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Pine Oak Builders v. Great American Lloyds
Posted 2/19/09 Lee Shidlofsky, Visser Shidlofsky LLP
On February 13, 2009, the Supreme Court of Texas issued another important opinion for insurance law jurisprudence. See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., No. 06-0867 (Tex. Feb. 13, 2009). Pine Oak, a homebuilder, was insured by Great American under consecutive, occurrence-based commercial general liability insurance policies covering April 1993 to April 2001. Mid-Continent Casualty Co. issued similar policies from April 2001 to April 2003. Both insurers refused to defend Pine Oak in lawsuits filed by five homeowners during a one-year period from February 2002 to March 2003, which alleged that their homes suffered water damage as a result of defective construction.
As a result of the insurers' denials, Pine Oak filed a declaratory judgment action against them both. The insurers counterclaimed and all parties moved for summary judgment. Great American argued that its policies did not cover the claims in the underlying lawsuits and Mid-Continent argued that its EIFS exclusion barred coverage. The trial court ruled in favor of the insurers on all the motions, and the court of appeals affirmed as to Mid-Continent because of the application of its EIFS exclusion. On appeal, with regard to both insurers, the court affirmed the trial court's ruling on the Glass lawsuit given the absence of any allegation that a subcontractor performed the work, but concluded that Great American owed a defense on each of the other four underlying lawsuits. The appellate court ruled that notwithstanding Great American's improper denial of defense, Pine Oak was not entitled to statutory damages. All parties appealed.
At the outset, the Supreme Court of Texas said that Lamar Homes foreclosed Great American's argument that the faulty-workmanship claims asserted against Pine Oak did not constitute "property damage" caused by an "occurrence." Turning to the issue of whether Great American's policies were triggered by the allegations in the underlying lawsuits, the Court noted that the houses at issue were built in 1996 and 1997—during Great American's time on the risk. The appellate court applied the "exposure rule" in finding that the Great American policies were potentially implicated and thus owed a defense. Great American, in turn, urged the Supreme Court to apply the "manifestation rule," which could have precluded coverage in its entirety. Having already rejected both such trigger rules and adopting instead an "actual injury rule" in its decision in Don's Building Supply, the Court ordered the trial court to apply the "actual injury rule" on remand "to any remaining disputes about whether the property-damage claims fall within the terms of the Great American policies."
The final issue addressed by the Court involved the admissibility of extrinsic evidence regarding the Glass lawsuit in order to establish Great American's duty to defend. The importance of the evidence stemmed from exclusion (l) of the CGL policy, which excludes property damage to the insured's completed work unless "the damaged work or the work out of which the damages arises was performed on your behalf by a subcontractor." The Glass lawsuit omitted any reference to defective work performed by a subcontractor, unlike the other four lawsuits. Rather, Pine Oak was alleged to have failed to perform its work in a good and workmanlike manner and failed to make requested repairs. In Pine Oak's lawsuit against the insurers, the company submitted extrinsic evidence that the work at issue was performed by Pine Oak's subcontractors, and thus it contended that Great American had to defend the company in the Glass lawsuit.
The Court acknowledged that the duty to defend is determined by the "eight corners" of the insurance policy and the underlying pleading. It noted that its decision in GuideOne Elite Insurance Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006), had been issued six days before the appellate court's ruling in the Pine Oak matter. In GuideOne, "[w]ithout recognizing an exception to the eight-corners rule, we held that any such exception would not extend to evidence that was relevant to both insurance coverage and the factual merits of the case alleged by the third-party plaintiff." Applying that rule to the case before it, the Court found that Pine Oak's evidence contradicted the facts alleged in the Glass lawsuit.
The Court said that in "deciding the duty to defend, the court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition." Because Pine Oak's evidence would have changed the allegations of the underlying lawsuit, it was inadmissible. "The policy imposes no duty to defend a claim that might have been alleged but was not, or a claim that more closely tracks the true factual circumstances surrounding the third-party claimant's injuries but which, for whatever reason, has not been asserted." Because the duty to defend does not extend to allegations—true or false—that have not been made, Great American's duty to defend was not triggered by the Glass lawsuit. By finding that Great American did not owe a defense in that underlying lawsuit, the Court affirmed the appellate court's opinion. The appellate court had ruled that because no duty to defend existed, Great American also was not obligated to indemnify Pine Oak. Thus, in essence, the Court affirmed the holding that "no duty to defend means no duty to indemnify."
The Supreme Court of Texas' decision in Pine Oak is another monumental case with significant ramifications. Importantly, while the Court once again failed to recognize any exception to the "eight corners" rule, it did not necessarily foreclose the adoption of a limited exception for "coverage only" facts. Rather, it merely found a way to bar the evidence presented by Pine Oak, stating that it would contradict the allegations of the facts pleaded by the plaintiff in the underlying lawsuit. Presumably, the Court may still recognize a limited exception for "coverage only" facts.
The most disturbing aspect of the Court's opinion in Pine Oak is the ruling that no duty to defend necessarily means no duty to indemnify. In this author's opinion, such a ruling simply is wrong. Here, the actual facts established that the defective work at issue was performed by a subcontractor. The duty to indemnify, in contrast to the duty to defend, is based on the actual facts. Accordingly, even if the Court adheres to a strict eight corners approach for determining the duty to defend, nothing should have prevented Pine Oak from using the extrinsic evidence to establish a duty to indemnify. In effect, the Court's ruling in Pine Oak places too much emphasis on the oft-recognized principle that the duty to defend is broader than the duty to indemnify. While that principle is true in most cases, it does not hold true in every case. Pine Oak is a perfect example of where a strict adherence to an "eight corners" rule defeated a duty to indemnify even though extrinsic evidence could have established coverage.