The following is an article from the Claims and Litigation Management Alliance, or theclm.org, co-authored by our own Cynthia Pertile Tarle. You can read the CLM article here.
Editor’s note: This article is based off of the presentation: “Texas Construction Project Litigation Issues: What Your Momma Did Not Tell You About Litigating in Texas,” which the authors will present, along with Argo Group’s Becky Vogel, at CLM’s virtual Construction Conference at 11 a.m. on Sept. 29.
Texas continues to experience a steady rise in construction litigation, including matters involving both property and injury claims. As design professionals, contractors, attorneys, and courts attempt to maneuver through the morass of evolving statutes and case law, the applications to construction-project litigation are often misunderstood or improperly applied by all sides, impeding efforts at resolution before trial and creating the potentiality of bad law.
To further complicate issues, insurers lack guidance from higher courts, while, at the same time, they face new Texas Supreme Court cases that serve to interpret—yet often question—previous understanding of policy language and what constitutes an “occurrence.” Whether there is a duty to defend, and also the breadth of said duty, is generally a battle between limiting versus broadening coverage. Different jurisdictional results create volatility for those seeking consistency in the success of arguments. Manuscript endorsements and unique insurance forms serve to significantly modify coverage under a particular policy and pose the risk of potential peril for any insured seeking meaningful coverage.
Eight Corners Rule
Over the years, Texas has applied an “eight corners” rule, looking to the petition and the policy to determine if there is a duty to defend. However, where the duty to defend does not exist, the potential of an insurer’s indemnity obligation may still remain open based upon the actual facts established in the case. Consideration should be given to whether a potential for an indemnity obligation at adjudication warrants an agreement to defend, despite the lack of specific allegations regarding the named insured or its work.
Moreover, where additional-insured coverage is at issue, courts also look to the contract to determine if the policy coverage is dependent on a contractual obligation. In Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589 (5th Cir. 2011), the 5th Circuit held that defense was owed to the additional insured only if the pleadings alleged that the named insured, or someone acting on its behalf, proximately caused the alleged injuries.
However, the 5th Circuit thereafter issued an opinion that arguably expands the scope of the eight corner’s rule with regard to coverage for additional insureds. In Lyda Swinerton Builders, Inc. v. Oklahoma Surety Co., 877 F.3d 600, 612 (5th Cir. 2017), the 5th Circuit found that a general contractor qualified as an additional insured on the insured subcontractor’s CGL policy based on general allegations of defects in the work completed by the subcontractor. Accordingly, closely review whether there are allegations related to the named insured’s scope of work in evaluating additional insured coverage.
Texas employs an injury-in-fact coverage trigger, but recognizes that an occurrence can continue through multiple policy terms [see Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008)]. Even if there is a continuing trigger, and multiple insurers are implicated, the respective defense and indemnity obligations are often impacted by standard and manuscript endorsements that may eliminate coverage for an otherwise implicated period. These include exclusions for work on projects that began prior to policy inception, pre-existing or continuing-damage exclusions—that may or may not require knowledge on the part of the insured—and elimination of the subcontractor exception to exclusion (l).
If additional-insured coverage is at issue, the scope of that coverage may also vary. Where one or more insurers have eliminated coverage, the other insurers may still have an obligation to defend, and to indemnify for the periods with no coverage.
Texas Insurance Code Chapter 151 (aka the Texas Anti-Indemnity Statute), applies to all commercial construction contracts in which the primary commercial contract was executed on or after Jan. 1, 2012. Significantly, the statute extends to additional-insured obligations, which has impaired an insurer’s ability in Texas to recover or share in the allocation of defense fees of its upstream insured. The definition of a “construction contract” is broad under Chapter 151, including “design, construction, alteration, renovation, remodeling, repair, or the furnishing of material or equipment” with the core of the statute, making contract language void and unenforceable to the extent that it requires an indemnitor (downstream) to indemnify, hold harmless, or defend a party, including a third party, against a claim caused by the negligence or fault of the indemnitee (upstream).
Thus, indemnification of the upstream contractor is limited to the extent of the downstream contractor’s own negligence or fault. The Texas Supreme Court has not yet opined on interpretation of the language “to the extent of,” allowing room for some practitioners to argue the entire indemnity provision is “void” if the language of the contract does not specifically comply with Chapter 151. Others, meanwhile, assert the legislature included the language “to the extent of” to allow contracts that exceed the scope to only provide what is allowed by statute.
With 254 counties, the inconsistencies of rulings based upon jurisdiction is challenging. One court in one city may have a reputation for never granting a motion for summary judgment, while the court system in the next town over may opt to entertain and rule upon dispositive motions regularly. One court may be known to be more favorable to insurers while the court in a neighboring county may historically favor insureds.
Insurers and practitioners in Texas are also challenged with differing appellate court rulings that can significantly impact the global posture of litigation, including split authority in case law. Understanding complex and evolving case law and statutes in a state that not only has a large, but also a geographically and socially diverse population is critical to successful resolution of construction claims and litigation in Texas.