Legal Matters

Texas high court prevents insurers from backpedaling on coverage for accidental property damage.

The Texas Supreme Court handed subcontractors, home builders and others in the construction industry a precedent-setting victory in an Aug. 31, 2007, decision concerning the coverage provided by a common type of commercial general liability (CGL) insurance policy. The decision denies an insurer's argument that a home builder's CGL policy does not cover accidental property damage caused by a subcontractor's allegedly defective work. The American Subcontractors Association Inc. (ASA) and ASA of Texas Inc. (ASAT) joined other construction trade associations in the state in filing two "friends of the court" briefs in the case in 2005 and 2006.

"If the Texas Supreme Court had decided in favor of the insurer, a lot of subcontractors and other businesses would have been looking at their CGL policies and wondering exactly what it is they bought," said 2007-08 ASA President David H. Bradbury, Precision Concrete Construction Inc., Alpharetta, Ga. "ASA and ASA of Texas presented subcontractors' view that insurance should be applied fairly and with common sense. One of the points we made was that if damage is accidentally caused where there's a construction defect, that alone isn't a reason for denying coverage. The insurance policy didn't contain that exclusion, so ASA believes the Texas Supreme Court came to the right conclusion."

In the underlying case, Lamar Homes Inc. v. Mid-Continent Casualty Company, two homebuyers sued Lamar Homes and a subcontractor for construction defects in the home that allegedly caused damage to the home. Lamar Homes asked Mid-Continent Casualty to defend them pursuant to the terms of its CGL policy. Lamar Homes' policy contained a standard ("your work") exclusion of coverage for damage caused by its own work, as well as a standard "subcontractor provision" that said the exclusion of coverage did not apply "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."

Mid-Continent refused, however, to defend Lamar and its subcontractor, arguing that the damage was outside the scope of the CGL policy because it was not an "occurrence" under the policy, was a financial loss resulting from an uninsured business risk, and more. A federal district court agreed with Mid-Continent and denied the home builder coverage under the CGL policy against the homeowners' claims. Lamar Homes filed an appeal.

On Jan. 12, 2005, ASA and ASAT filed a "friends of the court" brief with the U.S. Court of Appeals for the 5th Circuit supporting the home builder and asking the appeals court to overturn the district court's ruling. The brief cited information produced by insurance industry organizations, such as the International Risk Management Institute and the Insurance Services Office, that demonstrates the intended coverage of standard CGL policies, including the "subcontractor provision." ASA and ASAT said that if the denial of coverage was upheld, the home builder would have been "misled by the marketing of the policy by the insurance industry that it provides coverage for property damage arising out of the work of subcontractors."

Had the district court's decision remained successfully unchallenged, subcontractors, home builders and other builders would have been left to defend themselves against lawsuits for accidental injuries and property damage that they thought were covered by their CGL policies.

In their brief, ASA and ASAT pointed out that many businesses believe they are protected by standard CGL language: "That policy provides coverage for virtually all players in the construction industry, including ASA members and general contractors, together with all other parties that are affected by defective construction - including project owners and homeowners."

In their Feb. 1, 2006, brief to the Texas Supreme Court, ASA and ASAT noted: "All of the prerequisites for the application of the subcontractor provision to the property damage caused … apply here and cannot be ignored. That property damage occurred after completion and arose out of the work of subcontractors and coverage for that exposure is preserved under the your work exclusion."

In a 6-3 decision, the Texas Supreme Court agreed: "By incorporating the subcontractor exception into the 'your-work' exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor's defective performance. [citation omitted] More recently, the Insurance Services Office has issued an endorsement that may be included in the CGL to eliminate the subcontractor exception to the 'your-work' exclusion."

The court 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."

Founded in 1966, ASA amplifies the voice of, and leads, trade contractors to improve the business environment for the construction industry and to serve as a steward for the community. ASA's vision is to be the united voice dedicated to improving the business environment in the construction industry. The ideals and beliefs of ASA are ethical and equitable business practices, quality construction, a safe and healthy work environment, and integrity and membership diversity. For more information, visit the ASA Web site at or call ASA at (703) 684-3450.