Source: https://caselaw.findlaw.com/tx-supreme-court/1488885.html
Timestamp: 2019-04-24 23:08:01+00:00

Document:
PINE OAK BUILDERS, INC., Petitioner, v. GREAT AMERICAN LLOYDS INSURANCE COMPANY, Respondent.
Joseph H. Pedigo, Joseph S. Yardas Jr., for petitioner. Christopher Lee Burke, Miller & Burke, PC, San Antonio, Jennifer Bruch Hogan, Richard P. Hogan Jr., Matthew E. Coveler, Hogan & Hogan, L.L.P., Houston, for respondent.
Upon being sued by five different homeowners alleging various construction defects, Pine Oak Builders, Inc. made written demand on its insurers, including Great American Lloyds Insurance Co., for a defense. When the insurers denied any duty to defend, Pine Oak sued for breach of the insurers' defense obligations. This coverage dispute revisits issues addressed in three of our recent cases, which decide some matters in Pine Oak's favor and some in Great American's favor.
Great American issued occurrence-based commercial general liability (CGL) policies to Pine Oak, a homebuilder, covering April 1993 to April 2001. Another insurer, Mid-Continent Casualty Co., issued CGL policies covering April 2001 to April 2003. Between February 2002 and March 2003, five homeowners sued Pine Oak, alleging their homes suffered water damage because of defective construction. Four of the suits alleged improper installation of a synthetic stucco product known as an Exterior Insulation and Finish System (EIFS). The other suit, the Glass suit, alleged water damage due to improper design and construction of columns and a balcony.
The insurers denied Pine Oak's request for a defense in the homeowner suits, prompting Pine Oak to file this suit. The insurers in turn sought a declaratory judgment that they had no obligation to defend or indemnify Pine Oak. Both sides sought summary judgment-Pine Oak arguing its right to a defense and damages, and Great American arguing the policies did not cover the claims in the underlying suits. The trial court granted summary judgment for the insurers on all issues.
B. Don's Building Supply-What Triggers Coverage Under an Occurrence-Based CGL Policy?
The underlying suits concern homes built in 1996 and 1997. Great American's policies, consecutive one-year policies, cover the period from April 5, 1993 to April 5, 2001. On the question of whether Great American's policies were triggered under facts alleged in the underlying suits, the court of appeals followed the “exposure rule” for determining whether a property-damage claim is covered under an occurrence-based CGL policy.7 Great American urges us to adopt the “manifestation rule” for deciding whether a property-damage claim is covered.
We rejected both of these rules in Don's Building Supply, Inc. v. OneBeacon Insurance Co.,8 another case involving insurance coverage of EIFS claims. We 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.9 As we explained in that case, “the key date is when injury happens, not when someone happens upon it”-that is, the focus should be on “when damage comes to pass, not when damage comes to light.” 10 The policy language construed in Don's Building Supply is identical to the relevant language in Great American's policies.11 So property damage occurred under the Great American policies “when a home that is the subject of an underlying suit suffered wood rot or other physical damage.” 12 On remand, the trial court should apply the actual-injury rule to any remaining disputes about whether the property-damage claims fall within the terms of the Great American policies.
In four of the underlying suits against Pine Oak, the petitions expressly alleged defective work by one or more subcontractors. In the Glass case, the petition contains no allegations of defective work by a subcontractor. The petition asserted causes of action for breach of contract and warranty, violation of the Residential Construction Liability Act,14 and negligence, based on Pine Oak's alleged failure to perform its work in a good and workmanlike manner and a failure to make requested repairs.
In this coverage suit, Pine Oak submitted evidence that the defective work alleged in the Glass case was performed by subcontractors. Based on this extrinsic evidence, Pine Oak contends Great American had a duty to defend Pine Oak in the Glass case.
Pine Oak views GuideOne Elite as distinguishable because in that case the insurer was attempting to introduce extrinsic evidence to limit its duty to defend, whereas here Pine Oak, the insured, offered extrinsic evidence to trigger the duty to defend. This distinction is not legally significant.
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. The duty to defend depends on the language of the policy setting out the contractual agreement between insurer and insured.27 A defense of third-party claims provided by the insurer is a valuable benefit granted to the insured by the policy, separate from the duty to indemnify.28 But the insurer's duty to defend is limited to those claims actually asserted in an underlying suit. Great American's policy provides that it shall “have the right and duty to defend any ‘suit’ seeking” damages for bodily injury or property damage covered by the policy. “Suit” is defined as “a civil proceeding in which damages because of [property damage or other injuries] to which this insurance applies are alleged.” 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. To hold otherwise would impose a duty on the insurer that is not found in the language of the policy. Such a construction would subject an insurer to common-law and statutory liability for failing to defend the insured against a third-party claim that has not been alleged, despite policy language limiting the duty to defend to claims that have been alleged.
Such a construction would also “conflate the insurer's defense and indemnity duties,” since the duty to defend turns on the “factual allegations that potentially support a covered claim,” while “the facts actually established in the underlying suit control the duty to indemnify.” 29 The duty to defend protects the insured by requiring a legal defense to allegations without regard to whether they are true,30 but it 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 petition in the record before us.
We affirm in part and reverse in part the court of appeals' judgment, and remand the case to the trial court for further proceedings consistent with this opinion.
2. Tex. Ins.Code §§ 542.051-.061 (previously codified as Tex. Ins.Code art. 21.55).
3. 50 Tex. Sup.Ct. J. 1073-74 (Aug. 31, 2007).
4. 242 S.W.3d 1, 4-5, 16 (Tex.2007).
5. Great American's briefing concedes that the occurrence and property-damage issues presented in this case are identical to the issues then pending in Lamar Homes.
6. Lamar Homes, 242 S.W.3d at 5, 20.
7. --- S.W.3d at ----.
8. 267 S.W.3d 20 (Tex.2008).
11. The Great American policies provided:We will pay those sums that the Insured becomes legally obligated to pay as damages because of ․ “property damage” to which this insurance applies. We will have the right and duty to defend any “suit” seeking those damages.․This insurance applies to ․ “property damage” only if ․ the ․ “property damage” is caused by an “occurrence” ․ and ․ the ․ “property damage” occurs during the policy period.․“Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.․“Property damage” means ․ physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it.
12. Don's Bldg., 267 S.W.3d at 24.
13. See Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 11 (Tex.2007) (describing identical policy language).
14. Tex. Prop.Code §§ 27.001-.007.
15. See Nat'l Union Fire Ins. Co. of Pittsburgh, PA, v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.1997); Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex.1965).
16. Nat'l Union, 939 S.W.2d at 141.
17. 197 S.W.3d 305, 307 (Tex.2006).
21. Id. at 308 (footnotes omitted).
23. Id. at 310. Our analysis in GuideOne Elite did not consider whether an exception to the eight-corners rule might exist where the parties to the underlying suit collude to make false allegations that would invoke the insurer's duty to defend, because the record did not indicate collusion. Id. at 311.
24. Fid. & Guar. Ins. Underwriters, Inc. v. McManus, 633 S.W.2d 787, 788 (Tex.1982).
25. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 142 (Tex.1997).
26. Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 829 (Tex.1997).
27. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex.1994) (“Interpretation of insurance contracts in Texas is governed by the same rules as interpretation of other contracts. When construing a contract, the court's primary concern is to give effect to the written expression of the parties' intent.” (citations omitted)).
28. See Cowan, 945 S.W.2d at 821-22 (noting that “the duty to defend and the duty to indemnify by an insurer are distinct and separate duties.”); Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 25 (Tex.1965) (noting that duty to indemnify protects insureds “from payment of damages they may be found legally obligated to pay,” while duty to defend “protects the same parties against the expense of any suit seeking damages” covered by the policy).
29. GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 310 (Tex.2006).
30. See Heyden Newport Chem. Corp., 387 S.W.2d at 24 (“We think that in determining the duty of a liability insurance company to defend a lawsuit the allegations of the complainant should be considered in the light of the policy provisions without reference to the truth or falsity of such allegations and without reference to what the parties know or believe the true facts to be, or without reference to a legal determination thereof.”).

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