We will examine the court's decision in Don's Bldg.
and the potential application and effect of this decision to the Texas Homeowners
Policy HO-B standard policy.
Don's Building—Texas Supreme Court—Injury-in-Fact
Texas's high court finally determined the trigger theory for Texas insurance
coverage cases under CGL policies: When does "property damage" or "bodily injury"
"occur" in a liability policy that covers only property damage that "occurs"
during the policy period, which is typically 1 year? Simply put, when does property
damage happen?
This seems like an easy question unless, as in Don's
Bldg., the damage-causing event is the installation of defective siding
that allows moisture to slowly seep into the interior walls, and the damage
does not become noticeable to the ordinary eye until a year or more later.
This issue is so contentious, and it is easy to understand why. Insurers
typically try to persuade courts that the damage occurred on some other insurer's
watch, and policyholders are just as eager to show that that the damage "occurred"
over a number of years, triggering several policies, all of which should comply
with the defense obligation and possibly indemnity dollars.
In American Physicians Ins. Exch. v. Garcia,
876 S.W.2d 842, 853 n. 20 (Tex. 1994), the Texas Supreme Court declined to adopt
a specific test for the trigger of an "occurrence" for insurance policies. The
Supreme Court surveyed the law of other jurisdictions and noted at least five
tests for when a harm occurs to trigger coverage under an insurance policy:
The "pure" or "strict" manifestation rule—triggers coverage
upon actual discovery of injury;
The "relaxed" manifestation rule—triggers coverage in the
first policy period during which discovery of injury is possible;
The "exposure" rule—triggers coverage in any policy period
in which exposure to cause of injury occurred;
The "injury-in-fact" rule—sets trigger in personal injury
cases at point when body's defenses are "overwhelmed;" and
The "multiple" or "triple-trigger" rule—requires coverage
under all policies during period of continuing exposure and manifestation.
Id. (citations omitted).
After noting Dorchester Dev. Corp. v. Safeco Ins.
Co., 737 S.W.2d 380, 383 (Tex. App.—Dallas 1987, no writ), as limited
Texas precedent for the "pure manifestation" approach, the Texas Supreme Court
specifically declined "to select among these tests, or formulate [the court's]
own," because the outcome of American Physicians did not require resolution
of the issue. Id.
In Don's Bldg., homeowners complained of a
synthetic stucco product universally known as exterior insulation and finish
systems (EIFS) that allegedly allowed moisture to penetrate into the interior
behind the EIFS and extensively damage the houses. The homeowners sued the builder
who was covered by OneBeacon CGL policies. They were unanimous in alleging that
the actual damage to the structure occurred during OneBeacon's policy limits,
but no apparent signs of damage appeared until well after the policies expired.
In order to tap into OneBeacon's coverage, the damage had to occur during the
policy period. This is why the complaints alleged that the damage actually occurred
unseen during the policy period. Yet the applicable statute of limitations would
have run if the homeowners had alleged that they discovered the damage during
the policy period. Recall, under Texas law, a court considers only the allegations
in the complaint, not what actually happened, to determine an insurer's duty
to defend.
OneBeacon denied coverage arguing that most Texas courts adopted the manifestation
trigger to determine when property damage occurred. Because the plaintiffs alleged
that the damage became apparent after the policy period, OneBeacon alleged it
did not have a duty to defend. OneBeacon is right. The Fifth Circuit Court of
Appeals and most Texas state courts applied the manifestation trigger to property
damage up to the issuance of the Don's Bldg.
opinion. Don's Bldg. argued that the injury-in-fact
trigger was the proper trigger theory in Texas to determine when damage occurs.
A coverage suit was filed in federal court and wound up before the Fifth
Circuit on appeal. Rather than following the trend toward the manifestation
trigger, the Fifth Circuit punted and certified the question to the Texas Supreme
Court to answer.
The Texas Supreme Court followed the same approach it had taken in the groundbreaking
Lamar Homes, Inc. v. Mid-Continent Cas. Co.,
242 S.W.3d 1 (Tex. 2007), case and simply gave effect to the literal meaning
of the policy, which covers damage caused by an occurrence during the policy
period. Thus, the injury or damage—not the conduct that caused it or the manifestations
that followed from it—must happen during the policy period. However, manifestation
is more workable because it is often difficult to know when damage in fact occurred.
Fixing the occurrence at the point that damage becomes capable of discovery
seems like a more practical rule. The High Court recognized this concern but
refused to allow "ease of proof or administrative convenience" to be exalted
over faithfulness to the policy language.
The reasoning of the court was as follows:
Pinpointing the moment of injury retrospectively is sometimes difficult,
but we cannot exalt ease of proof or administrative convenience over faithfulness
to the policy language; our confined task is to review the contract, not
revise it. Our prevailing concern is not one of policy but of law, and we
must honor the parties' chosen language-covering third-party claims if damage
to the claimant's property occurred during the policy period. The policy
asks when damage happened, not whether it was manifest, patent, visible,
apparent, obvious, perceptible, discovered, discoverable, capable of detection,
or anything similar. Occurred means when damage
occurred, not when discovery occurred.
In this case, property damage occurred when the home in question suffered
wood rot or some other form of physical damage.
Id.
Although the court cites Couch on Insurance
in support of its holding that the injury-in-fact theory most closely follows
the language of the CGL policy, it ignores the following statement on the difficulties
of proof in that same section of the treatise:
The need to delve into such a tricky and time-consuming issue of fact may
be fairly viewed as one reason that this theory has not been universally
adopted.
7 Couch on Insurance § 102:22.
The court also notes in footnote 45 that it does not have any coverage issues
before it regarding potential indemnity if damage continues through more than
one policy period. The court stated as follows:
… this case does not require an analysis of coverage questions in circumstances
where property damage occurred in the course of a continuing process, but
began before the inception of the term of the policy in issue. Nor do we
understand the Fifth Circuit to have asked how OneBeacon's indemnity obligations
are determined if the facts ultimately show that the property damage began
during the OneBeacon policy period but continued beyond that period, perhaps
into periods covered by other policies. We express no opinions on these
questions, but see Am. Physician's Ins. Exc. v. Garcia, 876
S.W.2d 842, 855 (Tex. 1994) ("If a single occurrence triggers more than
one policy … all insurers whose policies are triggered must allocate funding
of the indemnity limit among themselves according to their subrogation rights.");
7 Couch on Insurance § 102:23 (discussing
"loss in progress" doctrine)…(other citations omitted).
Id. at n. 45.
Accordingly, the court adopted the injury-in-fact rule in property damage
cases and held that the allegations in the Don's Bldg.
pleading (that injury occurred in fact during the policy period yet was not
discovered until later), OneBeacon's duty to defend was triggered under the
"eight-corners rule."
Texas Homeowners Policy HO-B
The Texas Homeowners Policy contains similar liability coverage language
as the CGL policy at issue in Don's Bldg. The
insuring agreement under the HO-B states as follows:
COVERAGE C (Personal Liability)
If a claim is made or a suit is brought against an
insured for damages because of
bodily injury or
property damage caused by an
occurrence to which this coverage applies,
we will …
HO-B, II, Part C, (accessed October 20, 2008).
Under the policy, "occurrence" is defined as follows, "an accident, including
exposure to conditions, which results in bodily injury
or property damage during the policy period."
Pursuant to the Texas Supreme Court's decision in
Don's Bldg., the injury-in-fact trigger will likely be applied in the
context of homeowners policies in Texas. While pinpointing the moment of injury
retrospectively is sometimes difficult, courts in Texas are instructed to follow
the language of the policy when determining when the property damage occurred.
Thus, the injury-in-fact will apply as the trigger of coverage for property-damage
liability insurance cases.
Don's Building—Dallas Court of Appeals
In September 2008, the Dallas Court of Appeals issued the first subsequent
opinion to Don's Bldg. in
Union Ins. Co. v. Don's Building Supply, Inc.,
No. 05-06-00884-CV (Tex. App.—Dallas, Sept. 23, 2008, no pet. h.). In the Dallas
Court of Appeals case, the court reviewed the same injury as asserted as in
Don's Bldg., property damage to private homes
caused by exterior insulation sold by the unfortunate Don's Building Supply
(DBS).
DBS sold the insulation to an unnamed builder who constructed the home in
1991. The homeowner plaintiffs in the underlying lawsuit, Bill and Jo Kantz,
purchased the house in 2003 and were the first owners to discover the damage.
They alleged that the damage began about 6 months after installation in 1991.
Union Insurance issued liability policies to DBS from December 1996 through
December 1998. One Beacon insured DBS from December 1993 to December 1996. The
Kantzes also alleged:
[C]ontinuous and repeated exposure of the moisture-sensitive substrates
of the home to the elements, specifically rain …, resulted in an ongoing
exposure to moisture and accumulation of water behind the [insulation] system.
Each repeated moisture intrusion event has contributed to and worsened the
damage to Plaintiffs' property.
DBS argued that because the alleged damage was progressive, Union had a duty
to defend it because injury-in-fact was alleged within the Union policy period.
Union argued, as had One Beacon, that its 1996-1998 policies were not triggered
because the damage was not discovered until 2003. However, the Texas Supreme
Court's decision in Don's Building rejected the
discovery trigger.
Union argued: How could the Kantzes allege they were damaged in the 1996-1998
period when they did not even own the house until 2003? The Dallas Court of
Appeals neatly avoided question by stating, "Whether there are defenses available
to Don's on the merits of the Kantzes' claims based on the time of the Kantzes'
purchase of the home is not our inquiry." The court held:
Under the eight corners of the Kantzes' petition and Don's
insurance policy, the Kantzes allege property damage occurred during the policy
term. Union is contractually obligated to defend Don's against the Kantzes'
claim.
However, this raises another problem. If there are multiple insurers for
an insured, do they all have a duty to defend the insured? Under Texas law,
the answer is clearly "Yes." Each insurer whose policy is triggered has a duty
to defend the entire action. Handling the
question of the duty to indemnify in this situation was likely answered in
American Physicians Ins. Exch. v. Garcia, 876
S.W.2d 842 (Tex. 1994), which stated as follows:
If a single occurrence triggers more than one policy, covering different
policy periods, then different limits may have applied at different times.
In such a case, the insured's indemnity limit should be whatever limit applied
at the single point in time during the coverage periods of the triggered
policies when the insured's limit was highest. The insured is generally
in the best position to identify the policy or policies that would maximize
coverage. Once the applicable limit is identified, all insurers whose policies
are triggered must allocate funding of the indemnity limit among themselves
according to their subrogation rights.
See Id.
However, where multiple policies have been triggered, there is likely to
be a more litigation regarding the duty to indemnify and the insured's right
to select which policy will apply.