Builder Wins General Liability Insurance Coverage Case
In a long awaited decision, the Texas Supreme Court on Aug. 31 found that faulty workmanship by a subcontractor causing property damage to a home was covered by a builder’s comprehensive general liability insurance policy.
Builders purchase comprehensive general liability insurance covering accidents that result in or cause property damage on the job to help manage the risk of construction defect claims by home owners.
The case — Lamar Homes, Inc, v. Mid-Continent Casualty Co. — is significant because insurers across the country have been denying the claims of builders for construction defects arising out of the work of their subcontractors. If the insurers prevail, this could create a coverage gap that would be difficult to fill.
NAHB filed a friend of the court brief in support of Lamar in the Texas Supreme Court, and to date has filed similar amicus briefs in Arizona, Florida, Kansas, Pennsylvania, South Carolina and several federal courts arguing that that the interpretation of coverage by the insurers has been rigid, overly broad and not supported by language in the policies.
In 2003, Lamar Homes, Inc. was sued for “faulty workmanship” on a foundation poured by a subcontractor. Since his company was insured by a policy covering on-the-job accidents and property damage, Gerald Lamar, a member of the Home Builders Association of Greater Austin in Texas, forwarded the lawsuit to his insurance company, expecting the company to defend him in the lawsuit.
The insurance company rejected Lamar’s claim on the grounds that a problem with workmanship was not an accident covered under his general liability policy.
The high court disagreed, noting that “on even a moment’s reflection, we all understand that contracts are broken, many times, for reasons that we would call accidental.” The court also determined that an insurance company could not assume that workmanship was faulty without proving so in a trial.
When a builder obtains a general liability policy to protect himself against mistakes, the insurance company has an obligation to carry out its duties as stated in the policy, the court found.
“It is not often that a small business wins in court against a large, national insurance company,” said Harry Savio, executive vice president of the Austin home builders association. “It’s a true David and Goliath scenario. Since 87% of the HBA’s members are small businesses, this is an important feat for the industry.”
For more information on this issue, e-mail David Jaffe at NAHB, or call him at 800-368-5242 x8317.