The Texas Supreme Court has answered the long-standing question of when property damage occurs under a standard CGL policy in Texas.
The ruling departs significantly from existing law, and we predict in the short term that there will be substantial uncertainty, and likely more coverage litigation, as insureds and insurers adapt to this new rule.
For many years, most lower courts have followed a manifestation or discovery rule, although both Houston Courts of Appeal had recently suggested that an exposure rule might be more appropriate.
The case, Don’s Building Supply, Inc. v. OneBeacon Ins. Co., Case No. 07-0639, came to the Supreme Court on Certified Questions from the Fifth Circuit, asking:
1. When not specified by the relevant policy, what is the proper rule under Texas law for determining the time at which property damage occurs for purposes of an occurrence-based commercial general liability policy?
2. Under the rule identified in the answer to the first question, have the pleadings in lawsuits against an insured alleged that property damage occurred within the policy period of an occurrence-based commercial general liability insurance policy, such that the insurer’s duty to defend and indemnify the insured is triggered, when the pleadings allege that actual damage was continuing and progressing during the policy period, but remained undiscoverable and not readily apparent for purposes of the discovery rule until after the policy period ended because the internal damage was hidden from view by an undamaged exterior surface?
In this case the insured was a supplier of EIFS siding products which were installed on various homes during OneBeacon’s mid-1990’s policy periods. Some years later, in 2003 to 2005, suits were filed alleging that the EIFS was defective and not watertight, allowing moisture to penetrate and cause wood rot and other damage.
The petitions expressly alleged that the damage “began to occur on the occasion of the first penetration of moisture behind” the EIFS, which was within six months to one year after application of the EIFS. However, the petitions also alleged that the damage was hidden from view and not discoverable until much later (so as to avoid any statute of limitations problems).
As it has been wont to do in recent insurance cases, the Court professed to look solely to the language of the policy to answer the first question.
Noting that the CGL language states that it applies to “property damage” which “occurs during the policy period,” the Court held that this meant that property damage takes place when “actual physical damages to the property occurred.” Thus, the Court specifically rejected both the “manifestation” and “exposure” trigger rules, in favor of an “injury-in-fact” rule.
As respects the manifestation rule, the Court noted that many of the lower court decisions endorsing the rule did not involve latent injury fact patterns, and thus were not inconsistent with an injury-in-fact rule. More importantly, the policy language makes no provision for discovery or manifestation of damages: “Whatever practical advantages a manifestation rule would offer to the insured or the insurer, the controlling policy language does not provide that the insurer’s duty is triggered only when the injury manifests itself during the policy term, or that coverage is limited to claims where the damage was discovered or discoverable during the policy period.”
Likewise, the policy’s language makes no mention of exposure to some process, event or substance “that later results in bodily injury or physical injury to tangible property.” Thus, an exposure-based trigger rule would be equally inappropriate.
The court acknowledged that there may be some difficulties in “pinpointing the moment of injury retrospectively,” but refused to adopt a rule which could be more conveniently applied when that rule was not faithful to the policy language. Thus, henceforth in Texas, property damage under a CGL policy takes place at the time of “actual damage” – whenever that may be.
As to the second question, the Court concluded that a duty to defend was owed where (as in this case) the petition expressly alleged physical injury during the policy period.
This duty to defend is not “diminished because the property damage was undiscoverable or not readily apparent or ‘manifest’ until after the policy period ended.”
By Sid Davis
Sidney H. Davis, Jr. passed away on October 26, 2009. If you are seeking legal help, or have a question about this article or a pending legal matter, please contact Dawn Woelfel Hansen at (214) 741-1166.