Texas Supreme Court Adopts The "Actual Injury" Trigger For Construction Defect Claims
November, 2008
In Don’s Building Supply, Inc. v. OneBeacon Ins. Co., 2008 WL 3991187 (Tex., August 29, 2008) (“DBS”), the Texas Supreme Court adopted the “actual injury” trigger of coverage to find that an insurer had a duty to defend under an occurrence-based commercial general liability policy because the claimant’s pleadings alleged that physical injury to tangible property took place during the policy period, and was caused by the insured’s allegedly defective product. Even though the majority of Texas courts have applied the manifestation trigger in similar cases, the Texas Supreme Court declined to follow such a rule, and determined that for construction defect claims under an occurrence-based CGL policy, the relevant inquiry is when the damage actually took place, as opposed to when the damage is discovered.Facts
Don’s Building Supply, Inc. (“DBS”) sold and distributed a synthetic stucco product
known as an Exterior Insulation and Finish System (“EIFS”). DBS installed this siding system on various homes from December 1, 1993 to December 1, 1996. During this time, DBS was covered by comprehensive general liability (“CGL”) policies issued by Potomac Insurance Company of Illinois and assigned to OneBeacon Insurance Company (“OneBeacon”).
From 2003 to 2005, various Texas homeowners filed state court lawsuits against DBS asserting causes of action for negligence, fraud, and violations of the Texas Deceptive Trade Practices Act. The homeowners alleged that the EIFS installed by DBS was defective and not weather-tight, thereby allowing moisture to seep into wall cavities behind the siding, causing wood rot and other damages. The homeowners asserted that these injuries began to occur on the occasion of the first penetration of moisture behind the EIFS. The homeowners further asserted that the first penetration of moisture behind the EIFS was within six months to one year after the application of the EIFS.
The homeowners sought to avoid the statute of limitations for their various claims by pleading the discovery rule, and contending that the damage to their homes was hidden from view and not discoverable or readily apparent until after the policy period ended.
OneBeacon initially defended DBS, but subsequently filed a declaratory judgment action in the U.S. District Court for the Northern District of Texas seeking a declaration that it had no duty to defend and indemnify DBS under the CGL policies. The court concurred with OneBeacon and held that an insurer’s duty to defend does not arise until the damage becomes identifiable. DBS subsequently appealed and the question of when an insurer’s duty to defend is triggered, where damage is alleged to have occurred during the policy period but was inherently undiscoverable until after the policy period expired, was certified for the Texas Supreme Court.
Analysis
The relevant policies contained the standard definitions of “bodily injury,” “property damage” and “occurrence”, as those terms are usually defined under occurrence-based CGL policies. The Texas Supreme Court analyzed those definitions as well as the language of the Insuring Agreement and held that coverage was available to DBS if the property damage occurred during the policy period. Thus, coverage obligations under an occurrence-based CGL policy were triggered when the claimant’s home suffered wood rot or other physical damage. According to the Texas Supreme Court, the date that the physical damage is or could be discovered was not relevant to the analysis under an occurrence-based CGL policy. The Texas Supreme Court adopted what is referred to as the “actual injury” or “injury-in-fact” approach to property damage claims where the damage was not necessarily discoverable until after the expiration of the policy. Under the actual injury rule, coverage is triggered if physical property damage occurs during the policy period.
In adopting this approach, the Texas Supreme Court expressly rejected the “manifestation rule,” the “exposure rule,” as well as multiple trigger rules, based on the plain language of the policy. Although OneBeacon advocated for the manifestation rule, and although most Texas courts had previously applied the manifestation trigger for property damage claims, the Texas Supreme Court found that the controlling policy language did not justify use of the manifestation rule. The court reasoned that the policy language did not limit coverage to those instances where the actual injury manifests itself during the policy period, or where the damage was discovered or discoverable during the policy period. The policy language at issue provided coverage if an actual physical injury to tangible property took place during the policy period. Consequently, the court held that actual injury to property, as opposed to discovery of such damage, triggers an insurer’s duty to defend under occurrence-based CGL policies.
Learning Point
The Texas Supreme Court’s decision in DBS is a landmark pronouncement because it is the first time that a high court explicitly defined when an insurer’s duty to defend is triggered in the context of construction defect claims. Moreover, DBS marks the first time that actual injury to property, as opposed to discovery of such injury, is sufficient to trigger an insurer’s duty to defend such claims. Given that other jurisdictions have not uniformly resolved the issue of when an insurer’s duty to defend is triggered for construction defect claims under an occurrence-based policy, the persuasive impact of DBS may be significant as other states wrestle with the difficult trigger issues associated with construction defect claims.
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