Pine Oak Builders, Inc. v. Great American Lloyds Ins. Co., No. 06-0867. (DB) Issued February 13, 2009. Opinion by Justice Willett.
This is a dispute between a homebuilder and its insurance company over the duty to defend the homebuilder against lawsuits filed home buyers alleging construction defects. When the homebuilder (Pine Oak Builders) asked its insurer (Great American Lloyds) to pay for its defense, the insurer declined. The builder sued. The insurer counter-sued for a declaration that its policies did not cover these clams.
In resolving Pine Oak Builders, the Texas Supreme Court touched on several of its recent insurance decisions.
Notably, all of those decisions were handed down after the parties in this case took their positions on appeal. Two of them were handed down after briefing was fully completed in the Texas Supreme Court.
In an area of law with this many moving pieces, it just makes sense to keep your eye on other relevant pending cases, not just your appeal.
Lamar Homes. In Lamar Homes, Inc. v. Mid-Continent Casualty Co., the Texas Supreme Court held that a common general-liability policy indeed covered construction defect claims. The insurer in this case asked the Court to distinguish Lamar Homes, but the Court refused, noting that “[t]he relevant policy language in the Great American policies is identical to the policy language we construed in Lamar Homes.” (( Lamar Homes was decided in August 2007 and a motion for rehearing in that case was resolved in December 2007.
The merits briefing for Pine Oak Builders was already complete by the time Lamar Homes was issued. (The Texas Supreme Court granted review in Pine Oak Builders the very same day, in fact, that it first resolved Lamar Homes, so the overlap between the two cases was on the Court’s mind. ) ))
Don’s Building Supply. In Don’s Building Supply v. OneBeacon Insurance Co., the Texas Supreme Court adopted the “actual injury” rule for timing which of several annual liability policies would be called upon to cover a particular claim. The Court noted that the policy language in Pine Oak Builders was identical to that in Don’s Building Supply and thus applied the same rule. (( This is another aspect of the case in which changes in the law outpaced the parties’ ability to brief them. Both Pine Oak Builders and Don’s Building Supply were argued in February 2008. The decision in Don’s Building Supply came down in August 2008. )) Applying that rule, the Court concluded that damage occurred under Great American’s policies at the point a home suffered actual wood rot or other physical damage.
GuideOne Elite (the eight-corners rule). The third recent insurance decision in play here is GuideOne Elite Insurance Co. v. Fielder Road Baptist Church, which the Texas Supreme Court notes was “issued six days before the court of appeals’ decision in this case.”
In GuideOne Elite, the Court held that questions about whether the duty to defend was triggered — a dispute between the insured and their insurance company — generally must turn on the “eight corners” of the two relevant documents, the insurance policy itself and the plaintiff’s petition. In GuideOne Elite, the Court did not preclude the possibility that there was a narrow class of exceptions to that rule, but it held the facts of that case would not trigger more lenient treatment.
The insurance policy in Pine Oak Builders provided coverage if the allegations were that a subcontractor had performed defective work; the policy excluded coverage when the only defective work was performed by the homebuilder itself — what the opinion calls the “your work” exclusion.
Five sets of plaintiffs filed petitions (claims) against Pine Oak Builders. In four of them, the Court noted, the plaintiffs specifically mentioned defective work done by subcontractors. In those, the Court held, the duty to defend was triggered.
But the fifth petition was different. Its text mentioned only Pine Oak Builders, not any subcontractor. The homebuilder sought to introduce evidence that, in fact, the defective work had been done by a subcontractor. But the Texas Supreme Court refused to permit extrinsic evidence that, in essence, tried to rebut the plaintiff’s claim that it had been Pine Oak Builders itself that had done the defective work.
Thus, the Texas Supreme Court held, the eight-corners rule applies. Because this fifth petition did not mention subcontractors, it fell within the “your work” exclusion of the insurance policy and no duty to defend against that petition had been triggered.
Accordingly, the Court reversed the court of appeals in part, holding that four of the petitions did trigger the duty to defend. And it affirmed in part, holding that the petition that made no explicit mention of subcontractors did not trigger a duty to defend.
Take away value: The plaintiff drafting its petition can control whether a homebuilder gets the benefit of the “duty to defend” by how it words the petition. The homebuilder might not have control over this, short of negotiating more favorable language with its insurance company (such as language that would expressly permit it to offer evidence that a subcontractor was involved).