Texas Federal Court Delivers Another Big Victory to Policyholders on CGL Coverage for Construction Defect Claims and “Tear-Off” Damages | payne and fears
Insurers regularly argue that Commercial General Liability (“CGL”) policies are not performance warranties and therefore there is no coverage for claims seeking damages for defective work or defective. Insurers also say there is no cover for so-called ‘snatch’ or ‘rip’ damage, where repairing physical damage requires replacing faulty work that was not itself damaged. . Fortunately, in a newly decided case, a federal district court in Texas rejected both of an insurer’s arguments. Amerisure Mutual Insurance Company v McMillin Texas Homes, LLC, No. SA-20-CV-01332-XR, 2022 WL 686727 (WD Tex. March 8, 2022).
As with most construction defect claims, this case involved landlord claims against a residential developer, McMillin Texas Homes (“McMillin”). After the houses were completed, the owners complained about flaws in the artificial stucco exterior finish and took legal action. McMillin submitted a quote to its insurer, Amerisure Mutual Insurance Company (“Amerisure”). Amerisure then sued McMillin for declaratory judgment, arguing that it had no obligation to defend or indemnify the owner’s claims. McMillin filed a counterclaim alleging that Amerisure violated its policies by refusing to defend or indemnify McMillin.
Amerisure sought summary judgment, arguing that because its CGL policies are not performance warranties, claims arising from McMillin’s poor performance on stucco are not covered. The insurer also made a number of other arguments, including that so-called “tear” damage is not covered by Texas law.
The court rejected each of Amerisure’s arguments. First, the court explained, citing Lamar Homes, Inc. v. Mid-Continent Case. Co., 242 SW3d 1, 10 (Tex. 2007), this coverage rests on the specific language used in the policy and not on arguments that simply liken a CGL policy to a performance bond. After reviewing the policy and the owner’s claims, the court ruled that the underlying complaints alleged the possibility of a covered claim for property damage other than defective stucco work. Second, the court held that because the defective stucco work would have damaged other property, the costs of replacing the defective but undamaged stucco were potentially covered, since the stucco replacement was necessary to repair the damaged property that lay beneath. the stucco.
Take away food
Policyholders can breathe a collective sigh of relief knowing that Texas courts continue to find coverage for construction defect claims under CGL policies, and that Texas courts continue to hand down common sense decisions that benefit policyholders who operate in the construction and home building sectors. Americanure also gives policyholders a big win on the highly contentious issue of covering ‘rips’ costs by making it clear that these costs are at least potentially covered in the event of property damage claims other than faulty workmanship and replacement of faulty material work is required to repair the damaged property. This is an issue that is often litigated, and Texas continues to do a great job of explaining when and why “rips and tears” damage is covered by CGL policies.