Hot Topics for Trial Lawyers
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Don’s Building Supply, Inc. v. OneBeacon Insurance Co.
Posted 11/4/08 Lee Shidlofsky, Visser Shidlofsky LLPThe Supreme Court Pulls the Trigger on Manifestation
In Don's Building Supply, Inc. v. OneBeacon Insurance Co., a unanimous Supreme Court of Texas held that, absent specific policy language to the contrary, "property damage" under a CGL policy occurs when actual physical damage to the property occurs¡Xnot when the damage was or could have been discovered.
In Don's Building Supply, Inc. v. OneBeacon Insurance Co., 2008 WL 3991187 (Tex. Aug. 29, 2008), a unanimous Supreme Court of Texas addressed the issue of which "trigger" applies under an occurrence-based insurance policy in the context of latent "property damage" claims. The Court held that, absent specific policy language to the contrary, "property damage" under a commercial general liability policy occurs when actual physical damage to the property occurs—not when the damage was or could have been discovered.
Don's Building Supply, Inc. ("DBS") is a seller and distributor of a synthetic stucco product known as an Exterior Finish and Insulation System ("EIFS"). EIFS was installed on a number of homes from December 1, 1993 and December 1, 1996. From 2003 to 2005, numerous homeowners filed lawsuits against DBS, alleging that the EIFS was defective and not weather-tight, allowing moisture to enter the wall cavities. As a result of the water intrusion, the walls purportedly suffered wood rot and other damages. According to the homeowners, the damages began to occur after the first instance of water intrusion behind the EIFS, which allegedly occurred within six months to one year after the EIFS was applied to their homes. The homeowners claimed that the water intrusion caused extensive damage, reduced their property values, and necessitated a retrofit or replacement of the EIFS.
In an apparent attempt to avoid a statute of limitations defense against their claims, the homeowners relied on the discovery rule. In particular, the homeowners alleged that the damages were "hidden from view" because the siding's exterior was undamaged and it was "not discoverable or readily apparent to someone looking at the surface until after the policy period ended."
OneBeacon initially provided a defense to DBS, but it later filed a declaratory judgment action in which it sought a declaration that it had no duty to defend or indemnify DBS because the damages were not alleged to have become identifiable until after the OneBeacon policies had expired. The district court, relying on a "manifestation" trigger, agreed with OneBeacon. DBS appealed to the Fifth Circuit Court of Appeals, which certified questions to the Supreme Court.
The Supreme Court of Texas held that property damage occurred when actual physical injury to the property at issue occurred under the plain meaning of the OneBeacon policy provisions. In other words, the Court adopted what other courts have called the "actual injury" or "injury-in-fact" approach by which an insurer must defend any claim of physical property damage that occurred during the policy period. The Court held the plain language of the policy linked coverage to damage, not to damage detection, thus supporting the application of the injury-in-fact trigger.
As for the manifestation rule, which was the theory urged by OneBeacon and followed by most Texas courts, the Court found that the language of the policy did not provide for the application of that trigger. Under the "manifestation trigger," the insurer's duty arises only when the injury manifests itself during the policy period, but the Court recognized that the plain language of the policy only requires the "property damage" to occur during the policy period—not be discovered. In addition, the Court was concerned that if a manifestation rule was adopted, the line between occurrence-based and claims-made policies would be blurred. And further, despite OneBeacon's claim that the manifestation rule is easier to apply, the Court said that it "does not eliminate the need to address sometimes nettlesome fact issues." The Court recognized that pinpointing the moment of injury retrospectively can be difficult in some cases, "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." Once the proper trigger for coverage was decided, the Court promptly determined that OneBeacon had a duty to defend DBS in the underlying lawsuits because any amount of physical damage to tangible property during the OneBeacon policy period was sufficient to trigger the duty to defend.
While deciding an important issue, the DBS opinion left many questions unanswered. When is coverage triggered for "bodily injury" claims under commercial general liability and other policies? If property damage occurs during the course of a continuing process, but began prior to the inception date of a policy, is the duty to defend triggered under the policy? What about the duty to indemnify? How will insurers adjust losses where property damage begins during the policy period but continues into other policy periods? Will insurance companies take the Court's suggestion and try to modify the insuring agreement in a standard CGL policy in order to better reflect a manifestation trigger? Despite these questions, one principle remains clear: The language of the policy at issue must be read in a manner so as to give words their plain meaning.
OneBeacon's motion for rehearing is currently pending before the Supreme Court of Texas. OneBeacon argues that the Court's opinion has set aside twenty years of established jurisprudence applying the manifestation trigger rule to latent property damage claims. OneBeacon also argues that the Court incorrectly interpreted the policy's insuring language and the opinion conflicts with the Court's ruling in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765, 773-76 (Tex. 2007). Given the significance of the Court's opinion, it is a safe bet that OneBeacon will receive an abundance of amicus support from other insurance carriers.