IN LAWSUIT BETWEEN INSURERS, DALLAS COURT OF APPEALS FINDS OTHER INSURER WRONGFULLY REFUSED TO DEFEND AND INDEMNIFY MUTUAL INSURED

August 20, 2012

On August 6th, the Dallas Court of Appeals considered whether one insurer wrongfully refused to defend and indemnify in a case where two insurance carriers provided consecutive coverage to a mutual insured, a homebuilder.  Great American Lloyds Ins. Co. v. Audubon Ins. Co., --- S.W.3d ---, 2012 WL 3156571, No. 05–11–00021–CV (Tex. App.—Dallas, August 6, 2012).

In the underlying suit, the homeowners sued the insured homebuilder alleging that it negligently constructed their home.  One of the insurers, Great American, initially agreed to contribute to the insured’s defense costs, but after some discovery was conducted early in the lawsuit, Great American concluded that the earliest date any damage occurred was around March 30, 1998, which was outside its policy period, and therefore it did not have a duty to defend or indemnify the homebuilder and withdrew its defense.  Appellee Audubon Insurance Company later sought contribution and reimbursement from appellant Great American Lloyds Insurance Company for defense and settlement costs it incurred allegedly as the result of Great American’s breach of its duty to defend and indemnify their mutual insured. The parties filed cross- motions for summary judgment, and the trial court granted Audubon’s and denied Great American’s.

Great American appealed contending that its traditional motion for summary judgment should have been granted for the following reasons: (1) its duty to defend was not triggered because the petition did not allege facts sufficient to show that bodily injury or property damage occurred during Great American’s policy period; (2) its duty to defend was not triggered because an exclusion applied to preclude coverage; (3) Audubon’s claim for breach of contract of Great American’s 1995–96 policy was barred by limitations; and (4) all of Audubon’s claims are barred by the supreme court’s decision in Mid–Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765 (Tex.2007).  The Dallas Court of Appeals disagreed.

As to Great American’s first argument, the Court stated that where the pleadings do not state facts sufficient to show that the cause of action is clearly covered or not covered, “the general rule is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy.” Regarding Great American’s second argument, the Court concluded that the homeowners’ allegations in the underlying suit were sufficient to claim that subcontractors may have performed the work and, as a result, the exclusion for “damage to your work” contained in Great American’s policy did not apply to preclude Great American’s duty to defend.  On the third issue, the Court held that Audubon’s claim for breach of contract of Great American’s 1995–96 policy was not barred by limitations.  As to the fourth and final issue, the Court held that Mid–Continent was distinguishable because Great American and Audubon were not co- primary insurers and the policies at issue were consecutive, not concurrent. Therefore, the appellate court concluded that Mid–Continent did not bar Audubon’s claims against Great American and that the trial court did not err by denying Great American’s traditional motion for summary judgment on that basis. Accordingly, the trial court’s judgment concluding that the evidence showed that property damage occurred during the insurers’ respective policy periods and holding that Great American wrongfully refused to defend and indemnify its mutual insured, was affirmed.