TEXAS SUPREME COURT ADOPTS “ACTUAL INJURY RULE” TO DETERMINE INSURER’S DUTY TO DEFEND: This morning in a landmark decision, at least insofar as insurance coverage goes, the Texas Supreme Court rejected both the exposure and manifestation rules for determining when an insurer’s duty to defend is triggered under an occurrence based, commercial general liability policy. The court instead adopted the “actual injury rule.” The court also once again rejected a consideration of extrinsic evidence that would undermine the complaint allegations rule.
The principal issues are (1) whether the “exposure rule” or “manifestation rule” should determine when the duty to defend is triggered under an occurrence-based commercial general liability insurance policy and (2) whether evidence outside the pleadings and policy provisions may be introduced to determine a duty to defend. In this case Pine Oak sued two insurers with which it had policies (each insurer for a different policy period) after the insurers refused to defend the homebuilder from home buyers’ lawsuits. Both insurers argue Pine Oak’s policies did not cover the home buyers’ claims. Great American contends its policy with Pine Oak did not cover Pine Oak’s own work but would cover subcontractors’ work – and one home buyer’s suit only cited Pine Oak’s work in its allegations. In that case, Pine Oak argues that it should be allowed to prove by evidence beyond the lawsuit pleadings that a subcontractor’s work was at issue. Great American argues that its duty to defend Pine Oak also should depend on when the construction defects were manifest rather than when the exposure to harmful conditions began. The trial court granted summary judgment for the insurers. The court of appeals affirmed the trial court’s ruling that extrinsic evidence should not be allowed to show coverage, but reversed on when coverage was triggered.
The Supreme Court HOLDS that the actual-injury rule will control in this occurrence-based policy and that Pine Oak failed to plead facts that would invoke the subcontractor exception to the no-coverage provision of the policy.
The Court rejected both exposure and manifestation rules in Don’s Building Supply v OneBeacon Ins Co. another case involving insurance coverage for claims about the homes’ exterior finish and adopted instead the actual-injury rule, under which property damage occurs during the policy period if “actual physical damage to the property occurred” during the policy period. The key date is when injury happens, not when “someone happens upon it.” The policy language construed in Don’s Building Supply is identical to the relevant language in Great American’s policies.
The extrinsic fact Pine Oak seeks to introduce in this coverage action contradicts the facts alleged in the one suit. Faulty workmanship by a subcontractor that might fall under the subcontractor exception to the “your work” exclusion is not mentioned in the petition. Unlike the petitions in the other four suits, the petition in the Glass case does not accuse any subcontractor – a separate legal entity – of defective work or other legally actionable conduct, nor does it allege that Pine Oak is liable under any theory for the conduct or work of a subcontractor. 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. Pine Oak Builders Inc. v. Great American Lloyds Insurance Co. (Tex. February 14, 2009).
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We will cover this and other notable cases at our 2009 Ultimate Claims Handling Seminar on October 16, 2009. Save the date.
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