The Dallas Court of Appeals, in Vines-Herrin Custom Holmes, LLC v. Great American Lloyds, No. 05-10-00007-CV, 2011 WL 6396473 (Tex. App.—Dallas Dec. 21, 2011, no pet. h.) handed down an opinion overturning a take-nothing judgment on behalf of an insurer of a construction company and remanding to the trial court for further proceedings. In so doing, the court held that (1) the plaintiff/owners had pled sufficient facts supporting when the physical damage to the property occurred to trigger the duty to defend on behalf of the insurer, and (2) the duty to indemnify was also triggered where the actual damages manifested during the insurer’s policy period.
This case involves a home owner who purchased a defective house from a contractor builder. The owner sued the contractor, who tendered the defense of the case to its liability insurer. The insurer denied coverage on several grounds repeatedly over several years. Eventually the owner and the contractor entered into a settlement agreement, whereby the owners were assigned the contractor’s claims against its insurer. The owners then intervened in the coverage lawsuit between the insurer and the contractor. This case was originally tried to the court in June 2008 and the court applied the “manifestation rule” (the controlling law at the time) regarding when the injury occurred. The “manifestation rule” imposed a duty to defend only if the property damage became apparent during the policy period. After the trial was complete and during the period of appeal on this case, the Texas Supreme Court issued its opinion in Don’s Building Supply, Inc. v. One Beacon Ins. Co., 267 S.W.3d 20 (Tex. 2008), which adopted the “actual injury” approach to determining when an injury takes place thereby rejecting the “manifestation rule”. The “actual injury” approach holds that the property damage occurs when the actual physical damage takes place, rather than when it manifests itself or becomes discoverable. The trial court reopened evidence and eventually ruled in favor of the insurers based on the “actual injury” standard. The trial court was concerned that the owners had failed to provide expert testimony regarding the exact date on when the property damage occurred—and by failing to show when the damages actually occurred, found in favor of the insurer. This appeal followed challenging the trial court’s interpretation of Don’s Building to require a party to allege an exact date that physical damage occurred and to require expert testimony to prove actual date of injury.
As has been the rule for years, the duty to defend is determined under the “eight-corners rule,” where only the pleadings and policy language are considered. Burlington N. & Santa Fe Ry. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 334 S.W.3d 217, 219 (Tex.2011). The first question to determine in this case was whether the pleadings potentially allege property damage that actually occurred within the policy period. The pleadings in the underlying case contained allegations of when water damages were noticed, and given the continuous coverage of the contractor’s insurance policies, the petitions adequately pled that actual physical damage occurred during the insurance policies. Therefore, this was sufficient to trigger the duty to defend.
Next, with respect to the duty to indemnify, the trial court made the following finding of fact:
In May 2000, shortly after purchasing the home, there was substantial flooding from a rainstorm that caused damage to the Resident [sic], including water leaks. This property damage manifested during the coverage period of Great American Policy No. PAC 9–86–51–21–04, which was in effect from November 9, 1999 through November 9, 2000.
Because actual damages have occurred by the time they manifest, coupled with the fact that the cause of the damages was held to be defective framing which occurred between the start of construction and the completion of construction, the appellate court held the evidence showed the insurer’s duty to indemnify was triggered, and no expert testimony establishing the exact date of injury was required. Although there were additional grounds raised in the appeal, because the trial court did not rely on them for the take-nothing judgment, the appellate court did not address them.
The case was remanded to the trial court for further proceedings.