Unintended Construction Defects May Constitute an “Accident” or “Occurrence” Under Commercial General Liability Policy

Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007)

In this landmark decision, the Texas Supreme Court ruled that commercial general liability policies provide a duty to defend claims for property damage caused by an insured contractor’s defective construction.  Resolving a split of authority on certified questions from the Fifth Circuit, the court ruled that unintended construction defects may constitute an “accident” or “occurrence” within the meaning of a commercial general liability policy.  It also ruled that the resulting damage to or loss of use of the building may constitute “property damage” sufficient to trigger the insurer’s duty to defend.  The court also held that the CGL policy made no distinction between tort and contract damages, rejecting the insurer’s economic loss rule defense.

The court held that the damage did not have to be to a third-party’s property, finding that damage to a general contractor’s work, other than the defective construction itself, could constitute “property damage.”  In this case, the home suffered cracks in sheetrock and stone veneer as a result of defects in the foundation.  While the foundation defects themselves were not considered property damage, the resulting damage to other components of the house were, triggering the duty to defend.

The court also ruled that the Prompt Payment of Claims Statute, Tex. Ins. Code §§ 542.051-061, applies to the duty-to-defend benefit.  Thus, an insurer failing to defend an insured entitled to a defense is liable for the insured’s attorney’s fees as well as 18 percent interest accruing from the date the insured paid each invoice for attorney’s fees.