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IN THE SUPREME COURT OF TEXAS EMPLOYERS MUTUAL CASUALTY COMPANY

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IN THE SUPREME COURT OF TEXAS EMPLOYERS MUTUAL CASUALTY COMPANY Powered By Docstoc
					                                 04-1087
                     IN THE SUPREME COURT OF TEXAS

               EMPLOYERS MUTUAL CASUALTY COMPANY AND
              GREAT AMERICAN LLOYDS INSURANCE COMPANY,
                                                  Petitioners,
                                 V.

                               GEHAN HOMES, LTD.,
                                                                   Respondent.

                             On Petition for Review from the
                                 Fifth Court of Appeals
                                    05-03-00574-CV

                       BRIEF ON THE MERITS OF
              GREAT AMERICAN LLOYDS INSURANCE COMPANY


Jennifer Bruch Hogan                           John Engvall, Jr.
Richard P. Hogan, Jr.                          J. Jonathan Hlavinka
PILLSBURY WINTHROP                             ENGVALL & HLAVINKA, L.L.P.
SHAW PITTMAN LLP                               2603 Augusta Drive, Suite 1200
909 Fannin, 22nd Floor                         Houston, Texas 77057-5639
Houston, Texas 77010                           (713) 787-6700 – telephone
(713) 425-7300 − telephone                     (713) 787-0070 – facsimile
(713) 452-7373 − facsimile
                                               Lawrence Fischman
Scott Smith                                    Mark C. Enoch
Patrick Smith                                  GLAST, PHILLIPS & MURRAY, P.C.
SMITH, SMITH & SMITH, LLP                      2200 One Galleria Tower
3939 US Highway 80 E, Suite 486                13355 Noel Road, L.B. 48
Mesquite, Texas 75150-3373                     Dallas, Texas 75240-6457
(972) 698-0999 – telephone                     (972) 419-8300 – telephone
(972) 698-0900 – facsimile                     (972) 419-8329 – facsimile

                       ATTORNEYS FOR PETITIONER
               GREAT AMERICAN LLOYDS INSURANCE COMPANY




310067503v1
                     IDENTITY OF PARTIES AND COUNSEL

Petitioner/Appellee/Cross-Appellant/Defendant is:

        Great American Lloyds Insurance Company

Great American is represented by:

        Jennifer Bruch Hogan                        John Engvall, Jr.
        Richard P. Hogan, Jr.                       J. Jonathan Hlavinka
        PILLSBURY WINTHROP                          ENGVALL & HLAVINKA, L.L.P.
        SHAW PITTMAN LLP                            2603 Augusta Drive, Suite 1200
        909 Fannin, 22nd Floor                      Houston, Texas 77057-5639
        Houston, Texas 770101                       (713) 787-6700 – telephone
        (713) 425-7300 – telephone                  (713) 787-0070 – facsimile
        (713) 425-7373 – facsimile
                                                    Scott Smith
        Lawrence Fischman                           Patrick Smith
        Mark C. Enoch                               SMITH, SMITH & SMITH, LLP
        GLAST, PHILLIPS & MURRAY, P.C.              3939 US Highway 80 E, Ste 486
        2200 One Galleria Tower                     Mesquite, Texas 75150-3373
        13355 Noel Road, L.B. 48                    (972) 698-0999 – telephone
        Dallas, Texas 75240-6457                    (972) 698-0900 – facsimile
        (972) 419-8300 – telephone
        (972) 419-8329 – facsimile

Petitioner/Appellee/Plaintiff is:

         Employers Mutual Casualty Company

Employers is represented by:

        Thomas Daryl Caudle
        MATEER & SHAFFER, LLP
        325 N. St. Paul Street
        1300 Republic Center
        Dallas, Texas 75201
        (214) 720-9912—telephone
        (214) 720-9910—facsimile




310067503v1                              i
Respondent/Appellant/Defendant is:

        Gehan Homes, Ltd.

Respondent is represented by:

        Thomas V. Murto, III
        George E. Crumbley
        STRADLEY & WRIGHT
        Abrams Center
        9330 LBJ Freeway, Suite 1400
        Dallas, Texas 75243
        (972) 231-6001—telephone
        (972) 231-7001—facsimile




310067503v1                            ii
                                              TABLE OF CONTENTS

                                                                                                                                Page

IDENTITY OF PARTIES AND COUNSEL ....................................................................... i

TABLE OF AUTHORITIES..............................................................................................vi

STATEMENT OF THE CASE ........................................................................................xiv

STATEMENT OF JURISDICTION ................................................................................. xv

ISSUES PRESENTED .....................................................................................................xvi

STATEMENT OF FACTS.................................................................................................. 1

SUMMARY OF THE ARGUMENT.................................................................................. 3

ARGUMENT....................................................................................................................... 6

         I.        This Court Should Exercise Jurisdiction to Decide the Issues
                   Presented in this Case and to Resolve Conflicts Among the Lower
                   Courts. ........................................................................................................... 6

         II.       General Liability Policies Are Not Intended to Cover the Insured’s
                   Mere Failure to Perform Its Contractual Obligations. .................................. 8

                   A.        The intent of the parties controls........................................................ 8

                   B.        Liability insurance is not intended to be a performance bond. .......... 9

                             1.         Performance bonds are intended to cover a builder’s
                                        contractual defaults; liability insurance is not......................... 9

                             2.         Numerous courts from around the country have
                                        recognized this distinction between liability insurance
                                        and performance bonds. ........................................................ 11

                   C.        Gehan’s policy interpretation ignores the parties’ intent and
                             the fundamental purpose of liability insurance. ............................... 12

                   D.        Gehan’s policy interpretation would reward shoddy
                             workmanship and require all policyholders to subsidize the
                             worst contractors. ............................................................................. 14



310067503v1                                                      iii
        III.   Construction Defects And Poor Workmanship That Cause No
               Bodily Injury And No Damage To Property Other Than The Home
               Itself Are Not “Accidents” Causing “Property Damage” Under The
               CGL Policy.................................................................................................. 15

               A.        There is no occurrence. .................................................................... 16

                         1.        The meaning of “occurrence” is well-established................. 17

                         2.        The labels attached to the plaintiff’s claims are not
                                   determinative......................................................................... 19

                         3.        Because the injuries suffered by the Larsons are of the
                                   type that ordinarily follow and could be reasonably
                                   anticipated from Gehan’s conduct, there is no accident. ...... 20

                         4.        Numerous courts from around the country have
                                   reached the identical conclusion. .......................................... 22

                         5.        Two decades ago, in Jim Walter Homes v. Reed, this
                                   Court recognized the nature of the Larsons’ claims. ............ 25

               B.        There is no property damage............................................................ 28

                         1.        Economic losses are not “property damage” under
                                   Texas law. ............................................................................. 28

                         2.        Numerous other courts agree that economic losses are
                                   not property damage.............................................................. 30

               C.        Gehan’s contrary arguments in favor of coverage are
                         unpersuasive. .................................................................................... 32

                         1.        The legal rules set forth in Jim Walter Homes and
                                   Nobility Homes cannot be ignored in this insurance
                                   coverage case. ....................................................................... 32

                         2.        The Orkin case does not support Gehan’s request for
                                   coverage. ............................................................................... 33

                         3.        Gehan’s reliance on policy exclusions is misplaced............. 35

                                   a.        Exclusions cannot “create coverage” where
                                             none exits. .................................................................. 36



310067503v1                                                iv
                                         b.        Gehan’s argument is logically flawed........................ 37

                              4.         Gehan advances the minority view. ...................................... 41

          IV.       Physical and Mental Pain, Suffering and Anguish Are Not “Bodily
                    Injuries.” ...................................................................................................... 42

PRAYER ........................................................................................................................... 45

CERTIFICATE OF SERVICE.......................................................................................... 46




310067503v1                                                       v
                                       TABLE OF AUTHORITIES

                                                                                                             Page(s)

Cases

ACS Constr. Co. v. CGU,
     332 F.3d 885 (5th Cir. 2003) .................................................................................. 41

American Family Mut. Ins. Co. v. American Girl, Inc.,
      673 N.W.2d 65 (Wis. 2004) ................................................................................... 38

American Fire & Cas. Co. v. Broeren Russo Constr., Inc.,
      54 F.Supp.2d 842 (C.D. Ill. 1999).......................................................................... 23

American States Insurance Co. v. Mathis,
      974 S.W.2d 647 (Mo. App. 199)..................................................................... 22, 41

American States Insurance Co. v. Martin,
      662 So.2d 245 (Ala. 1995) ..................................................................................... 31

Amerisure, Inc. v. Wurster Construction Co., Inc.,
      818 N.E.2d 998 (Ind. App. 2004)..................................................................... 36, 41

Argonaut Southwest Insurance Co. v. Maupin,
      500 S.W.2d 833 (Tex. 1973) .............................................................................. 7, 18

Arthur Anderson & Co. v. Perry Equipment Corp.,
      945 S.W.2d 812 (Tex. 1997) .................................................................................. 21

Blaylock v. American Guar. Bank Liab. Ins. Co.,
      632 S.W.2d 719 (Tex. 1982) .................................................................................. 36

Bonded Concrete, Inc. v. Transcontinental Ins. Co.,
     784 N.Y.S.2d 212 (N.Y. App. 2004).......................................................... 12, 30, 41

Brosnahan Builders, Inc. v. Harleysville Mut. Ins. Co.,
      137 F.Supp.2d 517 (D. Del. 2001) ......................................................................... 41

Burlington Ins. Co. Oceanic Design & Constr. Inc.,
      383 F.3d 940 (9th Cir. 2004) .................................................................................. 41




310067503v1                                               vi
Bush v. Shoemaker-Beal,
      987 P.2d 1103 (Kan. 1999) .................................................................................... 31

Centex Homes v. Buecker,
      95 S.W.3d 266 (Tex. 2002) .................................................................................... 27

Connolly v. St. Paul Fire & Marine Ins. Co.,
     603 N.Y.S. 2d 611 (N.Y. App. 1993)..................................................................... 37

Continental Cas. Co. v. Pittsburgh Corning Corp.,
      917 F.2d 297 (7th Cir. 1990) .................................................................................. 37

Corder v. William W. Smith Excavating Co.,
      556 S.E.2d 77 (W. Va. 2001) ..................................................................... 23, 24, 41

Custom Planning & Dev., Inc. v. American Nat’l Fire Ins. Co.,
      606 S.E.2d 39 (Ga. App. 2004) .............................................................................. 41

DCB Const’r Co. v. Travelers Indemn. Co.
     225 F.Supp. 1230 (D. Colo. 2002) ......................................................................... 11

Devoe v. Great American Insurance Co.,
      50 S.W.3d 567 (Tex. App.—Austin 2001, no pet.)................................................ xv

DeWitt County Elec. Co-op. v. Parks,
      1 S.W.3d 96 (Tex. 1999) .................................................................................. 18, 27

Diamond State Ins. Co. v. Chester-Jensen Co.,
     611 N.E.2d 1083 (Ill. App. 1993)........................................................................... 23

Erie Ins. Prop. and Cas. Co. v. Pioneer Home Improvement, Inc.,
       526 S.E.2d 28 (W. Va. 1999) ........................................................................... 30, 41

Farmers Texas County & Mut. Ins. Co. v. Griffin,
     955 S.W.2d 81 (Tex. 1997) ........................................................................ 19, 20, 32

Federated Mut. Ins. Co. v. Grapevine Excavation, Inc.,
      197 F.3d 720 (5th Cir. 1999) .................................................................................. 18

Gehan Homes, Ltd. v. Employers Mut. Ins. Co.,
     146 S.W.3d 833 (Tex. App.—Dallas 2004, pet. filed)............................. 2, 7, 18, 43




310067503v1                                               vii
George A. Fuller Co. v. United States Fidelity & Guar. Co.,
     613 N.Y.S.2d 152 (N.Y. App. Div. 1994)........................................................ 24, 31

Graber v. State Farm Fire and Casualty Co.,
      797 P.2d 214 (Mont. 1990) .................................................................................... 31

Great American Lloyds Insurance Co. v. Mittlestadt,
      109 S.W.3d 784 (Tex. App.—Fort Worth 2003, no pet.) ...................................... 29

H.E. Davis & Sons, Inc. v. North Pacific Ins. Co.,
      248 F.Supp.2d 1079 (D. Utah 2002) ...................................................................... 41

Harbor Court Assocs. V. Kiewit Constr. Co.,
     6 F.Supp.2d 449 (D. Md. 1998) ....................................................................... 22, 41

Hartford Casualty Insurance Co. v. Cruse,
      938 F.2d 601 (5th Cir. 1991) .................................................................................. 35

Hartrick v. Great American Lloyds Insurance Co.,
      62 S.W.3d 270 (Tex. App.—Houston [1st Dist.] 2001, no pet.)............................ xv

Hawkeye-Security Ins. Co. v. Davis,
     6 S.W.3d 419 (Miss. Ct. App. 1999)..................................................................... 22,

Hawkeye-Security Insurance v. Vector Construction Co.,
     460 N.W.2d 329 (Mich. App. 1990) ................................................................ 37, 41

Heile v. Herrmann,
       736 N. E. 2d 566 (Ohio App. 1999) ................................................................. 24, 41

Home Owners Warranty Corp. v. Hanover Insurance Co.,
     683 So.2d 527 (Fla. App. 1996) ....................................................................... 36, 41

Houston Petroleum Co. v. Highlands Insurance Co.,
      830 S.W.2d 153 (Tex. App.—Houston [1st Dist.] 1990, writ denied) .................. 29

Indiana Insurance Co. v. Hydra Corp.,
      615 N.E.2d 70 (Ill. App. 1993)............................................................................... 41




310067503v1                                              viii
International Printing Pressmen & Assistants’ Union of N. Am. v. Smith,
       198 S.W2d 729 (Tex. 1947) ............................................................................. 18, 27

J.Z.G. Resources Inc. v. King,
       987 F.2d 98 (2nd Cir. 1993) ................................................................................... 41

Jim Walter Homes, Inc. v. Reed,
     711 S.W.2d 617 (Tex. 1986) ...................................... xv, 4, 7, 15, 25, 26, 27, 29, 32

Jim Walters Homes, Inc. v. Reed,
     703 S.W.2d 701 (Tex. App.—Corpus Christi, 1985),
     rev’d, 711 S.W.2d. 617 (Tex. 1986)....................................................................... 27

Keystone Filler & Mfg. Co. v. American Mining Ins. Co.,
      179 F.Supp.2d 432 (M.D.Pa. 2002) ....................................................................... 12

L-J Inc, v. Bituminous Fire and Marine Insurance Co.,
       __ S.E. 2d __, 2004 WL 1775571 (S.C. 2004)................................................. 36, 41

L. Ray Packing Co. v. Commercial Union Insurance Co.,
       469 A.2d 832 (Me. 1983) ....................................................................................... 31

Lassiter Constr. Co. v. American States Ins. Co.,
       699 So.2d 768 (Fla. App. 1997) ............................................................................. 37

Lay v. Aetna Insurance Co.,
       599 S.W.2d 684 (Tex. Civ. App.—Austin 1980, writ ref’d n.r.e.) ........................ 29

Lerner Corp. v. Assurance Co. of Am.,
      707 A.2d 906 (Md. App. 1998) .............................................................................. 22

Massachusetts Bonding & Ins. Co. v. Orkin Exterminating Co.,
     416 S.W.2d 396 (Tex. 1967) ............................................................................ 18, 33

McAllister v. Peerless Insurance Co.,
      474 A.2d 1033 (N.H. 1984).................................................................................... 41

Mead v. Johnson Group, Inc.,
      615 S.W.2d 685 (Tex. 1981) .................................................................................. 21

Mid-Century Insurance Co. v. Lindsey,
     997 S.W.2d 153 (Tex. 1999) ........................................................ 7, 8, 17, 20, 21, 25



310067503v1                                                ix
Mid Continent Aircraft Corp. v. Curry County Spraying Serv., Inc.,
     572 S.W.2d 308 (Tex. 1978) .................................................................................. 30

Montgomery Ward & Co. v. Scharrenbeck,
     204 S.W.2d 508 (Tex. 1947) .................................................................................. xv

Mullaney v. Aetna U.S. Healthcare,
      103 F.Supp.2d 486 (D.R.I. 2000) ........................................................................... 37

Nabholz Constr. Corp. v. St. Paul Fire & Marine Ins. Co.,
     354 F.Supp.2d 917 (E.D. Ark. 2005) ............................................................... 24, 41

National Union Fire Ins. Co. v. CBI Indus., Inc.,
      907 S.W.2d 517 (Tex. 1995) .................................................................................... 8

National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc.,
      939 S.W.2d 139 (Tex. 1997) .................................................................. 5, 19, 20, 32

Nobility Homes of Texas, Inc. v. Shivers,
       557 S.W.2d 77 (Tex. 1977) ............................................................................ 4, 5, 28

Oak Crest Constr. Co. v. Austin Mut. Ins. Co.,
     998 P.2d 1254 (Or. 2000) ................................................................................. 24, 41

Olson v. Richards,
      89 P.3d 31 (Nev. 2004)............................................................................................. 7

Orkin Exterminating Co. v. Massachusetts Bonding & Ins.,
      400 S.W.2d 20 (Tex. Civ. App.—Houston 1966),
      rev’d, 416 S.W.2d 396 (Tex. 1967)........................................................................ 34

Progresssive Cas. Co. v. McManus,
      732 P.2d 932 (Or. App. 1987) ................................................................................ 37

Pursell Construction, Inc. v. Hawkeye-Security Insurance Co.,
       596 N.W.2d 67 (Iowa 1999)....................................................................... 24, 37, 41

R. N. Thompson & Assoc., Inc. v. Monroe Guar. Ins. Co.,
       686 N.E.2d 160 (Ind. App. 1997),
       transfer denied, 698 N.E.2d 1191 (Ind. App. 1997) .................................. 11, 24, 30

Reilly v. Rangers Managm’t, Inc.,
       727 S.W.2d 527 (Tex. 1987) .............................................................................. 8, 14


310067503v1                                                 x
Republic National Life Insurance Co. v. Heyward,
      536 S.W.2d 549 (Tex. 1976) .................................................................................. 17

Rocky Mountain Helicopters, Inc. v. Bell Helicopter Co.,
      491 F.Supp. 611 (N.D. Tex. 1979)......................................................................... 30

Ryan v. Pennsylvania Life Ins. Co.,
      123 S.W.3d 142 (Ky. 2003) ................................................................................... 37

Solcar Equip. Leasing Corp. v. Pennsylvania Manufacturers’ Ass’n Ins. Co.,
       606 A.2d 522 (Pa. Super. 1992) ............................................................................. 41

Southwestern Bell Telephone Co. v. DeLanney,
      809 S.W.2d 493 (Tex. 1991) ............................................................................ xv, 25

Standard Fire Insurance Co. v. Chester-O’Donley & Associates, Inc.,
      972 S.W.2d 1 (Tenn. App. 1998) ..................................................................... 37, 41

State Farm Fire & Casualty Co. v. Volding,
       426 S.W.2d 907 (Tex. Civ. App.—Dallas 1968, writ ref’d n.r.e.)......................... 36

State Farm Lloyds v. Kessler,
       932 S.W.2d 732 (Tex. App.—Fort Worth 1996, writ denied) ............................... 29

Terra Int’l., Inc. v. Commonwealth Lloyd’s Insurance Co.,
       829 S.W.2d 270 (Tex. App.—Dallas 1992, writ denied)....................................... 29

Trinity Universal Insurance Co. v. Cowan,
       945 S.W.2d 819 (Tex. 1997) ........................................................................... passim

Two Rivers Co. v. Curtiss Breeding Serv.,
      624 F.2d 1242 (5th Cir. 1980)................................................................................ 30

Union Insurance Co. v. Hottenstein,
      83 P.3d 1196 (Col. App. 2003) .............................................................................. 41

United States Fidelity & Guaranty Corp. v. Advance Roofing & Supply Co.,
      788 P.2d 1227 (Ariz. 1990) .............................................................................. 36, 41

United States Fidelity & Guar. Co. v. Warwick Dev. Co. Inc.,
      446 So.2d 1021 (Ala. 1984) ................................................................................... 41



310067503v1                                               xi
United States Fire Ins. Co. v. Milton Co.,
      35 F.Supp.2d 83 (D.D.C. 1998) ............................................................................. 41

Utica Nat’l Ins. Co, v. American Indemn. Co.,
      141 S.W.3d 198 (Tex. 2004) .................................................................................... 8

Vernon Williams & Son Construction, Inc. v. Continental Ins. Co.,
      591 S.W.2d 760 (Tenn. 1979) ................................................................................ 41

Voorhees v. Preferred Mut. Ins. Co.,
      607 A.2d 1255 (N.J. 1992) ....................................................................................... 7

Webster County Solid Waste Auth. V. Brackenrich & Assoc., Inc.,
      __ S.E.2d __, 2005 WL 1545273 (W. Va. June 2005)..................................... 11, 23

Western Exterminating Co. v. Hartford Accident and Indemnity Co.,
      479 A.2d 872 (D.C. App. 1984) ............................................................................. 31

Wm. C. Vick Constr. Co. v. Pennsylvania Nat’l Mut. Cas. Ins. Co.,
     52 F.Supp.2d 569 (E.D. N.C. 1999)
     aff’d, 213 F.3d 634 (4th Cir. 2000) ........................................................................ 41

Yegge v. Integrity Mut. Ins. Co.,
      534 N.W.2d 100 (Iowa 1995)................................................................................. 31


Rules and Statutes

TEX. GOV’T CODE ANN. § 22.001(a)(2) (Vernon 2004) ............................................ xv, xvi

TEX. GOV’T CODE ANN. § 22.001(a)(6) (Vernon 1988) ................................................... xv

TEX. GOV’T CODE ANN. § 22.001(e) (Vernon 2004) ................................................. xv, xvi




310067503v1                                               xii
Miscellaneous

LEE R. RUSS & THOMAS F. SEGALLA,
      COUCH ON INSURANCE 3D (12/98 update) .................................................. 9, 10, 12

STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES:
      BUSINESS, CONSUMER, EMPLOYMENT, PJC 110.3................................................. 21




310067503v1                                      xiii
                               STATEMENT OF THE CASE

Nature of the case:               This is a declaratory judgment proceeding to determine
                                  whether Gehan Homes’ general liability insurers have a
                                  duty to defend and indemnify Gehan for economic
                                  damages allegedly caused by faulty workmanship in
                                  Gehan’s construction of a home.

Trial Court:                      The Honorable Carlos Lopez,
                                  116th Judicial District Court of Dallas County, Texas.

Trial Court’s Disposition:        The trial court granted summary judgment for the CGL
                                  insurers, concluding they owed no duty to defend or
                                  indemnify Gehan in the faulty workmanship suit.

Parties in Trial Court:           Plaintiff:         Employers Mutual Casualty Company

                                  Defendants: Gehan Homes, Ltd. and Great American
                                              Lloyds Insurance Company

Parties in Court of Appeals:      Appellant:         Gehan Homes, Ltd.

                                  Appellees:         Employers Mutual Casualty Company
                                                     and Great American Lloyds Insurance
                                                     Company

Court of Appeals:                 Fifth Court of Appeals, Dallas, Texas.
                                  (Justices Whittington, Lang, and Lang-Miers (author)).

Court of Appeals’ Disposition:    Identifying conflicting lines of authority, the court of
                                  appeals reversed the trial court’s summary judgment.
                                  The court of appeals held that the CGL insurers had a
                                  duty to defend Gehan and that a ruling on the duty to
                                  indemnify was premature.

Citation:                         Gehan Homes, Ltd. v. Employers Mut. Ins. Co., 146
                                  S.W.3d 833 (Tex. App.—Dallas 2004, pet. filed).




310067503v1                                    xiv
                          STATEMENT OF JURISDICTION

        The supreme court has jurisdiction because this case is important to the

jurisprudence of Texas. See TEX. GOV’T CODE ANN. § 22.001(a)(6) (Vernon 2004). The

issues presented in this case—whether a commercial general liability insurer has a duty to

defend and indemnify a homebuilder sued for faulty workmanship—are pending in

numerous cases in lower courts around the state. Moreover, the lower courts have not

reached consistent conclusions when deciding these issues, and homeowners, home

builders, and insurers are locked into litigating these issues in every case. Litigants and

the lower courts need this Court’s guidance.

        The supreme court also has jurisdiction because the court of appeals’ opinion in

this case conflicts with the decisions of other courts of appeals which hold that claims by

homeowners against their builders for economic losses caused by allegedly defective

construction do not trigger CGL policy obligations because the claims do not allege

“property damage” caused by an “occurrence.” See Devoe v. Great American Ins. Co.,

50 S.W.3d 567 (Tex. App.—Austin 2001, no pet.); Hartrick v. Great American Lloyds

Ins. Co., 62 S.W.3d 270 (Tex. App.—Houston [1st Dist.] 2001, no pet.); TEX. GOV’T

CODE ANN. §§ 22.001(a)(2) and (e) (Vernon 2004).

        The supreme court also has jurisdiction because the court of appeals’ opinion

conflicts with this Court’s decisions in a line of cases beginning with Montgomery Ward

& Co. v. Scharrenbeck, 204 S.W.2d 508, 508-510 (Tex. 1947), and including Jim Walter

Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986), and Southwestern Bell Telephone

Co. v. DeLanney, 809 S.W.2d 493, 494 (Tex. 1991), each of which holds that pure


310067503v1                                 xv
economic losses to the subject matter of a contract are not recoverable in tort, only in

contract. See TEX. GOV’T CODE ANN. §§ 22.001(a)(2) and (e) (Vernon 2004).

          The supreme court also has jurisdiction because the court of appeals’ opinion

conflicts with this Court’s decision in Trinity Universal Insurance Co. v. Cowan, 945

S.W.2d 819, 823 (Tex. 1997), which holds that the term “bodily injury” does not include

purely emotional injuries but requires an unambiguous description of an “injury to the

physical structure of the human body.” See TEX. GOV’T CODE ANN. §§ 22.001(a)(2) and

(e) (Vernon 2004).

                                  ISSUES PRESENTED

1.        Large numbers of homebuyers are discovering defective workmanship in their

homes after their home purchases are complete. When their homebuilders fail or refuse

to repair the faulty workmanship, the homebuyers sue the builders alleging claims for

breach of contract, breach of warranty, negligence, DTPA violations, and other causes of

action.       Does the homebuilder’s general liability insurer owe a duty to defend or

indemnify the builder in such lawsuits?

2.        The liability insurer’s duty to defend and indemnify arises only when an

“occurrence” causes “bodily injury” or “property damage.” The CGL policy defines an

“occurrence” as “an accident, including continuous or repeated exposure to substantially

the same general conditions.” When there is no bodily injury to any person and no

damage to any property other than the home itself, do allegations of faulty workmanship

in the home ever allege an “accident” or “occurrence” sufficient to trigger the duty to

defend or indemnify?


310067503v1                                 xvi
3.      This Court has long recognized the distinction between purely economic losses to

the subject matter of a contract, on the one hand, and actual property damage, on the

other. When a homeowner alleges damage only to the subject matter of his contract with

the builder—his home—does the homeowner allege “property damage” sufficient to

trigger a general liability insurer’s duty to defend or indemnify a homebuilder in a faulty

workmanship case?

4.      The CGL policy defines “bodily injury” as “bodily injury, sickness, or disease.”

Does an allegation that homeowners have suffered “great physical and mental pain,

suffering and anguish” allege a “bodily injury” sufficient to trigger a liability insurer’s

duty to defend or indemnify a homebuilder in a faulty workmanship case?

5.       Alternatively, do the CGL policy exclusions negate any duty to defend and

indemnify a homebuilder sued for faulty workmanship that caused no bodily injury to

any person and no damage to any property other than the subject matter of the

homebuilder’s contract with the homebuyer?




310067503v1                                xvii
                              STATEMENT OF FACTS

        This declaratory judgment action concerns the defense and indemnity obligations

owed by Employers Mutual Casualty Co. (“Employers”) and Great American Lloyds

Insurance Co. (“Great American”) to their insured, Gehan Homes, in an underlying suit

filed against Gehan by Teri and Mark Larson. See CR 10-21, 29-33.

        Employers issued a Commercial General Liability (“CGL”) policy to Gehan

Homes with a policy period of June 30, 1997 to June 30, 1998. CR 191. Thereafter,

Great American issued a CGL policy to Gehan Homes with a policy period of June 30,

1998 to June 30, 1999. See CR 59, 106, 107. Great American charged Gehan an annual

premium of $18,459 for CGL coverage with an aggregate limit of $2,000,000. Id.

Gehan’s estimated home sales in 1997 and 1998 were $40 million a year. See CR 107,

199.

        Nearly two years after Great American’s policy period had expired, in May 2001,

Gehan Homes was sued by Teri and Mark Larson in state district court in Denton County,

Texas. CR 146. The Larsons alleged they purchased a home located at 1849 Crosshaven

Drive in Lewisville, Texas from Gehan. Id. According to the Larsons’ original petition,

the home “designed and constructed” by Gehan “was not as represented, not of proper

quality and was not designed or constructed in a good or workmanlike manner.” CR 147.

The Larsons additionally alleged that Gehan participated in the design and/or

construction of the home’s foundation, and Gehan’s work “was insufficient and resulted

in a foundation and home that were not properly designed or built.” Id. The Larsons

generally alleged that “[t]he home and Plaintiffs have suffered damage resulting from


310067503v1                                1
Defendant’s actions or inactions,” pleaded a single negligence cause of action, and

prayed for the recovery of actual damages, interest, and court costs. Id.

        The Larson plaintiffs amended their petition twice in the ensuing months. See CR

134, 150. The plaintiffs added defendants and pleaded additional causes of action against

Gehan for breach of contract and warranty, violations of the DTPA, and fraud. See CR

134-39. The plaintiffs also claimed mental anguish and sought attorney’s fees. CR 140.

The only change the plaintiffs made in their statement of facts concerning Gehan was to

allege that their home had been designed and constructed by Gehan “independently

and/or through engineers and subcontractors hired by it” and to allege they and their

home had suffered damage resulting from the acts of Gehan “independently and/or

through engineers and subcontractors hired by it.” Compare CR 135 with CR 146-47.

        In January 2002, Employers filed this declaratory judgment action in the 116th

district court of Dallas County. CR 10. Employers sought a declaration that it owed no

duty to defend or indemnify Gehan in the Larson lawsuit. Id. Alternatively, Employers

sought a declaration that Great American should share in the defense and indemnity of

Gehan. Id. Employers, Great American, and Gehan each filed motions for summary

judgment on the defense and indemnity issues, and the trial court granted summary

judgment to Employers and Great American, concluding that they owed no duty to

defend or indemnify Gehan in the Larson lawsuit. CR 642.




310067503v1                                  2
        Gehan appealed, and the Dallas Court of Appeals reversed. See Gehan Homes,

Ltd. v. Employers Mut. Ins. Co., 146 S.W.3d 833 (Tex. App.—Dallas 2004, pet. filed).

The court of appeals held that Employers and Great American owed a duty to defend

Gehan and that it was premature to decide the duty to indemnify. Id.

                          SUMMARY OF THE ARGUMENT

                                             I.

        As numerous courts around the country have recognized, a general liability policy

provides coverage for tort liability for physical damage to others. However, such policies

do not cover economic loss suffered when a builder fails to build the home as his contract

requires. The insurance market provides two distinct products to cover these two entirely

different categories of risks: liability insurance and performance bonds.

        The Larsons could have required, and Gehan could have purchased, a performance

bond to protect against the ordinary business risk that Gehan might not perform its

contractual obligations. That the Larsons and Gehan chose not to avail themselves of this

option is no reason to convert liability insurance into a performance bond. If CGL

policies cover construction deficiencies, builders have little incentive to hire competent

subcontractors, utilize proper materials and subcontractors, or adhere to design and

construction requirements. The incentive is to cut corners and increase profits.

        Nothing in the policy language expresses the parties’ intent to insure Gehan’s

failure to deliver the home it promised and was contractually obligated to deliver. Yet,

taken to its logical conclusion, Gehan’s policy interpretation would require Great

American to complete every homeowner’s punch list and warranty work.               Gehan’s


310067503v1                                  3
argument requires this Court to conclude that for a premium of $18,459, Great American

agreed to repair or replace $2 million worth of defective workmanship that occurred in

homes worth $40 million. That result is unreasonable and inequitable and should be

rejected by the Court.

                                             II.

        Nearly two decades ago, at the request of a homebuilder, this Court held that

allegations like those made by the Larsons can only be characterized as a breach of

contract action seeking damages for economic loss. See Jim Walter Homes, Inc. v. Reed,

711 S.W.2d 617 (Tex. 1986). Direct economic losses to the subject matter of a contract

are conclusively presumed to have been foreseen by the contracting party and represent

expected, foreseeable losses. Thus, Gehan’s failure to fulfill its contractual obligations is

not an “accident” or “occurrence.” Poor construction ordinarily follows from Gehan’s

failure to perform its contract; such a failure could be reasonably anticipated, and is an

effect that Gehan can be charged with producing. Simply put, a breach of contract that

causes no physical harm to persons or property beyond the subject of the contract is not

an accident as a matter of law.

        Moreover, this Court has long recognized the distinction between economic losses

and property damage. “There is a distinction between physical harm, or damage, to

property and commercial loss.” Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77,

80 (Tex. 1977). “Direct economic loss may be said to encompass damage based on

insufficient product value . . . .” Id. at 78 n.1. It may be measured by loss of value, loss




310067503v1                                  4
of bargain, and/or costs of repair and replacement. Id. The Larsons allege no “property

damage.” They allege only economic losses.

                                            III.

        This Court insists that in determining the duty to defend, “the court must focus on

the factual allegations that show the origin of the damages rather than the legal theories

alleged.” National Union Fire Ins. Co. v. Fast Motor Lines, Inc., 939 S.W.2d 139, 141

(Tex. 1997). Gehan asks this Court to do the reverse: ignore the plaintiffs’ factual

allegations that show the origin of their damages and give conclusive effect to their

pleading of negligence. Heeding the standard of review, and looking to the substance of

the homeowners’ factual allegations in the underlying suit, the homeowners’ injury is that

the house they were promised by Gehan and paid Gehan to deliver is not the house they

received.

        Under controlling Texas law, the Larsons have not alleged claims for property

damage caused by an accident; instead, they have alleged claims for economic loss

caused by Gehan’s failure to fulfill its contractual obligation to deliver a non-defective

home. Great American has no duty to defend or indemnify Gehan in a suit seeking

economic damages for faulty construction. Consequently, the court of appeals should be

reversed and the district court’s judgment should be affirmed.




310067503v1                                  5
                                      ARGUMENT

I.      This Court Should Exercise Jurisdiction to Decide the Issues Presented
        in this Case and to Resolve Conflicts Among the Lower Courts.

        This case—like many others pending in the lower courts—involves a Commercial

General Liability (“CGL” or “liability”) insurance policy. There is no dispute the CGL

insurance “applies . . . only if” “bodily injury” or “property damage” is caused by an

“occurrence.”    An “occurrence” is defined as an “accident, including continuous or

repeated exposure to substantially the same general harmful conditions.” See CR 109,

120.

        All around the state, creative lawyers argue that these insuring provisions require

CGL insurers to defend and indemnify a homebuyer’s claim against a homebuilder for

faulty workmanship. In every case, the homebuyer seeks damages to repair or replace the

home the builder agreed to construct, and this case is no exception. In every case, the

homebuyer labels one of his alleged causes of action against the builder a “negligence”

cause of action. Invariably, the homebuyer also alleges claims for breach of contract,

breach of warranty, violations of the DTPA, and fraud.

        This case presents a recurring question of great importance: Does a standard form

CGL policy require an insurer to defend and indemnify a homebuilder against claims for

defective workmanship when that defective workmanship causes no bodily injury and no

damage to property other than the subject of the contract?          The number of suits

presenting the identical issue is enormous, as a review of the recent state and federal

decisions makes plain. Moreover, the lower courts have issued conflicting decisions on



310067503v1                                  6
this issue, ensuring continued litigation in every case. See Gehan Homes, 146 S.W.3d at

840, 843 (identifying some of the conflicting decisions). This Court’s resolution of the

issue will benefit courts and litigants across the state.

        Around the country, courts have considered these same issues and reached

divergent conclusions.     The majority of these decisions supports Great American’s

arguments and denies coverage for construction defects. Nonetheless, some courts have

accepted Gehan’s arguments, so no single uniform rule has been adopted.

        This lack of uniformity is somewhat understandable, given the differences that

exist in state substantive law. Unlike Texas, some states permit homeowners to pursue

negligence claims for defective workmanship against their builders. See, e.g., Olson v.

Richards, 89 P.3d 31, 32-33 (Nev. 2004) (“unlike at common-law, a plaintiff can pursue

a negligence claim when suing under [Nevada’s construction defect statute]”); and

compare Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986) (“when the injury

is only the economic loss to the subject of a contract itself, the action sounds in contract

alone). More importantly, several states embrace a purely subjective test to determine

whether an “accident” is alleged. See, e.g., Voorhees v. Preferred Mut. Ins. Co., 607

A.2d 1255, 1264 (N.J. 1992) (New Jersey courts “require an inquiry into the actor’s

subjective intent to cause injury”); and compare Mid-Century Ins. Co. v. Lindsey, 997

S.W.2d 153, 155 (Tex. 1999) (“an injury caused by voluntary and intentional conduct is

not an accident just because ‘the result or injury may have been unexpected, unforeseen

and unintended’”) (quoting Argonaut Southwest Ins. Co. v. Maupin, 500 S.W.2d 633




310067503v1                                    7
(Tex. 1973)). These differences in substantive law can lead to differing results in faulty

workmanship cases.

        This Court should resolve these important issues for Texas. Considering public

policy concerns, and applying existing Texas law, this Court should hold that claims for

poor workmanship are not claims for bodily injury or property damage caused by an

occurrence. They are claims for economic losses caused by the contractor’s failure to

perform his contractual obligations, and they are not covered by a commercial general

liability policy.

II.     General Liability Policies Are Not Intended to Cover the Insured’s
        Mere Failure to Perform Its Contractual Obligations.

        A.     The intent of the parties controls.

        Insurance policies are controlled by the rules of interpretation and construction

that govern contracts generally. National Union Fire Ins. Co. v. CBI Indus., Inc., 907

S.W.2d 517, 520 (Tex. 1995). “Fundamentally, of course, the issue is what coverage is

intended to be provided by insurers and acquired and shared by premium payers.” Mid-

Century Ins. Co. v. Lindsey, 997 S.W.2d 153, 158 (Tex. 1999). As the Court has

recognized, the parties’ “[r]easonable expectations are often affected by the conditions

surrounding the formation of the policy language and the type of clause at issue.” Utica

Nat’l Ins. Co, v. American Indemn. Co., 141 S.W.3d 198, 202 (Tex. 2004). Furthermore,

“[c]ourts will avoid when possible and proper a construction which is unreasonable,

inequitable, and oppressive.” Reilly v. Rangers Managm’t, Inc., 727 S.W.2d 527, 530

(Tex. 1987).



310067503v1                                  8
        B.     Liability insurance is not intended to be a performance bond.

        To understand the parties’ intent in furnishing and acquiring general liability

insurance, it is important to understand the distinction between liability insurance policies

and performance bonds and the different purposes they serve.

               1.     Performance bonds are intended to cover a builder’s
                      contractual defaults; liability insurance is not.

        The most widely recognized insurance treatise explains the distinction between

liability insurance and surety bonds in this way:

        The nature of the risk assumed by the party in the role of “insurer” is a
        major distinction between insurance and the arrangements of guaranty and
        surety. As a broad general rule, the risk can be characterized in terms of the
        degree to which the contingency is within the control of one of the parties.
        In the classic instance of insurance, the risk is controlled only by chance or
        nature. In guaranty and surety arrangements, the risk tends to be wholly or
        partially in the control of one of the three parties.

        There is also a difference in the liability of a classic insurer and that of a
        surety/guarantor. An insurer is the primary party liable upon the
        occurrence of the contingency, and with the occasional exception as to
        liability insurance and automobile insurance, must bear the ultimate loss.
        In the classic case of surety or guaranty, on the other hand, the “insurer” is
        essentially liable secondarily (regardless of how the liability may be labeled
        for legal analysis). A surety is ordinarily entitled to indemnity from the
        principal in case the surety is compelled to perform.

LEE R. RUSS & THOMAS F. SEGALLA, COUCH ON INSURANCE 3D, § 1:18, p. 1-31 (12/98

update).

        Thus, liability insurance is distinguished from a performance bond by the nature of

the risk covered and by the primacy of the obligation owed by the insurer and surety. Id.

Liability insurance is intended to cover fortuitous risks beyond the control of the insured




310067503v1                                   9
contractor. Id. Performance bonds are intended to cover risks within the control of the

contractor. Id.

        Risks within the control of the contractor, and thus covered by a performance

bond, include the risk a contractor will not properly perform his contractual promises. As

Couch explains:

        The concept of a breach or a default on a contract is not limited to the
        obvious case of the contract’s not being performed but extends to any major
        departure from the contract, even though the building itself, or other
        construction itself, is actually physically completed.        The surety’s
        obligation to cure defects in the contractor’s performance applies to latent
        as well as patent defects. . . .

Id. at 164:11, pp. 164-18 – 164-19.

        Because of the nature of the risks involved, liability insurers have no right to

recover from their insureds when the insurers pay for covered losses, while sureties have

the right to seek reimbursement from their principals. This distinction makes good public

policy sense. When the covered risks are largely fortuitous, liability insurance helps to

disburse the cost of these risks among many policyholders. When the risks are largely

within the control of a party, however, an obligation to pay claims without recourse

against the insured makes no sense at all, because the cost of theses risks should not be

borne by all policyholders.




310067503v1                                 10
              2.     Numerous courts from around the country have
                     recognized this distinction between liability insurance and
                     performance bonds.

        This Court should join the numerous courts that have rejected attempts to convert

liability insurance into cost free performance bonds. “The great weight of authority is to

the effect that CGL policies cover the possibility that the goods, products, or work of the

insured, once relinquished or completed, will cause bodily injury or damage to property

other than to the product or completed work itself, and for which injury or damage the

insured might be exposed to liability.” R. N. Thompson & Assoc., Inc. v. Monroe Guar.

Ins. Co., 686 N.E.2d 160, 162 (Ind. App. 1997), transfer denied, 698 N.E.2d 1191 (Ind.

App. 1998) (emphasis original); accord Amerisure, Inc. v. Wurtzer Constr. Co., 818

N.E.2d 998, 1003 (Ind. App. 2004). “The coverage is for tort liability for physical

damages to others, and not for contractual liability of the insured for economic loss

suffered because the completed work is not what the damaged person bargained for.” Id.

        A general liability policy is not intended to provide “coverage for a product or

work performance that fails to meet contractual requirements.” Webster County Solid

Waste Auth. v Brackenrich & Assoc., Inc., __ S.E.2d __, 2005 WL 1545273, *1 (W.Va.

June 2005).    “The risk that an owner might reject performance as inadequate is a

‘business risk’ allocated by parties in contract, and is insured by a performance bond, not

general liability insurance intended to provide coverage for injuries or damages resulting

from ‘accidents.’” DCB Const’r Co. v. Travelers Indemn. Co., 225 F.Supp. 1230, 1231

(D. Colo. 2002) (applying Colorado law). “[T]he issuer of a commercial general liability

insurance policy is not a surety for a construction contractor’s defective work product.”


310067503v1                                 11
Bonded Concrete, Inc. v. Transcontinental Ins. Co., 784 N.Y.S.2d 212, 213 (N.Y. App.

2004). A CGL policy “is not intended to substitute for a contractor’s performance bond,

the purpose of which is to insure the contractor against claims for the cost of repair or

replacement of faulty work.” Nabholz Constr. Corp. v. St. Paul Fire & Marine Ins. Co.,

354 F.Supp.2d 917, 922 (E.D. Ark. 2005).

          The insurance market recognizes two entirely different types of risk, and the

market provides two distinct products to cover those risks: liability insurance and

performance bonds. Id.; see also COUCH ON INSURANCE 3D, § 1:18, 1:64. The Larsons

could have required, and Gehan could have purchased, a performance bond to protect

against the ordinary business risk that Gehan and its subcontractors might not perform

their contractual obligations. Id. That Gehan has no remedy “under its CGL Policy is

neither troublesome nor unexpected given the nature of the risks involved.” Nabholz

Constr. v. St. Paul Fire & Marine, 354 F.Supp.2d at 922.1

          C.       Gehan’s policy interpretation ignores the parties’ intent and the
                   fundamental purpose of liability insurance.

          Gehan does not dispute the distinctions between insurance policies and

performance bonds.              Likewise, Gehan does not deny that performance bonds are

available and intended to protect owners, like the Larsons, against defects in the

contractor’s performance. Gehan nonetheless asserts that this Court should interpret its

general liability insurance policy to cover these same defects in the contractor’s

1
    Another of the numerous decisions recognizing the distinction between liability insurance and performance bonds
    is Keystone Filler & Mfg. Co. v. American Mining Ins. Co., 179 F.Supp.2d 432, 439 (M.D.Pa. 2002) (“The
    purpose and intent of [a CGL] insurance policy is to protect the insured from liability for essentially accidental
    injury to the person or property of another rather than coverage for disputes between parties to a contractual
    undertaking.”).


310067503v1                                               12
performance. Gehan thus wants the protection afforded by a performance bond without

the payment or indemnity obligations attached to such a bond. Gehan does not want to

pay the premium required to obtain a performance bond, and Gehan does not want to be

financially responsible for its performance failures. Gehan wants to shift that payment

obligation and financial responsibility to its liability insurer (and ultimately to all

policyholders).

        Gehan asks this Court to convert liability insurance into a performance bond

without considering the risk, the premium charged, or the intent of the parties. Nothing

in the CGL policy language expresses the parties’ intent to insure Gehan’s failure to

deliver the home it promised and was contractually obligated to deliver.          Gehan’s

argument requires this Court to conclude that for a premium of $18,459, Great American

agreed to repair or replace $2 million worth of defective workmanship that occurred in

homes worth $40 million. See CR 59, 106, 107. If the roofs leaked, if the floors warped,

if the paint chipped, if the doors stuck—if anything at all was poorly constructed in $40

million worth of homes—Gehan asserts that Great American is required to pay to replace

or repair the defective work, with no recourse against the builder who pocketed the profit.

        No reasonable insurer would agree to provide, and no reasonable insured would

expect to receive, insurance coverage for $2 million worth of repair and warranty work

on $40 million worth of homes for $18,459. There is virtually no chance that punch list

and warranty repairs in $40 million worth of homes will not exceed $18,459. Most

would agree this is a statistical impossibility.




310067503v1                                   13
        The policy language does not require this Court to ignore the purpose of liability

insurance, nor does it compel the Court to ignore the parties’ reasonable expectations.

“Courts will avoid when possible and proper a construction which is unreasonable,

inequitable, and oppressive.” Reilly v. Rangers Managm’t, Inc., 727 S.W.2d 527, 530

(Tex. 1987). The construction urged by Gehan—requiring Great American to repair and

replace all construction deficiencies in $40 million worth of homes for a premium of

$18,459—is unreasonable, inequitable, and oppressive.

        D.    Gehan’s policy interpretation would reward shoddy
              workmanship and require all policyholders to subsidize the
              worst contractors.

        In arguing for a duty to defend, Gehan embraces and advocates a poor public

policy choice. If CGL policies cover all construction deficiencies, builders have little

incentive to hire competent subcontractors, utilize proper materials and workmanship, or

adhere to design and construction requirements.          In fact, cheaper materials and

workmanship ensure a higher profit. Thereafter, when homebuyers discover the faulty

workmanship, the CGL insurer—not the builder—pays to deliver the home the builder

was obligated to deliver. The builder pockets the profits.

        Taken to its logical conclusion, Gehan would require Great American to complete,

or pay to complete, every homeowner’s punch list and warranty work. The builder need

only say, “I didn’t intend that result,” in order to obtain coverage for every contractual

failure ⎯no matter how large and no matter how small. In these circumstances, the

insured’s incentive to maximize loss-prevention measures is not merely reduced, it is

eliminated entirely. See Trinity Univ. Ins. Co. v. Cowan, 945 S.W.2d at 828 (rejecting


310067503v1                                 14
insured’s argument that his conduct was accidental because “[t]o hold otherwise would

inappropriately enhance rather than minimize the moral hazard inherent in insurance”).

          The CGL policy is intended and expected to cover property damage and bodily

injury caused by an accident. See § II.B above. If the insured drops a tool or a piece of

lumber on the owner, or the owner’s car; if someone falls from the roof or trips over a

board and injures himself or someone else; if a wall collapses on a neighbor’s fence⎯all

of these circumstances, and many others, involve bodily injury or property damage

caused by an accident. All of these accidents are covered by the CGL policy. What the

CGL policy does not cover are economic repair and replacement losses caused by the

contractor’s failure to meet his contractual obligations.

          The Court should give effect to the parties’ intent, considering the purpose of

liability insurance, the language of the policy, the premium charged, and the

contemplated risk. The language of the policy does not compel the Court to accept

Gehan’s proposed interpretation, and the Court should reject Gehan’s proposed

interpretation as unreasonable, contrary to the purpose of liability insurance, and

promoting a poor public policy.

III.      Construction Defects And Poor Workmanship That Cause No Bodily
          Injury And No Damage To Property Other Than The Home Itself Are
          Not “Accidents” Causing “Property Damage” Under The CGL Policy.

          This Court well-understands⎯and the law well-reflects⎯the distinction between

contract claims for economic loss and tort claims for property damage and personal

injury.       See Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986)

(recognizing that the “nature of the injury most often determines which duty or duties are


310067503v1                                  15
breached” and concluding that “[w]hen the injury is only the economic loss to the subject

matter of the contract, the plaintiff’s action is ordinarily on the contract”).

        Applying this Court’s settled analysis of construction defect claims brought

against homebuilders by homebuyers, this case involves no “property damage” caused by

an “occurrence.” The Larsons’ claims against Gehan are claims for economic loss

resulting from Gehan’s failure to perform its contractual obligations, not claims for

property damage caused by an accident.

        A.    There is no occurrence.

        The CGL “Insuring Agreement” provides:

        a.     We will pay those sums that the insured becomes legally obligated to
        pay as damages because of “bodily injury” or “property damage” to which
        this insurance applies. We will have the right and duty to defend the
        insured against any “suit” seeking those damages.

        b.     This insurance applies to “bodily injury” and “property damage”
        only if:

        (1)   the “bodily injury” or “property damage” is caused by an
        “occurrence” that takes place in the “coverage territory”; and

        (2)    the “bodily injury” or “property damage” occurs during the policy
        period.

CR 109.

        The policy defines an occurrence as an “accident, including continuous or repeated

exposure to substantially the same general harmful conditions.” CR 120.




310067503v1                                   16
              1.     The meaning of “occurrence” is well-established.

        While the CGL policy defines an “occurrence” as an “accident,” the policy does

not define an “accident.” The absence of a policy definition is of little consequence,

however, for the meaning of the word “accident” as used in liability insurance policies is

well-developed in Texas law.

        This Court has held that “an injury is accidental if ‘from the viewpoint of the

insured, [it is] not the natural and probable consequence of the action or occurrence

which produced the injury; or in other words, if the injury could not reasonably be

anticipated by the insured or would not ordinarily follow from the action or occurrence

which caused the injury.” Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d 153, 155 (Tex.

1999) (quoting Republic National Life Insurance Co. v. Heyward, 536 S.W.2d 549, 557

(Tex. 1976)) (emphasis added).       Similarly, an effect which “cannot be reasonably

anticipated from the use of [the means that produced it], an effect which the actor did not

intend to produce and which he cannot be charged with the design of producing, is

produced by accidental means.” Id. By contrast, injuries are not accidental when they

are “of a type that ‘ordinarily follows’ from [the insured’s] conduct,” when “the injuries

could be ‘reasonably anticipated from the use of the means’” that produced them, or

when they represent an effect the insured “can be charged with . . . producing.” Trinity

Univ. Ins. Co v. Cowan, 945 S.W.2d 819, 827 (Tex. 1997).

        The court of appeals acknowledged this definition of an “accident,” but instead of

applying it, the court of appeals concluded that the world of claims is divided into two

parts: negligence and intentional torts. According to the court, “Two lines of cases


310067503v1                                 17
defining the term occurrence have evolved.” Gehan Homes, Ltd. v. Employers Mut. Cas.

Co., 146 S.W.3d 833, 839 (Tex. App.⎯Dallas 2004, pet. filed). The first, deriving from

Argonaut Southwest Insurance Co. v. Maupin, 500 S.W.2d 833 (Tex. 1973), “pertains to

coverage of claims against an insured for damage caused by its alleged intentional torts.”

Gehan Homes, 146 S.W.3d at 839 (quoting Federated Mut. Ins. Co. v. Grapevine

Excavation, Inc., 197 F.3d 720, 723 (5th Cir. 1999)). The second line of cases, deriving

from Massachusetts Bonding & Insurance Co. v. Orkin Exterminating Co., 416 S.W.2d

396 (Tex. 1967), pertains to allegations of “negligent acts of the insured causing damage

which is undesigned and unexpected.” Gehan Homes, 146 S.W.3d at 839 (quoting

Massachusetts Bonding v. Orkin, 416 S.W.2d at 400).

          Contrary to the court of appeals’ analysis, not every claim is a tort claim involving

negligence or intentional conduct. Some claims are not tort claims at all. This Court has

long recognized the distinction between tort claims and contract claims,2 and the court of

appeals was wrong to ignore the distinction between these types of claims.

Consequently, the court of appeals was wrong to suggest that an insurer’s duty to defend

is determined simply by looking to see if the underlying plaintiff alleged “negligence” or

“intentional acts.” This Court has never made such a holding, and such a simplistic

approach ignores this Court’s definition of an “accident.”

2
    Texas law has long distinguished between actions in contract and in tort. See International Printing Pressmen &
    Assistants’ Union of N. Am. v. Smith, 198 S.W.2d 729, 735 (Tex. 1947). Generally speaking, “if the action is not
    maintainable without pleading and proving the contract, where the gist of the action is the breach of the contract,
    whether by malfeasance or nonfeasance, it is, in substance, an action on the contract, whatever may be the form
    of the pleading.” Id.; accord DeWitt County Elec. Co-op. v. Parks, 1 S.W.3d 96, 105 (Tex. 1999) (“if the
    defendant’s conduct . . . would give rise to liability only because it breaches the parties’ agreement, the plaintiff’s
    claim ordinarily sounds only in contract” and when there is “a contract spelling out the parties’ respective rights .
    . . the contract and not common-law negligence governs any dispute”).


310067503v1                                                 18
                2.     The labels attached to the plaintiff’s claims are not
                       determinative.

        Contrary to the court of appeals’ analysis, the Court does not merely accept the

underlying plaintiff’s allegations of “negligence” as ending the inquiry. The Court has

repeatedly held that in determining an insurer’s duty to defend, “the court must focus on

the factual allegations that show the origin of the damages rather than on the legal

theories alleged.” National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939

S.W.2d 139, 141 (Tex. 1997); accord Farmers Tex. County Mut. Ins. Co. v. Griffin, 955

S.W.2d 81, 82 (Tex. 1997) (“A court must focus on the factual allegations rather than the

legal theories asserted in reviewing the underlying petition.”). The labels a particular

plaintiff might attach to his causes of action do not control. See id.

        For example, in the Farmers case, a Farmers’ insured was sued for his

involvement in a drive-by shooting. The insured was the driver of the automobile

involved in the shooting, not the shooter. A passenger in the insured’s vehicle shot the

plaintiff.    The injured plaintiff sued the insured driver alleging that the driver was

negligent and grossly negligent. Farmers, 955 S.W.2d at 82. Despite these allegations of

“negligence,” Farmers refused to defend the driver in the plaintiff’s lawsuit, and the

driver sued Farmers.




310067503v1                                  19
        Agreeing that Farmers owed no duty to defend or indemnify its insured, this Court

explained:

        A court must focus on the factual allegations rather than the legal theories
        asserted in reviewing the underlying petition . . . .

        Although [the underlying plaintiff] seeks relief on legal theories of
        negligence and gross negligence, [the underlying plaintiff] alleged facts
        indicating that the origin of his damages was intentional behavior. He
        made no factual contention that could constitute negligent behavior.

Farmers, 955 S.W.2d at 82-83.

        Thus, the label chosen by the underlying plaintiff to characterize his legal claims

against an insured does not control the court’s review of the petition under the eight-

corners doctrine. What matters are “the factual allegations that show the origin of the

damages.” National Union Fire v. Merchants Fast Motor Lines, 939 S.W.2d at 141. Yet

despite these binding precedents, the court of appeals made no attempt to review the

Larson plaintiffs’ “factual allegations that show the origin of the damages.” That was

error, and the court’s error led it to an incorrect judgment.

              3.     Because the injuries suffered by the Larsons are of the
                     type that ordinarily follow and could be reasonably
                     anticipated from Gehan’s conduct, there is no accident.

        In arguing that the Larsons’ petition alleges an accident, Gehan ignores the

Court’s consistent holdings that an occurrence is accidental only when its effects are not

of a type that ordinarily follow from the conduct, cannot be reasonably anticipated, and

cannot be charged to the insured. See Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d at

155; Trinity Univ. Ins. Co. v. Cowan, 945 S.W.2d at 555.




310067503v1                                   20
        The damages sought by the Larsons, other than for mental anguish, are damages

for diminution in value and repair and replacement of the house Gehan promised and was

contractually obligated to deliver.   See CR 141.      As a matter of law, these direct

economic damages, for injury to the subject matter of their contract with Gehan, are of

the type that ordinarily follow from Gehan’s contractual undertaking and are

“conclusively presumed to have been foreseen” by Gehan. Arthur Andersen & Co. v.

Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex. 1997) (“Direct damages compensate the

plaintiff for the loss that is conclusively presumed to have been foreseen by the defendant

from his wrongful act.”); see also Mead v. Johnson Group, Inc., 615 S.W.2d 685, 687

(Tex. 1981) (recognizing the distinction between direct and consequential economic

damages); STATE BAR OF TEXAS, TEXAS PATTERN JURY CHARGES: BUSINESS,

CONSUMER, EMPLOYMENT, PJC 110.3 (discussing direct damages available in breach of

contract actions including benefit of the bargain and remedial damages).

        As a matter of long-standing Texas law, the damages sought by the Larsons were

“reasonably anticipated,” are “the natural and probable consequence” of the breach of

contract, and are “legally chargeable” to Gehan, because Gehan had a contract to deliver

a properly constructed, non-defective home to the Larsons. Id. Consequently, there is no

“accident,” as that term is defined under Texas law. See Mid-Century Ins. Co. v. Lindsey,

997 S.W.2d at 155; Trinity Univ. Ins. Co. v. Cowan, 945 S.W.2d at 555.




310067503v1                                 21
              4.     Numerous courts from around the country have reached
                     the identical conclusion.

        Numerous courts around the country have concluded that claims for faulty

workmanship involving damage only to the subject of the contractor’s contract are not

claims for “accidental” damage.       As the Missouri court of appeals has explained:

“[B]reach of a defined contractual duty cannot fall within the term ‘accident.’” Hawkeye-

Security Ins. Co. v. Davis, 6 S.W.3d 419, 426 (Mo. App. 1999), transfer denied, (quoting

American States Ins. Co. v. Mathis, 974 S.W.2d 647, 650 (Mo. App. 1998)).

“Performance of [the] contract according to the terms specified therein was within [the

insured contractor’s] control and management and its failure to perform cannot be

described as an undesigned or unexpected event.” Id.

        Because “the damages suffered relate to the satisfaction of the contractual bargain,

it follows that they are not unforeseen.” Harbor Court Assocs. v. Kiewit Constr. Co., 6

F.Supp.2d 449, 456 (D. Md. 1998) (quoting, Lerner Corp. v. Assurance Co. of Am., 707

A.2d 906, 912 (Md. App. 1998)). “[C]ontractors, when they agree to construct a building

in a proper manner, expect that they will have to erect the building in a proper manner.

They further expect that if they do no do so, they will have to repair any defects in their

work so as to ‘deliver’ the product they promised to provide.” Harbor Court Assocs. v.

Kiewit Constr., 6 F.Supp.2d at 457.         Consequently, these repair and replacement

damages, for which a contractor is liable “in any event, irrespective of fault, because of

its contractual obligations,” are “expected” from the standpoint of the insured contractor

and do not result from an “accident.” Id. at 456-57.



310067503v1                                  22
        “Accordingly, the law is well-settled, in Illinois and in other jurisdictions, that the

natural results of negligent and unworkmanlike construction of a building do not

constitute an ‘occurrence.’” American Fire & Cas. Co. v. Broeren Russo Constr., Inc.,

54 F.Supp.2d 842, 847 (C.D. Ill. 1999). “The mere failure of a product to perform as

warranted is not beyond the realm of expectation and is foresseable by the parties . . . .

While such failure is most likely to be unintentional, it cannot be considered an ‘accident’

within the meaning of the policy because the natural and ordinary consequences of an act

do not constitute an accident.” Id., (quoting Diamond State Ins. Co. v. Chester-Jensen

Co., 611 N.E.2d 1083, 1092 (Ill. App. 1993)).

        Less than two months ago, the West Virginia Supreme Court reiterated that

“[p]oor workmanship, standing alone, does not constitute an ‘occurrence’ under the

standard policy definition of this term as an ‘accident including continuous or repeated

exposure to substantially the same general harmful conditions.’” Webster County Solid

Waste Auth. v. Brackenrich & Assocs., Inc., __ S.E.2d __, 2005 WL 1545273, *5 (W. Va.

2005) (quoting Corder v. William W. Smith Excavating Co., 556 S.E.2d 77, 78 (W. Va.

2001)). The court explained:

        The insured, as a source of goods or services, may be liable as a matter of
        contract law to make good on products or work which is defective or
        otherwise unsuitable because it is lacking in some capacity. This may even
        extend to an obligation to completely replace or rebuild the deficient
        product or work. This liability, however, is not what the coverages in
        question are designed to protect against. The coverage is for tort liability
        for physical damages to others and not for contractual liability of the
        insured for economic loss because the product or completed work is not
        that for which the damaged person bargained.




310067503v1                                   23
Id. at * 4, quoting Corder, 556 S.E.2d at 82 (emphasis original).3

          As these courts have recognized, Gehan expected and intended to fulfill its

contract with the Larsons from the moment Gehan contracted with the Larsons. (If

Gehan did not expect and intend to fulfill its contract, Gehan would be guilty of fraud.)

Gehan’s contractual obligation to the Larsons was not merely an obligation to “try” to

construct a proper home or to use its “best efforts.” By virtue of its own voluntary

contractual undertaking, Gehan’s obligation was to deliver a properly constructed

home⎯irrespective of its fault or the fault of its subcontractors,                                Whether Gehan

subjectively intended to breach its contract is of no consequence. Cf. Trinity Univ. Ins.

Co. v. Cowan, 945 S.W.2d at 827 (explaining that Maupin decision rested on the law of

trespass in which the “actor’s subjective intent . . . is irrelevant”).

          A general contractor entering into a contract is deemed as a matter of law to

expect that it will be liable to the purchasers if it should fail to deliver that which it

promised. Because the damages suffered by the Larsons relate to the satisfaction of their

contractual bargain, it follows that these damages are not unforeseen or unexpected. In
3
    Numerous other courts have reached the identical conclusion. See, e.g., Nabholz Constr. Corp. v. St. Paul Fire &
    Marine Ins. Co., 354 F.Supp.2d 917, 921 (E.D. Ark. 2005) (“a contractor’s obligation to repair or replace its
    subcontractor’s defective workmanship should not be deemed ‘unexpected’ on the part of the contractor, and
    therefore fails to constitute an ‘event’” defined as “an accident, including continuous or repeated exposure to
    substantially the same general harmful conditions”); Oak Crest Constr. Co. v. Austin Mut. Ins. Co., 998 P.2d
    1254, 1257 (Or. 2000) (“there can be no ‘accident’ within the meaning of a commercial liability policy, when the
    resulting damage is merely a breach of contract”); Heile v. Herrmann, 736 N.E.2d 566, 568 (Ohio App. 1999)
    (“courts in Ohio, as well as the majority of courts in jurisdictions throughout the country, have concluded that
    defective workmanship does not constitute an ‘occurrence’”); Pursell Constr., Inc. v. Hawkeye-Security Ins. Co.,
    596 N.W.2d 67, 70 (Iowa 1999) (“majority of courts . . . have concluded that a CGL policy does not provide
    coverage for claims against an insured for the repair of defective workmanship that damaged only the resulting
    work product’); R.N. Thompson & Assocs., Inc. v. Monroe Guar. Ins. Co., 686 N.E.2d 160, 164 (Ind. App. 1997)
    (damages were “the natural and ordinary consequence of the work done by [the insured] or under its supervision,”
    these “economic losses . . . arise out of the contractual relationship of the Association and [the insured], and not
    from an ‘occurrence’”); George A. Fuller Co. v. United States Fidelity & Guar. Co., 613 N.Y.S.2d 152, 155
    (N.Y. App. 1994) (“contract default under a construction contract” is not an “accident” even when labeled
    “negligent performance” and “negligent construction”).


310067503v1                                               24
other words, the damages sought by the Larsons⎯for repair and replacement and

diminution in value⎯are expected and intended from the standpoint of the insured by

virtue of its contractual promise to provide a properly constructed home to the Larsons.

The Larsons seek only to enforce their contractual bargain. The Larsons’ damages,

resulting from Gehan’s failure to perform its contractual undertaking, are not unexpected

or unintended from Gehan’s standpoint, are conclusively presumed to have been foreseen

by Gehan, and are chargeable to Gehan as a matter of law. Thus, the Larsons’ alleged

damages do not result from an accident. See Mid-Century Ins. Co. v. Lindsey, 997

S.W.2d at 155.

              5.     Two decades ago, in Jim Walter Homes v. Reed, this
                     Court recognized the nature of the Larsons’ claims.

        Nearly two decades ago, at the request of a homebuilder, this Court held that

“[w]hen the injury is only the economic loss to the subject of a contract itself, the action

sounds in contract alone.” Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex.

1986) (emphasis added). In reaching this conclusion, the Court recognized that “[t]he

acts of a party may breach duties in tort or contract alone or simultaneously in both.” Id.

Nonetheless, the Court did not conclude that plaintiffs are free to label their claims as

they choose. Nor did the Court conclude that courts are to accept the plaintiffs’ labels.

Instead, the Court instructed that “[t]he nature of the injury most often determines which

duty or duties are breached.” Id. And the Court held that “[w]hen the injury is only the

economic loss to the subject of a contract itself the action sounds in contract alone.” Id.;

accord Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494 (Tex. 1991)



310067503v1                                 25
(“When the only loss or damage is to the subject matter of the contract, the plaintiff’s

action is ordinarily on the contract.”).

        Importantly for this case, Jim Walter Homes emphasized that courts “must look to

the substance of the cause of action and not necessarily the manner in which it was

pleaded.” Jim Walter Homes, 711 S.W.2d at 617-18. For this reason, the Court did not

end its analysis by noting that the plaintiffs had pleaded negligence and gross negligence

against the builder. See id. The Court looked behind the plaintiffs’ labels to examine the

substance of their claims and the nature of their damages. Id.

        As summarized by the court of appeals, the factual allegations proved by the

plaintiffs in the Jim Walter Homes case included the following:

        The evidence in this case showed that appellant contracted with appellees to
        build a house on their land. Shortly after the concrete pier foundation was
        installed and during the framing of the house, appellees complained to
        appellant about the quality of the concrete. The concrete was crumbling
        and could easily be broken off. Appellant’s employees assured appellees
        that there was no problem, that the concrete had been tested and was good
        quality concrete. Appellees later found that there had been no tests run on
        the concrete and eventually had the tests done themselves. The tests
        showed that the strength of the concrete was significantly below the 2,500
        psi required by the specifications. Appellees’ expert witness testified that
        the foundation was inadequate and did not meet the specifications or the
        code, that the foundation needed to be replaced and the foundation
        constituted poor workmanship.

        The appellees also complained of the framing lumber used throughout the
        house. Appellees’ expert testified that both the quality of the lumber and
        the installation thereof was inadequate and constituted poor workmanship.
        Appellees’ expert testified that the poor quality of the foundation, framing
        and other deficiencies in the house were caused by lack of supervision
        amounting to gross negligence.




310067503v1                                 26
Jim Walters Homes, Inc. v. Reed, 703 S.W.2d 701, 705 (Tex. App.—Corpus Christi,

1985), rev’d ,711 S.W.2d. 617 (Tex. 1986).

          This Court considered these factual allegations and concluded: “The Reeds’ injury

was that the house they were promised and paid for was not the house they received.

This can only be characterized as a breach of contract . . . .” Jim Walter Homes, 711

S.W.2d at 618.4 Equally in this case, labels aside, the Larsons’ injury is that the house

they were promised by Gehan and the house they paid Gehan to deliver was not the house

they received. See CR 135, 141. “This can only be characterized as a breach of

contract.” Jim Walter Homes, 711 S.W.2d at 618.

          As a matter of law, the Larsons have alleged no claim but a contract claim, id., and

that breach of contract claim alleges no accident. Gehan’s failure to fulfill its contractual

obligations, i.e., its failure to provide a home that was constructed in a good and

workmanlike manner, is not an “accident,” as a matter of Texas law, because the injury to

the Larsons “is of a type that ‘ordinarily follow[s]’ from [Gehan’s] conduct and the

injuries could be ‘reasonably anticipated from the use of the means, or an effect’ that

[Gehan] can ‘be charged with . . . producing.” Trinity Univ. Ins. Co. v. Cowan, 945


4
    This Court has also recognized that “if the action is not maintainable without pleading and proving the contract,
    where the gist of the action is the breach of the contract, whether by malfeasance or nonfeasance, it is, in
    substance, an action on the contract, whatever may be the form of the pleading.” International Printing Pressmen
    & Assistants’ Union of N. Am. v. Smith, 198 S.W.2d 729, 735 (Tex. 1947); accord DeWitt County Elec. Co-op. v.
    Parks, 1 S.W.3d 96, 105 (Tex. 1999) (“if the defendant’s conduct . . . would give rise to liability only because it
    breaches the parties’ agreement, the plaintiff’s claim ordinarily sounds only in contract” and when there is “a
    contract spelling out the parties’ respective rights . . . the contract and not common-law negligence governs any
    dispute”). The duty to construct a proper foundation, the duty to build a house without cracks and with proper
    lumber arises in contract alone. There is no tort duty to build a defect free home. There is only a contractual
    duty. This contractual duty includes the seller’s warranty duty. Centex Homes v. Buecker, 95 S.W.3d 266 (Tex.
    2002) (“The implied warranty of good workmanship, however, defines the level of performance expected when
    the parties fail to make express provision in their contract. It functions as a gap-filler whose purpose is to supply
    terms that are omitted from but necessary to the contract’s performance.”).


310067503v1                                                27
S.W.2d 819, 828 (Tex. 1997). Simply put, the failure to perform a contract which causes

no physical harm to persons or property beyond the subject of the contract is not an

accident.

         B.     There is no property damage.

                1.     Economic losses are not “property damage” under Texas
                       law.

         Just as the Larsons do not state a claim for damages “caused by an ‘occurrence,’”

the Larsons likewise do not seek the recovery of “property damage.” Instead, the Larsons

seek to recover only economic losses arising out of Gehan’s breach of contract. The

Texas Supreme Court has long recognized the distinction between economic losses and

property damage. See Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77, 78 (Tex.

1977). In Nobility Homes, the Court defined direct and consequential economic loss as

follows:

         Direct economic loss may be said to encompass damage based on
         insufficient product value; thus, direct economic loss may be “out of
         pocket” the difference in value between what is given and received or “loss
         of bargain” the difference between the value of what is received and its
         value as represented. Direct economic loss also may be measured by costs
         of replacement and repair. Consequential economic loss includes all
         indirect loss, such as loss of profits resulting from inability to make use of
         the defective product.

Nobility Homes, 557 S.W.2d at 78 n.1. Reasoning that “economic loss is not ‘physical

harm’ to the user or his property” the Court concluded that “[t]here is a distinction

between physical harm, or damage, to property and commercial [or economic] loss.” Id.

at 80.




310067503v1                                   28
        Nowhere do the Larsons allege any physical damage to any property not the

subject of their contract with Gehan. See CR 134-44. All of the Larsons’ alleged

damages—from repair costs and diminution in value, to attorney’s fees and mental

anguish—represent direct and consequential economic losses under this Court’s decisions

in Nobility Homes and Jim Walter Homes.           The substance of the Larsons’ factual

allegations conclusively establishes the nature of their injury. The Larsons’ injury is that

the house they were promised and paid for was not the house they received. This is an

economic loss to the subject matter of their contract with Gehan Homes. See Jim Walter

Homes, 711 S.W.2d at 618. It is not “property damage.”

        Texas courts have repeatedly held that economic losses do not constitute “property

damage” within the meaning of liability insurance policies. See Great Am. Lloyds Ins.

Co. v. Mittlestadt, 109 S.W.3d 784 (Tex. App.—Fort Worth 2003, no pet.) (economic

losses do not constitute “property damage” within the meaning of a general liability

policy); State Farm Lloyds v. Kessler, 932 S.W.2d 732, 737 (Tex. App.—Fort Worth

1996, writ denied) (repair costs to restore home are economic damages, rather than

covered property damage); Terra Int’l, Inc. v. Commonwealth Lloyd’s Ins. Co., 829

S.W.2d 270, 272-73 (Tex. App.—Dallas 1992, writ denied) (insured’s actions resulting in

diminution of value of plaintiff’s land not “property damage” and not covered); Houston

Petroleum Co. v. Highlands Ins. Co., 830 S.W.2d 153, 156 (Tex. App.—Houston [1st

Dist.] 1990, writ denied) (complaint that alleges economic loss does not trigger duty to

defend; one who acquires something worth less than it was represented has suffered

economic harm and not “property damage”); Lay v. Aetna Ins. Co., 599 S.W.2d 684, 686-


310067503v1                                 29
687 (Tex. Civ. App.—Austin 1980, writ ref’d n.r.e.) (where there is no injury to tangible

personal property, there is no duty to defend and no duty to indemnify).

        When no physical injury results to persons or other property, injury to the

defective product itself is an economic loss. Mid-Continent Aircraft Corp. v. Curry

County Spraying Serv., Inc., 572 S.W.2d 308, 313 (Tex. 1978); Rocky Mountain

Helicopters, Inc. v. Bell Helicopter Co., 491 F.Supp. 611, 620 (N.D. Tex. 1979). An

economic loss affects only a party’s pocketbook, as opposed to personal injury or

physical injury to other property. See, e.g., Two Rivers Co. v. Curtiss Breeding Serv., 624

F.2d 1242, 1245-1246 (5th Cir. 1980).

              2.     Numerous other courts agree that economic losses are not
                     property damage.

        Several courts around the country have recognized the distinction between

contractual economic losses and property damage in construction defect cases. See, e.g.,

Bonded Concrete, Inc. v. Transcontinental Ins. Co., 784 N.Y.S.2d 212, 213-14 (N.Y.

App. Div. 2004) (“The damages sought were the costs of correcting the defect, not

damage to property other than the completed work itself.”); Erie Ins. Prop. & Cas. Co. v.

Pioneer Home Development, Inc., 526 S.E.2d 28, 34 (W. Va. 1999) (“[T]he damages

claimed by the Skanes arose out of Pioneer’s breach of contract. These damages which

resulted from faulty workmanhsip in the performance of the building contract fall outside

the coverage provided by the CGL policy of insurance purchased by Pioneer.”); R.N.

Thompson & Assocs., Inc. v. Monroe Guar. Ins., 686 N.E.2d 160, 165 (Ind. App. 1997)

(“Because Thompson’s claim arises from economic loss suffered by the Association, and



310067503v1                                 30
not from damage to property other than the contractor’s completed work itself, there was

no “property damage” covered by Thompson’s CGL policies.”); Yegge v. Integrity Mut.

Ins. Co., 534 N.W.2d 100, 102 (Iowa 1995) (“The subject of the counts did not qualify as

property damage within the policy’s definition because they are intangible economic

losses.”); George A. Fuller Co. v. United States Fidelity & Guar. Co., 613 N.Y.S.2d 152,

155 (N.Y. App. Div. 1994) (“Nor may the Epurio complaint be read to assert a claim

other than one by a contracting party for the economic loss it sustained due to the

allegedly defective work by the other contracting party.”).5

          These courts recognize, as this Court does, that the Larsons do not allege claims

for property damage caused by an accident. They allege claims for economic loss

resulting from Gehan’s failure to perform as it promised to perform and as it was

contractually obligated to perform. This Court’s precedents require the reviewing court

to examine the Larsons’ factual allegations to determine the nature and origin of the

Larsons’ damages. The court of appeals nonetheless refused to undertake this analysis

and instead gave controlling weight to pleaded legal theories labeled “negligence.” That

was error. The Larsons’ factual allegations establish their injury. The house they were

promised and paid for was not the house they received. This is a direct economic loss,

not property damage. Nobility Homes v. Shivers, 557 S.W.2d at 78 and n.1. For this




5
    Several other states have recognized the distinction between economic losses and property damage in cases not
    involving construction defect claims. See, e.g., American States Ins. Co. v. Martin, 662 So.2d 245 (Ala. 1995);
    Western Exterminating Co. v. Hartford Acc. and Indem. Co., 479 A.2d 872 (D.C. App. 1984); Bush v.
    Shoemaker-Beal, 987 P.2d 1103 (Kan. 1999); L. Ray Packing Co. v. Commercial Union Ins. Co., 469 A.2d 832
    (Me. 1983); Graber v. State Farm Fire and Cas. Co., 797 P.2d 214 (Mont. 1990).


310067503v1                                             31
independent reason as well, Great American Lloyds does not owe a duty to defend or

indemnify Gehan.

        C.    Gehan’s contrary arguments in favor of coverage are
              unpersuasive.

              1.     The legal rules set forth in Jim Walter Homes and
                     Nobility Homes cannot be ignored in this insurance
                     coverage case.

        The court of appeals concluded that this Court’s holdings in Jim Walter Homes

can be ignored because Jim Walter Homes is not a coverage case. That is incorrect. The

obligation to “look to the substance of the cause of action,” not to “the manner in which it

was pleaded” does not evaporate because the court is deciding an insurer’s defense and

indemnity obligation. This Court has consistently held that in determining an insurer’s

duty to defend, “the court must focus on the factual allegations that show the origin of the

damages rather than on the legal theories alleged.” National Union Fire Ins. Co. v.

Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997) (emphasis added);

accord Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 1997).

        This Court has already analyzed and determined the nature of the damage incurred

and the substance of the claim involved in construction defect claims brought against

homebuilders by homebuyers. See Jim Walter Homes, 711 S.W.2d at 617-18. The same

analysis should be applied to determine whether construction defect claims brought

against homebuilders by homebuyers are covered by the homebuilders’ liability insurance

policies. There is no persuasive reason to analyze construction defect claims one way




310067503v1                                 32
when insurance is not involved and another way when insurance is involved. The nature

of the claim involved and the damages incurred do not change.

        Thus, the Texas Supreme Court’s prior holdings conclusively establish the

principles which decide this case. First, the plaintiff’s factual allegations, not the labels

they attach to their legal theories, determine an insurer’s duty to defend. Second, when

the alleged injury is only the economic loss to the subject matter of a contract, the

plaintiff’s cause of action, no matter what label may be attached, sounds in contract

alone. Third, economic losses⎯for replacement and repair costs and loss of bargain

damages⎯are not physical harms to the user or his property. Fourth, these types of

direct economic losses to the subject matter of Gehan’s contract are conclusively

presumed to have been foreseen by Gehan, are chargeable to Gehan as a matter of law,

and represent expected losses.

        These established principles dictate the result in this case. When there are no

allegations of bodily injury to any person and no allegations of damage to any property

other than the home itself, allegations of faulty workmanship and construction

deficiencies do not allege “property damage” caused by an “accident” or “occurrence”

sufficient to trigger the duty to defend or indemnify.

              2.     The Orkin case does not support Gehan’s request for
                     coverage.

        The court of appeals identifies two lines of “occurrence” cases, one for intentional

tort cases and one for negligence actions, and the court of appeals concludes that this case

is controlled by Massachusetts Bonding & Ins. Co. v. Orkin Exterminating Co., 416



310067503v1                                  33
S.W.2d 396 (Tex. 1967). In Orkin, an exterminating company insured was hired to

eradicate pests that were causing damage to milled rice stored in a warehouse.6 In its

efforts to eradicate the pests, the insured exterminating service damaged the rice stored in

the warehouse. The warehouse owner sued, alleging damage to the rice stored in the

warehouse. The Court found that the damages for which the insured was held liable were

caused by an accident, because the damages caused were “undesigned and unexpected.”7

          Significantly, Orkin does not involve damage to anything the insured agreed to

build or provide, but instead involves damage to rice that was present on the premises of

the underlying plaintiff before the insured ever arrived or contracted with the plaintiff.

Orkin thus does not merely involve claims for repairing or replacing the very structure or

product that the insured agreed to provide, but instead involves damage to other property.

Stated another way, Orkin does not involve damages that are within the scope of the

transaction (i.e., repairs to the structure the insured agreed to build) that are presumed

foreseeable and expected, but instead involve damages to property that was outside the

scope of the parties’ contract to eradicate pests.

          Texas law on direct economic damages is clear. Direct economic losses to the

subject matter of a contract are expected and foreseeable as a matter of law. See pp. 21,

28-29, above. Direct economic losses to the subject matter of a contract include costs of

repair, diminution in value, and loss of bargain. Id. It is immaterial whether Gehan


6
    The underlying facts are recited in greater detail in the court of appeals opinion at 400 S.W.2d 20, 23 (Tex. Civ.
    App.—Houston 1966), rev’d, Massachusetts Bonding & Ins. v. Orkin Exterminating Co., 416 S.W.2d 396 (Tex.
    1967).
7
    The issue of economic loss distinguished from property damage was not before the court or raised by any party in
    Orkin.


310067503v1                                               34
admits or contests its “intent” to cause these damages; and it is immaterial whether Gehan

admits or contests the foreseeability of these damages. The Fifth Circuit explained the

rule this way:

        Direct (as opposed to consequential) damages that naturally flow from a
        breach of contract are conclusively presumed to have been in the
        contemplation of the parties and may therefore constitute expected or
        intended damages. A comprehensive general liability policy does not cover
        this cost of doing business.

Hartford Cas. Co. v. Cruse, 938 F.2d 601, 604 (5th Cir. 1991) (emphasis added).

        Here, the damages sought by the Larsons are “expected” and “intended” from the

standpoint of the insured by virtue of Gehan’s contractual undertaking and obligations.

See Cruse, 938 F.2d at 604; see also pp. 20-25 above. The Larsons’ damages are

conclusively presumed to have been foreseen by Gehan—regardless of any protestations

to the contrary. These damages are chargeable to Gehan as a matter of law, and under

Orkin, as well as Republic National Life v. Heyward, Trinity Universal v. Cowan, and

Mid-Century v. Lindsey, there is no “accident” or “occurrence” under the policy.

                 3.   Gehan’s reliance on policy exclusions is misplaced.

        Ignoring the definitions of “property damage” and “occurrence,” Gehan relies on

policy exclusions to argue that economic losses caused by defective construction are

covered under the insuring provisions. Gehan’s reliance on policy exclusions to prove

that construction defect claims must be within the initial grant of CGL coverage is

erroneous and logically flawed.




310067503v1                                35
                    a.     Exclusions cannot “create coverage” where none exits.

Texas law recognizes that “an exclusionary clause . . . can never be said to create

coverage where none existed before.” State Farm Fire & Cas. Co. v. Volding, 426

S.W.2d 907, 909 (Tex. Civ. App.—Dallas 1968, writ ref’d n.r.e.) (disapproved on other

grounds in Blaylock v. American Guarantee Bank Liability Ins. Co., 632 S.W.2d 719, 723

(Tex. 1982)). For this reason, unless an until the Larsons allege an “accident” causing

“property damage,” the policy exclusions are irrelevant. This Court recognized this

principle in Trinity Universal v. Cowan, explaining that “[b]ecause we decide Gage’s

conduct is not an ‘accident.’ We do not reach the question of whether the intentional

injury exclusion also applies to Gage’s conduct.” Trinity, 945 S.W.2d at 829 n.6.

        Numerous other jurisdictions have agreed that exclusions⎯and exceptions to

exclusions⎯cannot act as an additional grant or extension of coverage in construction

defect cases. See e.g., Amerisure, Inc. v. Wurster Construction Co., Inc., 818 N.E.2d 998,

1005 (Ind. App. 2004) (“Exclusion clauses do not grant or enlarge coverage . . . . In

simplistic terms, the process is such: if the insuring clause does not extend coverage, one

need look no further.”); L-J Inc. v. Bituminous Fire and Marine Ins. Co., __ S.E.2d __,

2004 WL 1775571 (S.C. 2004) (“Since there was no ‘occurrence’ . . . there is no need to

address whether the damage falls under the ‘your work’ exclusion.”); ACS Constr. Co., v.

CGU, 332 F.3d 885, 892 (5th Cir. 2003) (“The exclusionary language in the [policy]

cannot be used to create coverage where none exists.”); Home Owners Warranty Corp. v.

Hanover Ins. Co., 683 So.2d 527, 530 (Fla. App. 1996) (“exclusion does not provide

coverage but limits coverage”); United States Fidelity & Guar. Corp. v. Advance Roofing


310067503v1                                 36
& Supply Co., Inc., 788 P.2d 1227, 1234 (Ariz. App. 1990) (policy exclusions “merely

subtract from coverage already granted,” they do not “refer to or modify in any way the

policy’s definition of ‘occurrence’”) Hawkeye-Security Ins. Co. v. Vector Construction

Co., 460 N.W.2d 329, 336-37 (Mich. App. 1990) (exclusions limit coverage; “they do not

grant coverage”).8

                           b.       Gehan’s argument is logically flawed.

          Great American agrees with Gehan that the CGL policy should be read as a whole

so that none of its provisions is rendered meaningless. From this unremarkable starting

point, however, Gehan jumps to the illogical conclusion that anything a policy exclusion

might possibly encompass must be within the original grant of coverage. Thus, Gehan

argues, because some of the policy exclusions could possibly exclude certain construction

defect claims, all construction defect claims must be within the initial grant of coverage

afforded by the CGL policy.

          Gehan’s analysis⎯although accepted by the court of appeals⎯cannot withstand

scrutiny and is logically flawed. The CGL policy covers property damage caused by an

occurrence, an “accident.” Sometimes, an accident causes property damage to the

insured’s work. For example, a builder might come to perform warranty work on a

home, drop a cigarette, and burn down the home. This would be an accident causing

8
    Several other courts have recognized the same principle. See, e.g., Lassiter Constr. Co. v. American States Ins.
    Co., 699 So.2d 768 (Fla. App. 1997); Continental Cas. Co. v. Pittsburgh Corning Corp., 917 F.2d 297 (7th Cir.
    1990) (Illinois law); Pursell Constr., Inc. v. Hawkeye-Security Ins. Co., 596 N.W.2d 67 (Iowa 1999); Ryan v.
    Pennsylvania Life Ins. Co., 123 S.W.3d 142 (Ky. 2003); Hawkeye-Security Ins. Co. v. Davis, 6 S.W.3d 419 (Miss.
    App. 1999); Connolly v. St. Paul Fire & Marine Ins. Co., 603 N.Y.S.2d 611 (N.Y. App. 1993); Progressive Cas.
    Co. v. McManus, 732 P.2d 932 (Or. App. 1987); Mullaney v. Aetna U.S. Healthcare, 103 F.Supp.2d 486 (D.R.I.
    2000); Standard Fire Ins. Co. v. Chester-O’Donley & Associates, Inc., 972 S.W.2d 1 (Tenn. App. 1998).



310067503v1                                              37
property damage, not merely a breach of contract causing economic loss.           In this

scenario, the property damage would be covered under the insuring provisions, and then

the exclusions, including exclusion l, would be triggered.

        As another example, a builder might construct several homes or townhomes in a

single neighborhood. If the builder completes one home, and then bumps it with a

forklift as he is working on the home next door, this too would be an accident causing

property damage. If the builder was driving the forklift, the damage caused to the

completed house would be excluded from coverage, because the property damage is to

the builder’s work and arises out of the builder’s work. If the forklift was driven by a

subcontractor, however, the exception to exclusion l would negate the exclusion, and

coverage would exist.

        As these two examples illustrate, the exclusions are not rendered meaningless by

acknowledging that economic losses caused by defective workmanship do not represent

property damage caused by an occurrence. No legal principle requires the Court to

reason backwards from the exclusions and grant coverage in every conceivable

circumstance allegedly covered by those exclusions. Nor does logic support such an

analysis.

        Gehan and the court of appeals reason no further than to say that the “your work”

exclusion can be interpreted to exclude some construction defects, ergo, all construction

defects must be covered as property damage caused by an occurrence. For example, the

court of appeals cites American Family Mutual Insurance Co. v. American Girl, Inc., 673

N.W.2d 65, 78 (Wis. 2004), which asks the rhetorical question, “why would the


310067503v1                                 38
insurance industry exclude damage to the insured’s own work or product if the damage

could never be considered to have arisen from a covered ‘occurrence’ in the first place?”

Relying on this Wisconsin opinion, the court of appeals assumes that the only possible

damage to the insured’s work arising out of the insured’s work will be construction

defects caused by poor workmanship. Neither Gehan nor the American Family opinion

supports this assumption, and the assumption is demonstrably false.

        As the two examples discussed above demonstrate, the “your work” exclusion is

not rendered meaningless by acknowledging that economic losses caused by defective

workmanship are not property damage caused by an occurrence. Builders and their

subcontractors can be involved in accidents that cause property damage to their work,

without defining an accident to include defective workmanship. A builder can drop a

cigarette and cause a fire. A builder can back a forklift or a car into a house. A builder

can trip and fall through a glass door. A builder can drop a tool in the attic and put a hole

in the ceiling.

        None of these circumstances involves allegations of faulty workmanship, and all

of these circumstances involve damage “to the insured’s own work or product.” As these

examples illustrate, the court of appeals is simply wrong to conclude that the “your work”

exceptions have no meaning unless faulty workmanship claims are covered by the CGL

policy insuring provisions.     Reading the policy as a whole does not compel the

conclusion that economic losses resulting from the insured’s failure to perform its

contractual obligations are property damage caused by an occurrence or accident.




310067503v1                                  39
        A hypothetical helps to demonstrate the logical flaw in Gehan’s reasoning.

Consider a school. A sign on the front door reads: “Only students permitted within.”

Once inside the building, there is a classroom with its own sign on the door. This sign

reads: “Those under 50 pounds or 4 feet tall are not permitted within.” Accepting

Gehan’s logic, the classroom sign excludes many dogs and all cats, because they are less

than 4 feet tall and weigh less than 50 pounds. As a consequence, Gehan’s backward

reasoning compels the conclusion that cats and dogs must be among those “students”

originally allowed in the front door of the school. Because some cats and dogs are

excluded from the interior classroom, all cats and dogs must be permitted to enter in the

first instance.

        Gehan’s reliance on CGL policy exclusions suffers from the same logical flaws

the hypothetical demonstrates. In the hypothetical, if one begins at the front door, with

the initial grant of permission only to “students,” then the classroom exclusion applies

only to “students.”   Properly interpreting the word students to include only human

children does not render the classroom exclusion meaningless. The classroom exclusion

simply applies to restrict the types of human children admitted to the classroom. For the

same reasons, there is no logical basis for concluding that construction defects must be

covered accidents merely because an exclusion could be interpreted in the abstract to

exclude some construction defects.




310067503v1                                40
                  4.       Gehan advances the minority view.

          Gehan suggests that most modern courts accept its arguments.                              Contrary to

Gehan’s assertions, the majority of jurisdictions considering these issues has held that

CGL insurers do not owe a duty to defend or indemnify insured contractors against

claims for faulty construction seeking pure economic damages.9 As the cases cited in the

footnote and quoted in this brief demonstrate, the decisions we rely upon include very


9
    See, e.g., United States Fidelity & Guar. Co. v. Warwick Dev. Co. Inc., 446 So.2d 1021 (Ala. 1984) (faulty
    construction claims allege no occurrence and no property damage); United States Fidelity & Guar. Corp. v.
    Advance Roofing & Supply Co., Inc., 788 P.2d 1227 (Ariz. 1989) (faulty construction claims allege no occurrence
    and no property damage); Nabholz Constr. Corp. v. St. Paul Fire & Marine Ins. Co., 354 F.Supp.2d 917 (E.D.
    Ark. 2005) (faulty construction claims allege no occurrence); Union Ins. Co. v. Hottenstein, 83 P.3d 1196 (Col.
    App. 2003) (faulty construction claims allege no occurrence); Brosnahan Builders Inc. v. Harleysville Mut. Ins.
    Co., 137 F.Supp.2d 517 (D. Del. 2001) (faulty construction claims allege no occurrence); Home Owners
    Warranty Corp. v. Hanover Ins. Co., 683 So.2d 527 (Fla. App. 1996) (faulty construction claims allege no
    occurrence and no property damage); Custom Planning & Dev. v. American Nat’l Fire Ins. Co., 606 S.E.2d 39
    (Ga. App. 2004) (faulty construction claims allege no occurrence); Burlington Ins. Co. Oceanic Design & Constr.
    Inc., 383 F.3d 940 (9th Cir. 2004) (Hawaii law) (faulty construction claims allege no occurrence); Indiana Ins.
    Co. v. Hydra Corp., 615 N.E.2d 70 (Ill. App. 1993) (faulty construction claims allege no occurrence); Amerisure,
    Inc. v. Wurster Constr. Co., Inc., 818 N.E.2d 998 (Ind. App. 2004) (faulty construction claims allege no
    occurrence); Pursell Constr., Inc. v. Hawkeye-Security Ins. Co., 596 N.W.2d 67 (Iowa 1999) (faulty construction
    claims allege no occurrence); Standard Fire Ins. Co. v. Chester-O'Donley & Assoc., Inc., 972 S.W.2d 1 (Tenn.
    App. 1998) (Kentucky law) (faulty construction claims allege no property damage); United States Fire Ins. Co. v.
    Milton Co., 35 F.Supp.2d 83 (D.D.C. 1998) (Maryland law) (faulty construction claims allege no occurrence and
    no property damage); Harbor Court Assocs. v. Kiewit Constr. Co., 6 F.Supp.2d 449 (D. Md. 1998) (faulty
    construction claims allege no occurrence and no property damage); Hawkeye-Security Ins. Co. v. Vector Constr.
    Co., 460 N.W.2d 329 (Mich. App. 1990) (faulty construction claims allege no occurrence); ACS Constr. Co. v.
    CGU, 332 F.3d 885 (5th Cir. 2003) (Mississippi law) (faulty construction claims allege no occurrence); American
    States Ins. Co. v. Mathis, 974 S.W.2d 647 (Mo. App. 1998) (faulty construction claims allege no occurrence);
    McAllister v. Peerless Ins. Co. 474 A.2d 1033 (N.H. 1984) (faulty construction claims allege no occurrence);
    J.Z.G. Resources Inc. v. King, 987 F.2d 98 (2nd Cir. 1993) (New York law) (faulty construction claims allege no
    occurrence); Bonded Concrete, Inc. v. Transcontinental Ins. Co., 784 N.Y.S.2d 212 (N.Y. App. Div. 2004) (faulty
    construction claims allege no occurrence and no property damage); Wm. C. Vick Constr. Co. v. Pennsylvania
    Nat’l Mut. Cas. Ins. Co., 52 F.Supp.2d 569 (E.D.N.C. 1999), aff’d, 213 F.3d 634 (4th Cir. 2000) (faulty
    construction claims allege no occurrence and no property damage); Heile v. Herrman, 736 N. E.2d 566 (Ohio
    App. 1999) (faulty construction claims allege no occurrence); Oak Crest Constr. Co. v. Austin Mut. Ins. Co., 998
    P.2d 1254 (Or. 2000) (faulty construction claims allege no occurrence); Solcar Equip. Leasing Corp. v.
    Pennsylvania Mfr. Ass’n Ins. Co., 606 A.2d 522 (Pa. Super. 1992) (faulty construction claims allege no
    occurrence); L-J Inc, v. Bituminous Fire and Marine Ins. Co., __ S.E.2d __, 2004 WL 1775571 (S.C. 2004)
    (faulty construction claims allege no occurrence); Vernon Williams & Son Constr., Inc. v. Continental Ins. Co.,
    591 S.W.2d 760 (Tenn. 1979) (faulty construction claims allege no property damage); H. E. Davis & Sons, Inc. v.
    North Pacific Ins. Co., 248 F.Supp.2d 1079 (D. Utah 2002) (faulty construction claims allege no occurrence and
    no property damage); Erie Ins. Prop. & Cas. Co. v. Pioneer Home Development, Inc., 526 S.E.2d 28 (W. Va.
    1999) (faulty construction claims allege no occurrence and no property damage); Corder v. William W. Smith
    Excavating Co., 556 S.E.2d 77 (W. Va. 2001) (faulty construction claims allege no occurrence).



310067503v1                                              41
recent decisions and most address the same version of the CGL policy as the one

involved here. Moreover, once the Court recognizes that the revisions of the policy

exclusions in 1986 did not alter the meaning of the terms “property damage” and

“occurrence” in the insuring provision, there is no basis for ignoring or discounting the

older cases on which we rely.

        Thus, while Gehan can find some out-of-state cases that arguably support its

positions, the majority of jurisdictions reach the result the district court reached in this

case. On an individual basis, Gehan’s out-of-state cases require close scrutiny because

the facts, procedural history, and applicable substance law differ greatly from case to

case. Appling existing Texas law, this Court should conclude that claims for faulty

workmanship and construction deficiencies causing damage only to the subject matter of

the parties’ contract are not claims for property damage caused by an occurrence. The

Court will join the majority of jurisdictions reaching the same result.

IV.     Physical and Mental Pain, Suffering and Anguish Are Not “Bodily
        Injuries.”

        While the bulk of the Larsons’ allegations relate to the defective construction of

their home, they also include an allegation that “[t]he home and Plaintiffs have suffered

damage resulting from the actions or inactions of Defendant GEHAN” and assert a claim

for “mental anguish.” See CR 135, 140. In its entirety, the Larsons’ mental anguish

claims reads:




310067503v1                                  42
                                  X. MENTAL AGUISH

        Plaintiffs refer to and incorporate all factual contentions set forth in
        Paragraph IV above.

        As a further result of Defendants’ actions, Plaintiffs have suffered great
        physical and mental pain, suffering and anguish, and in all reasonable
        probability, will continue to suffer in this manner for a long time into the
        future. By reason of all of the above, Plaintiffs have suffered losses and
        damages in an amount in excess of the minimum jurisdictional limits of this
        Court.

CR 140. In paragraph XII, titled “DAMAGES,” the plaintiffs identify only “Mental

anguish” without any reference to “physical pain.” CR 141.

        The court of appeals held that the Larsons’ single mention of “physical . . . pain”

under their “Mental Anguish” heading alleges a “bodily injury” and triggers Great

American’s duty to defend.       See Gehan Homes, 146 S.W.3d at 844.          The court’s

conclusion is at odds with this Court’s holding in Trinity Universal Insurance Co. v.

Cowan, 945 S.W.2d 819, 823 (Tex. 1997), “that ‘bodily injury,’ as defined in the Trinity

policy, does not include purely emotional injuries, such as those alleged by Cowan, and

unambiguously requires an injury to the physical structure of the human body.” Id.

(emphasis added). As the Court explained, its “decision comports with the commonly

understood meaning of ‘bodily,’ which implies a physical and not purely mental,

emotional, or spiritual harm.” Id. (citing cases).

        The homeowner’s policy in Trinity defined “bodily injury” as “bodily harm,

sickness or disease. This includes required care, loss of services and death that result.”

Id. at 822. The CGL policy at issue in this case defines “bodily injury” in almost

identical terms as “bodily injury, sickness, or disease sustained by a person, including


310067503v1                                  43
death resulting from any of these at anytime.” CR 118. Contrary to the court of appeals’

holding, an allegation of “physical pain” is not an unambiguous allegation of an “injury

to the physical structure of the human body.” Pain is a sensation, a feeling. Pain is an

available element of damages. It is not an injury, a sickness, or a disease. While “an

injury to or disease or sickness of the physical structure of the human body” may cause

pain, it is equally true that “purely mental, emotional, or spiritual harm” may cause

physical pain. An allegation of pain—especially when it appears only with and as a part

of a mental anguish claim—is not an allegation of a bodily injury.

        The Larson plaintiffs do not unambiguously allege an injury to the physical

structure of their bodies, nor do they unambiguously allege a bodily sickness or bodily

disease. In Trinity, this Court left open the question “whether Cowan’s headaches,

stomachaches, and sleeplessness, as proved at trial, would be a bodily injury sufficient to

invoke Trinity’s duty to indemnify.” Trinity, 945 S.W.2d at 826 n.5. Like Cowan, the

Larsons did not even allege headaches or stomachaches or insomnia. CR 135, 140. As

this Court stated in Trinity, “Though we liberally construe the allegations in the petition

in determining the duty to defend, resolving any doubt in favor of the insured, . . . we will

not read facts into the pleadings for that purpose.” Trinity, 945 S.W.2d at 825. An

allegation of physical pain, standing alone, does not meet the definition of “bodily injury”

and does not trigger a duty to defend or indemnify. Only by reading facts into the

Larsons’ petition could the court of appeals conclude that the Larsons had alleged a

bodily injury. The lower court’s misguided analysis should be reviewed and rejected by

this Court.


310067503v1                                  44
                                       PRAYER

        The Larsons do not allege bodily injury or property damage caused by an

occurrence. Great American Lloyds Insurance Co. asks this Court to grant its petition for

review, to reverse the judgment of the court of appeals, and to render judgment that Great

American owes no duty to defend or indemnify Gehan Homes in the underlying suit filed

by Mark and Teri Larson. Great American also asks for all other relief to which it may

be entitled.

                                  Respectfully submitted,

Scott Smith                               John Engvall, Jr.
State Bar No. 18613220                    State Bar No. 06628975
Patrick Smith                             J. Jonathan Hlavinka
State Bar No. 18659700                    State Bar No. 09733250
SMITH, SMITH & SMITH, LLP                 ENGVALL & HLAVINKA, L.L.P.
3939 US Highway 80 E, Suite 486           2603 Augusta Drive, Suite 1200
Mesquite, Texas 75150-3373                Houston, Texas 77057-5639
(972) 698-0999 – telephone                (713) 787-6700 – telephone
(972) 698-0900 – facsimile                (713) 787-0070 – facsimile

Lawrence Fischman                         PILLSBURY WINTHROP
State Bar No. 07044000                    SHAW PITTMAN LLP
Mark C. Enoch
State Bar No. 06630360
GLAST, PHILLIPS & MURRAY, P.C.
2200 One Galleria Tower
13355 Noel Road, L.B. 48                         Jennifer Bruch Hogan
Dallas, Texas 75240-6457                         State Bar No. 03239100
(972) 419-8300 – telephone                Richard P. Hogan, Jr.
(972) 419-8329 – facsimile                State Bar No. 09802010
                                          909 Fannin, 22nd Floor
                                          Houston, Texas 77010
                                          (713) 425-7300−telephone
                                          (713) 425-7373−facsimile

                       ATTORNEYS FOR PETITIONER
               GREAT AMERICAN LLOYDS INSURANCE COMPANY


310067503v1                                45
                           CERTIFICATE OF SERVICE

      I certify that a true and correct copy of the foregoing instrument was served in
accordance with Rule 9.5 of the Texas Rules of Appellate Procedure.

                Attorneys for Employers Mutual Casualty Company

                                 Thomas Daryl Caudle
                              MATEER & SHAFFER, LLP
                                 325 N. St. Paul Street
                                 1300 Republic Center
                                  Dallas, Texas 75201
                     Via Certified Mail Return Receipt Requested

                          Attorneys for Gehan Homes Ltd.

                                 Thomas V. Murto, III
                                  George E. Crumbley
                                 STRADLEY & WRIGHT
                                    Abrams Center
                           9330 LBJ Freeway, Suite 1400
                                  Dallas, Texas 75243
                     Via Certified Mail Return Receipt Requested




                                              Jennifer Bruch Hogan
                                              DATE: August 12, 2005




310067503v1                              46

				
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