Note: The decision in this case has been superseded by the Texas Supreme Court ruling in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 2007 WL 2459193 (Tex. August 31, 2007). See Lamar Homes Decision
Charlton v. Evanston Insurance Co., Cause No. SA-06-CA-480-H (W.D.
The issue in the Charlton case has divided Texas courts for years. Standard (and even nonstandard)commercial general liability (CGL) insurance policies cover bodily injury and property damage caused by an "occurrence," defined typically as an accident or exposure to harmful conditions. Property damage is defined as physical injury to tangible property. When, as in this case, a building contractor is sued for damage caused by poor workmanship, does the CGL insurer have a duty to defend the lawsuit?
The insured builder says, "yes" because the defective construction was not intentional but the result of workers' negligence. Isn't negligence conduct what you buy liability insurance to cover? The insurer says, "No," the lawsuit is basically one over a breach of contract and warranty. If the builder fails to comply with its contractual obligations to perform in a workmanship manner, that is a business decision and creates a business risk, which general liability insurance is not designed to cover.
Can the allegation of defective workmanship be a covered occurrence under a CGL policy? The Texas Supreme Court has before it (and has had since November 2005) the Lamar case on that very issue.
In Charlton v. Evanston Insurance Co., Charlton sued his insurance company, Evanston Insurance, alleging that the insurer failed to provide a defense that it owed under a CGL policy in an underlying lawsuit that alleged that Charlton failed to properly and appropriately provide construction services, materials, and management and caused improper finish grade work, out-of-plumb walls, improperly installed stucco, and similar damages. The suit also alleged that real and personal property was damaged as a result of water intrusions at the property caused by the faulty workmanship.
The court also found no allegation of property damage. Rather, the court found that the damages sought against Charlton were all “economic damage,” which basically means that the value of the property was diminished without sustaining physical damage. The court characterized the damage allegation as, in a nutshell, the house that was promised was not the house that was received. The court noted in a foot note that it would have held for the insurance even if it had found an alleged occurrence and property damage because two exclusions applied.
I think the court’s “sounds-in-contract” approach to the occurrence issue is not correct because it short-circuits the true inquiry into whether or not the damage was cause by accidental performance. In the construction industry, and in many others as well, business operations are performed under contracts. Lawsuits over faulty construction will invariably, as in Charlton, allege both breach of contract/warranty and negligence. To hold that the “gravamen” of the lawsuit “sounds in contract” and ignore the negligence allegation is simply to ignore the issue and find in favor of the insurer.
More productive is to examine the factual allegations and ask if the complaint is really about workers making honest mistakes as opposed to choices to take short cuts or substitute faulty materials. For example, compare decisions in Michigan Mut. Ins. Co. v.
In Charlton, the allegations included failure to supervise subcontractors and failure to properly manage the work. Arguably, property damage was alleged as failing to manage the work “caused damage to other property at the residence which now requires repair.” In short, the Charlton court arguably did not consider the factual allegations but selected a conceptual approach, not followed by most