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Dear Jeff, 
Welcome to our first newsletter!  We are excited about having this avenue to keep in contact with our valued clients.  Hopefully, this will be informative and useful for you in your construction defect needs.  We are dedicated to continuing to provide those services that are most beneficial to you and welcome your feedback.  We look forward to a long and valued relationship with you.

Thank you,

Your Team at Advise & Consult

Speaking Of : Construction Defects
(Reprinted from Claims Magazine, November 2007 Issue. Copyright 2007. All rights reserved.)
Eric Gilkey, Managing Editor
     A significant construction defect coverage case, Lamar Homes, Inc. v. Mid-Continent Casualty Co. , was recently decided by the Texas Supreme Court. This is one of the few cases accepted by a state supreme court to determine if construction defects should be covered under a commercial general liability policy, and the decision likely will impact how these claims are handled locally and nationally.
     Claims last covered the case in Jan. 2007, so to give readers an update and find out how the recent decision could
impact the way construction defect claims are handled, we spoke with Veronica Bates, a founding partner at the law firm
of Hermes Sargent Bates, LLP to get further insight into the case and get her opinion on the ruling.
     Can you give our readers a brief synopsis and key points of the Lamar Homes v. Mid-Continent litigation?
     A major dispute over general liability coverage for construction defect claims in Texas has finally been concluded. The Texas Supreme Court's decision answered three certified questions from the Fifth Circuit: (1) Do pure construction defect claims against general contractors qualify as an occurrence under a CGL policy? (2) Do damages to or loss of use of the building itself constitute "property damage" under the CGL policy? (3) If so, does Article 21.55 of the Texas Insurance Code apply to the insurer's breach of the duty to defend?
     Lamar Homes arose out of a claim by the DiMares, who purchased a new home from Lamar and then discovered
defects. Lamar's carrier, Mid-Continent, refused to defend, prompting Lamar to bring a declaratory judgment against Mid-Continent in federal district court. The district court granted Mid-Continent's motion for summary judgment, holding that it had no duty to defend Lamar for construction errors that harmed only Lamar's own product.
     How did the subcontractor exception to the "your work" exclusion play into the decision?
     The Texas Supreme Court disagreed with the district court's decision, holding that the DiMares' complaint alleged an "occurrence" because it asserts that Lamar's defective construction was a product of its negligence. Significantly, the Court noted that the allegations did not state that Lamar intended or expected its work or its subcontractors' work to
damage the DiMares' home. Apparently, the allegations must assert that the damages were expected or intended by the
contractor in order to fall outside of the definition of "occurrence."
     The Court also found that the property damage definition in the CGL policy does not by itself eliminate the general
contractor's work. The home is clearly tangible property, and the cracking sheetrock and stone veneer constitute physical injury to tangible property. The Court noted that the exclusions are designed to address faulty workmanship claims. In fact, the Court stated that the "your work" exclusion would have eliminated coverage but for the subcontractor exception. Thus, a general contractor is protected from the consequences of a subcontractor's faulty workmanship causing property damage. The Court also found significant the history of this exclusion, since it has evolved to clearly contemplate coverage for property damage caused by a subcontractor's defective performance. This exclusion appears to have influenced the Court's decision and reject the carrier's contention that CGL policies were not intended to insure for faulty workmanship claims.
This opinion clearly solidifies that the standard CGL insuring agreement is triggered by claims against contractors for
unintended property damage arising from faulty workmanship. However, the exclusions still apply to certain damages.
     Do you agree with the logic used by the Texas Supreme Court to reach its decision?
     Perhaps the most surprising aspect of the Lamar Homes opinion is the Court's application of Article 21.55 of the Texas Insurance Code ( recodified as § 542.051-.061) to the breach of the defense obligation. Commonly referred to as the Prompt Payment of Claims statute, it was intended to apply to first-party claims. An insurer that violates the statute must pay the claim, as well as 18 percent interest as damages and attorney's fees.
     The Court concluded that the claim for defense costs is a first-party claim because the insured is the only party who will
suffer the loss or benefit from the claim. This has far-reaching implications for all policies that include a defense obligation. The Court addressed the difficulties of applying the mechanics of the statute to defense costs, yet found that the statutory deadlines apply, apparently triggered by the insured submitting his legal bills. This could place a new burden on CGL carriers (and any other carriers with a defense obligation) to evaluate its duty to defend under strict deadlines.
     Failure to comply with the deadlines may result in statutory penalties, even if the insurer ultimately rightfully denies the defense.
     The Court has requested briefs on rehearing in Lamar Homes as of the date this article was written. We can only hope that the justices will reconsider all or part of its decision.

 

 

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