeal and Federal district courts in Texas with no ruling from the Texas Supreme Court, we respectfully request that the Texas Supreme Court address and answer the questions we certify below.
1.
When a homebuyer sues his general contractor for construction defects and alleges only damage to or loss of use of the home itself, do such allegations allege an “accident” or “occurrence” sufficient to trigger the duty to defend or indemnify under a CGL policy?
2.
When a homebuyer sues his general contractor for construction defects and alleges only damage to or loss of use of the home itself, do such allegations allege “property damage” sufficient to*201 trigger-the duty to defend or indemnify under a CGL policy?
3.
If the answers to certified questions 1 and 2 are answered in the affirmative, does Article 21.55 of the Texas Insurance Code apply to a CGL insurer’s breach of the duty to defend?
V.
CONCLUSION
We disclaim any intent that the Texas Supreme Court confíne its reply to the precise form or scope of the legal questions we certify. The answer provided by the Texas Supreme Court will answer the issues on appeal in this case. We transfer to the Texas Supreme Court the record and appellate briefs in this case with our certification.
QUESTIONS CERTIFIED TO THE TEXAS SUPREME COURT.
. Tex. Ins.Code Ann. art. 21.55 (Vernon 2000) (current version at Tex. Ins.Code Ann. § 542.051-542.061).
.The district court found that this result was mandated by the Texas Supreme Court's decision in Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex.1986). In Jim Walter Homes, the court held that a homeowner could not recover punitive damages against a builder because the substance of the homeowner's claim was a breach of contract causing purely economic loss. Id. at 618. The district court was persuaded that, in Jim Walter Homes, “the Texas Supreme Court intended that the underlying petition be examined to determine if the cause of action sounds in contract or tort .... [i]f contract, there is no occurrence or accident.'' District Court Opinion at 9.
. District Court Opinion at 7.
. Id. at 7-8.
. The policy does not define the term "accident,” but the Texas Supreme Court has held that an injury is accidental for purposes of coverage under a CGL policy if “[it is] not the natural and probable consequence of the action or occurrence which produced the injury ... if the injury could not reasonably be anticipated by [the] insured, or would not ordinarily follow from the action or occurrence which caused the injury.” Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d 153, 155 (Tex.1999).
. Texas intermediate courts of appeal finding that damages resulting from construction errors do not constitute an "occurrence” under a CGL policy include Hartrick v. Great American Lloyds Ins. Co., 62 S.W.3d 270 (Tex.App.Houston [1st Dist.] 2001, no pet.) (builder’s breach of implied warranty in preparing the soil and constructing a foundation was not an "accident” and therefore not an "occurrence” under the policy); Devoe v. Great American Ins., 50 S.W.3d 567 (Tex.App.Austin 2001, no pet.) (claims by homeowner of substandard construction resulted from intentional and voluntary acts of the insured, and therefore did not constitute and "accident” or "occurrence” under the policy).
Texas intermediate courts of appeal finding that damages resulting from construction errors do constitute an "occurrence” under a CGL policy include Lennar Corp. v. Great American Ins. Co., 2005 WL 1324833 (Tex. App.-Houston [14th Dist.] 2005, no pet.) (construction errors causing water damage to homes constituted an "occurrence” under CGL policy); Gehan Homes, Ltd. v. Employers Mutual Cas. Co., 146 S.W.3d 833 (Tex.App.-Dallas 2004, pet. filed) (damages to home resulting from insured home builder’s negligence are an "occurrence” under a CGL policy); CU Lloyd’s of Texas v. Main Street Homes, Inc., 79 S.W.3d 687 (Tex.App.-Austin 2002, no pet.) (homeowner’s claims of improperly designed foundation are an "occurrence” under the policy).
.Federal district courts finding that damages resulting from construction errors do not constitute an "occurrence” under a CGL policy include Mid Arc, Inc. v. Mid-Continent Cas. Co., 2004 WL 1125588 (W.D.Tex.2004) (builder’s failure to properly grade and landscape property causing flooding not an "occurrence”); Tealwood Construction, Inc. v. Scottsdale Ins. Co., 2003 WL 22790856 (N.D.Tex.2003) (claims against contractor for damage to siding of home do not constitute an "occurrence” under CGL policy); Jim Johnson Homes, Inc. v. Mid-Continent Cas. Co., 244 F.Supp.2d 706 (N.D.Tex.2003) (construction errors causing damage to the subject of the contract arose from voluntary and intentional work by the insured, and therefore do not constitute an “accident” or "occurrence" under the policy); Malone v. Scottsdale Ins. Co., 147 F.Supp.2d 623 (S.D.Tex.2001) (insured’s faulty workmanship does not constitute an "accident” or “occurrence” under CGL policy); Acceptance Ins. Co. v. Newport Classic Homes, Inc., 2001 WL 1478791 (N.D.Tex.2001) (damage to home from insured's failure to construct home in good and workmanlike manner and in compliance with building code does not constitute "occurrence” under policy).
Federal district courts finding that damages resulting from construction errors do constitute an "occurrence” under a CGL policy include Luxury Living, Inc. v. Mid-Continent Cas. Co., 2003 WL 22116202 (S.D.Tex.2003) (construction errors causing water damage to home do constitute an "occurrence” under the policy); Great American Ins. Co. v. Calli Homes, Inc., 236 F.Supp.2d 693 (S.D.Tex.2002) (damage to home from negligent construction constitutes an "occurrence” under CGL policy); First Texas Homes, Inc. v. Mid-Continent Cas. Co., 2001 WL 238112
. Texas intermediate courts of appeal holding that damages resulting from construction errors do not constitute "property damage” under a CGL policy include Great American Lloyds Ins. Co. v. Mittlestadt, 109 S.W.3d 784 (Tex.App.-Fort Worth 2003, no pet.) (damage to home from construction errors was economic loss that does not constitute "property damage” under a CGL policy).
Texas intermediate courts of appeal finding that damages resulting from construction errors do constitute "property damage” under a CGL policy include Lennar Corp. v. Great American Ins. Co., 2005 WL 1324833 (Tex.App.-Houston [14th Dist.] 2005, no pet.) (homeowners' water damages from construction errors constitute "property damage” under CGL policy); Gehan Homes, Ltd. v. Employers Mutual Cas. Co., 146 S.W.3d 833 (Tex.App.-Dallas 2004, pet. filed) (construction errors causing damage to home falls under "loss of use” provision in CGL definition of property damage).
. At least one federal district court in Texas concludes that damages resulting from construction errors do not constitute "property damage” under a CGL policy include Jim Johnson Homes, Inc. v. Mid-Continent Cas. Co., 244 F.Supp.2d 706 (N.D.Tex.2003) (damages to home from construction errors are economic losses from a breach of warranty, and therefore do not constitute "property damage” under CGL policy).
At least two federal district courts in Texas that conclude damages resulting from construction errors do constitute "property damage” under a CGL policy include Mid-Continent Cas. Co. v. JHP Development, Inc., 2005 WL 1123759 (W.D.Tex.2005) (water damage to home caused by faulty workmanship constitutes "property damage” under CGL policy); Luxury Living, Inc. v. Mid-Continent Cas. Co., 2003 WL 22116202 (S.D.Tex.2003) (rejecting argument that damage to home itself does not constitute "property damage” under CGL policy).
. The CGL policy at issue in this case contains a standard "Your Work” exclusion that provides:
l. Damage to Your Work
"Property damage” to "your work” arising out of it or any part of it and included in the "products-completed operations hazard.”
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. (Emphasis added).
. See State Farm Fire & Cas. Co. v. Volding, 426 S.W.2d 907, 909 (Tex.Civ.App.-Dallas 1968, writ ref’d n.r.e.) ("an exclusionary clause ... can never be said to create coverage where none existed before.”).
. See Lennar Corp. v. Great American Ins. Co., 2005 WL 1324833, * 11 (Tex.App.-Houston [14th Dist.] 2005) ("[w]e based [the] principle [that defective construction cannot constitute an 'occurrence'] solely on the ‘business risk’ exclusions, particularly the 'your work' exclusion ... we interpreted the 'your work' exclusion in the earlier version of the CGL policy, which did not contain a subcontractor exception .... Therefore, the principle we recited in [prior cases denying coverage for construction errors caused by subcontractors] has been modified.”).
. See Gehan Homes, Ltd. v. Employers Mutual Casualty Co., 146 S.W.3d 833 (Tex.App.—Dallas 2004, pet. filed).
. Tex. Ins.Code Ann. art. 21.55 § 2(a) (current version at Tex. Ins.Code Ann. § 542.055(a)) ("an insurer shall, not later than the 15th day after receipt of notice of a claim ... (1) acknowledge receipt of the claim; (2) commence any investigation of the claim; and (3) request from the claimant all items, statements, and forms that the insurer reasonably believes, at the time, will be required from the
. Tex Ins.Code Ann. art. 21.55 § 6 (current version at Tex. Ins.Code Ann. § 542.60) ("In all cases where a claim is made pursuant to a policy of insurance and the insurer liable therefor is not in compliance with the requirements of this article, such insurer shall be liable to pay the holder of the policy ... in addition to the amount of the claim, 18 percent per annum of the amount of such claim as damages, together with reasonable attorney fees.”).
. Tex. Ins.Code Ann. art. 21.55 § 1(3) (current version at Tex. Ins.Code Ann. § 542.056).
. TIG Ins. Co. v. Dallas Basketball, Ltd., 129 S.W.3d 232 (Tex.App.—Dallas 2004).
. Northern County Mutual Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex.2004). Two Federal District Courts in Texas have addressed this issue and agree with Davalos that requests for a defense under an insurance policy does constitute a "first party claim” under Article 21.55. See Rx.Com, Inc. v. Hartford Fire Ins. Co., 364 F.Supp.2d 609 (S.D.Tex.2005); Housing Authority of City of Dallas v. Northland Ins. Co., 333 F.Supp.2d 595 (N.D.Tex.2004).