COURT HOLDS THAT INSURER BREACHED DUTY TO DEFEND – COURT FOUND INSURED SUBCONTRACTOR’S ALLEGED DEFECTIVE WORK POTENTIALLY OCCURRED DURING THE POLICY PERIOD

In Tejas Specialty Group, Inc. v. United Specialty Ins. Co., No. 02-20-00085-CV, 2021 WL 2252742 (Tex. App.—Fort Worth, June 3, 2021), Tejas, a subcontractor, sued its liability insurer, United Specialty Insurance Company (“United”), seeking declaratory relief and asserting claims of breach of contract for United's refusal to defend and indemnify Tejas in a third-party claim filed by another subcontractor against Tejas and five other subcontractors, seeking indemnity and contribution in a construction defect case.

United's position in denying a defense was that the Third-Party Petition alleged that the work on the project had been certified as substantially complete by March 9, 2017. Additionally, the Third-Party Petition alleged that the Plaintiffs in the underlying case alleged that problems with the construction had been observed or made known “in the middle of 2017.”  Because the inception date of United’s policy was October 1, 2017, the work and resulting property damage allegedly occurred before the policy was issued, thereby excluding the claims.

The Court of Appeals disagreed:  “While simplistically appealing, this position fails when tested against the rules of construction which apply to the eight-corners rule.” Construing the allegations of the Third-Party Petition in favor of Tejas and resolving all doubts about coverage in favor of Tejas, the court held that the property damage claim would not be excluded because the work and property damage arising therefrom could have occurred after the inception date of the policy.  The court reasoned that (1) the Third-Party Petition was not just directed at the work of Tejas and property damages arising from it; the pleading named six subcontractors as third-party defendants, including Tejas; (2) the subcontractors' contracts were all signed in 2014, 2015, and 2016, and the Third-Party Petition was filed on April 30, 2019; thus, it could be inferred that the work of all the subcontractors was performed and the property damage occurred between 2014 and April 30, 2019; and (3) the Third-Party Petition did not allege specifically when Tejas's work was performed during that period, nor did it expressly state when property damage specifically from Tejas's work occurred. So, Tejas's work could have been performed, and property damage could have occurred, after October 1, 2017. Further, the fact that the work on the project had been certified as substantially complete on March 9, 2017, did not establish that Tejas's work did not occur after that date. Lastly, the certificate of substantial completion was not binding and, thus, the allegation of substantial completion merely created conflicting factual inferences which would not negate coverage.