By: Julie Shehane
Commercial general liability policies define an “occurrence” as “an accident, including continuous or repeated exposure to the same general harmful conditions.” While the policies do not define the term “accident,” the Texas Supreme Court has held that “[a]n accident is generally understood to be a fortuitous, unexpected, and unintended event.” Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 8 (Tex. 2007). The Fifth Circuit echoes this, stating that “both state and federal courts in Texas have interpreted the terms ‘accident’ and ‘occurrence’ to include damage that is the unexpected, unforeseen or undesigned happening or consequence of an insured’s negligent behavior.” Federated Mut. Ins. Co. v. Grapevine Excavation Inc., 197 F.3d 720, 725 (5th Cir. 1999).
For insurance coverage practitioners, determining the number of occurrences involved in a particular claim always required a close examination of case law that focuses primarily “on the events that cause the injuries and give rise to the insured’s liability, rather than on the number of injurious effects.” H.E. Butt Grocery Co. v. National Union Fire Ins. Co., 150 F.3d 526, 530 (5th Cir. 1998). For example, in Maurice Pincoffs Co. v. St. Paul Fire & Marine Ins. Co., the insured imported bird seed and sold it to several dealers. Id. at 205. The bird seed was contaminated, however, and the dealers suffered losses from birds that died as a result. Id. In determining the number of occurrences, the court reasoned that:
[I]t was not the act of contamination which subjected [the insured] to liability. . . . It was the sale that created the exposure to ‘a condition which resulted in property damage neither expected nor intended from the standpoint of the insured,’ under the definition of the policy.
Id. at 206. With this framework in mind, the Court concluded each sale triggered a new occurrence because the sale triggered separate, new liability to each dealer who purchased the seed and fed it to its birds. Id. at 205-06. The Maurice Pincoffs decision is an example of the “liability triggering event” test often applied in construction defect cases where a contract exposes the insured to liability, and it is part of the framework by which insurance practitioners have determined the number of “occurrences.”
In Lennar Corp. v. Great American Insurance Co., a home builder applied defective insulation to hundreds of homes. 200 S.W.3d 651, 682-83 (Tex. App.—Houston [14th Dist.) 2006), abrogated on other grounds by Gilbert Texas Const., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118 (Tex. 2010). The builder sought a declaration of only one “occurrence” because all the homes suffered damage from only one cause – water entrapment caused by the defective insulation. Id. at 660-61, 681-82.
Ultimately, the Court rejected the builder’s argument and, instead, concluded that Lennar’s liability stemmed from its act of building and individually selling each home, which caused Lennar to incur liability to each homeowner. Id. As such, the court directly tied each “occurrence” to each new contract that Lennar entered.
Following Maurice Pincoffs and Lennar, the Northern District of Texas ruled that a developer’s liability arose from its general duties as a developer – the sale of the property. Trammel Crow Residential Co. v. St. Paul Fire & Marine Ins. Co., No. 3:11-cv-02853-N, 2014 WL 12577393 (N.D. Tex. Jan. 21, 2014). In Trammel, the claims involved defective construction that caused water intrusion and property damage. Id. at *1. In holding that the developer’s liability stemmed from the contract for sale, it specifically rejected the notion that “there was a separate occurrence each time a building sprang a leak.” Id. at *5.
Recently, however, the Southern District of Texas departed from this approach that focuses on the contract as the “liability triggering event” in construction defect cases. In Urban Oaks Builders, LLC v. Gemini Ins. Co., Urban Oaks contracted to be the general contractor on the construction of several apartment buildings and a clubhouse in Florida. No. 4:19-cv-4211, at *1 (S.D. Tex. Dec. 14, 2021). According to the decision, the claimant alleged construction defects to various buildings related to a variety of different products and systems. Id. at *4. The court noted that the parties agreed:
this action involves multiple construction defects, at multiple locations [or at multiple buildings], constructed at different points in time, and attributable to the construction activities of multiple subcontractors, each performing different activities within, and among, the separately constructed buildings.
Gemini argued the event that triggered its insured’s liability was the sale of the property, so the claim involved one occurrence. Id. at *5. Relying on the pre-existing case law, it reasoned that its insured’s liability was not tied to the cause of the damage to the property, which was various acts of faulty construction, but to the sale of the property. Id.
The Court, however, concluded that the damages alleged by the claimant “did not result from a single, uninterrupted, continuing cause, but from multiple types of work, by multiple subcontractors, on multiple areas of multiple buildings.” Id. While the Court discussed Lennar, it disregarded the Lennar court’s holding that tied the number of occurrences to Lennar’s sale of each home with the defective insulation.
Moreover, the court appeared to focus on the number of injurious effects and actual construction defects, which the Fifth Circuit strictly rejected in Evanston Ins. Co. v. Mid-Continent Cas. Co. In Evanston, the Fifth Circuit reiterated that the proper test for interpreting “occurrence” “is on the events that cause the injuries and give rise to the insured’s liability, rather than on the number of injurious effects.” 909 F.3d 143, 147-48 (5th Cir. 2018).
To further justify its departure from prior Texas precedent, the Urban Oaks court relied on cases from California and Florida and specifically declined to follow the Trammell Crow decision discussed above. This was the first Southern District case to depart from the “liability triggering event” test announced in Maurice Pincoffs.
In an even more recent case, Millsap v. Amerisure Ins. Co., et, al., the Southern District again departed from existing Texas law and applied the same reasoning that it did in the Urban Oaks decision. No. 3:20-cv-00240 (S.D. Tex. May 19, 2022). Although the district judge has not yet adopted the Magistrate’s report and recommendation in Millsap, it is expected to do so based upon the Urban Oaks decision.
In Millsap, the plaintiff sued Millsap, a waterproofing subcontractor, for damages to three buildings in a condominium project. While the project was allegedly constructed in phases, Millsap performed its work under one contract and subsequent change orders pursuant to that one contract. Amerisure argued that there was only one liability triggering event and, thus, only one occurrence, which was Millsap’s failure to perform its work as specified in the contract.
Ultimately, the Magistrate applied the Urban Oaks decision and concluded there were multiple occurrences, although it declined to engage in any analysis to determine the exact number of occurrences. The Magistrate’s report and recommendation reasoned that “Millsap performed work on multiple, distinct phases of the project” and each “phase,” therefore, was a separate occurrence-causing force giving rise to liability. Amerisure has objected to the report and recommendation pointing out that it ignores existing precedent, and instead, misapplies foundational cases, such as Maurice Pincoffs and Lennar.
The Urban Oaks and Millsap decisions from the Southern District of Texas clearly depart from existing Texas law, and it is unknown whether the Southern District has considered the effects of its decisions on carriers and policyholders in Texas. If the Southern District focuses its occurrence inquiry on the phases of construction and the number of defects complained of, general liability insurers may be forced to pay aggregate limits in most construction defect cases that are decided in the Southern District.
Moreover, many subcontractors in Texas purchase general liability policies with high self-insured retentions to help keep premiums low; but, they now will be faced with the prospect of having to pay hundreds of thousands of dollars in self-insured retentions before their general liability carriers will owe any indemnity coverage. In fact, the opinions in Urban Oaks and Millsap tend to favor excess carriers, whose coverage now will not apply until the aggregate limit of liability is met.
It was only ten years ago that Texas subcontractors had trouble securing general liability insurance in light of often-required indemnity agreements that required subcontractors to fully defend and indemnify the general contractor, owner, developer, and the like (“indemnitees”) from the indemnitees’ own acts of negligence. To combat the issue, the Texas Legislature enacted the Texas Anti-Indemnity Act, which voids most of these agreements, as well as agreements requiring subcontractors to name indemnitees as additional insureds for the indemnitees’ own acts of negligence. Now, because of the Southern District’s deviation from existing Texas precedent, subcontractors may once again face increasing issues in obtaining affordable general liability insurance.
Given the departure from existing law and the negative consequences to insurers and policyholders alike, the Urban Oaks and Millsap cases are ones to watch closely when and if they are appealed to the 5th Circuit.