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Courts and Coverage

Injury-in-Fact Coverage Trigger—HO Policy View

Brent Cooper | October 1, 2008

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The Texas Supreme Court finally pulled the trigger in Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., No. 07-0639 (Tex. Aug. 29, 2008). In Don's Bldg., the Texas Supreme Court held for the first time that "injury-in-fact" was the proper trigger theory under a commercial general liability (CGL) policy for a property damage claim arising out of a defective product/work product of the insured. The Texas Supreme Court held that the insurer's duty is triggered under Texas law "when injury happens, not when someone happens upon it."

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.


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.

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