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Click here for the full text of this decision FACTS:Lennar Corp. and several of its affiliates built more than 400 homes in the Houston area from 1996 to 1999 using a synthetic stucco called Exterior Insulation and Finish System (EIFS), which was marketed as an ideal product for wood-framed houses. Lennar received a handful of complaints about the stucco from customers through the spring of 1999, but then the complaints grew after a television program about EIFS aired. Lennar concluded in September 1999 that the product was defectively designed because it prohibited adequate water drainage, causing problems from wood rot to mold. Lennar removed EIFS from the homes it built, replacing it with traditional stucco. Lennar also repaired damages caused by the product. Lennar then sought indemnification from its six primary and excess insurance carriers: Great American Insurance Co. and its affiliate American Dynasty Surplus Lines Insurance Co. (together referred to as “American Dynasty”); Gerling America Insurance Co.; Markel American Insurance Co.; RLI Insurance Co.; Insurance Co. of the State of Pennsylvania (ICSOP); and Westchester Fire Insurance Co. The carriers refused coverage, so Lennar filed a declaratory action to determine whether the carriers had a duty to indemnify or not. Lennar also filed extra-contractual claims against American Dynasty, one of its primary carriers. Lennar filed summary judgment motions for each carrier, and each carrier filed its own motions. The trial court granted all of the carriers’ motions, including American Dynasty’s motion aimed at the extra-contractual claims, and denied all of Lennar’s motions. HOLDING:Affirmed in part; reversed and remanded in part. The court first establishes that Texas law applies, not Florida law, as American Dynasty asserts. Though Lennar’s parent company is in Florida, one of the construction arms involved in this situation is Texas-based and Texas has the most significant relationship to the litigation. The court next reviews the question of whether the act of replacing the EIFS was an “occurrence” under the policies, a question common to all six motions for summary judgment, noting that Texas law is unsettled on whether defective construction resulting in damage to the insured’s work can constitute an “occurrence.” The court reviews several conflicting state and federal rulings on the issue. From these cases, the court gleans that the relevant inquiry is not whether the insured damaged its own work, which would mean the claim sounds in contract only. Instead, the court holds that defective construction resulting in damage to the insured’s own work can constitute an “occurrence” as long as the resulting damage was unintended and unexpected. Though some court cases have found that defective construction is merely a business risk that cannot be considered an occurrence, the court notes that those cases have not acknowledge that insurers ordinarily eliminate coverage for business risks through exclusions, not through the definition of “occurrence.” Moreover, these cases don’t recognize that coverage for business risks is not necessarily precluded when the damaged work was performed by subcontractors. On the latter point, the court adds that the standard “your work” exclusion would not include a subcontractor exception if insurers did not intend to cover some property damages resulting from defective construction. “Here, it is undisputed the homes were built, and the EIFS applied, by subcontractors. All the policies, except the ICSOP policy, contain the standard”business risk’ exclusions, including the”your work’ exclusion and its subcontractor exception. . . . However, the ICSOP policy contains the [broad form property damage endorsement], which effectively includes a subcontractor exception to the”your work’ exclusion. . . . Therefore, reading the policies as a whole, we conclude that Lennar’s defective construction constitutes an”occurrence’ as a matter of law because any resulting”property damage’ was unexpected and unintended from Lennar’s standpoint.” After establishing that the defective construction was an occurrence under the insurance policies, the court then considers whether Lennar paid damages because of property damage caused by the defective construction. The court agrees with Lennar that the costs to repair the homes that had water damage can be considered damages caused by the defective construction. The court disagrees, however, that the costs incurred by Lennar to remove and replace EIFS as a preventative measure are “damages because of . . . property damage.” Similarly, the cost of inspection, Lennar’s overhead, personnel costs and attorneys’ fees are not damages because of property damage. The court thus rules that Lennar must separate out its damages for the costs of repairing the water-damaged homes from the other costs. The court then turns to address arguments specific to each carrier. First is Gerling, another of Lennar’s primary carriers, who argues that it has no duty to indemnify Lennar because Lennar cannot satisfy the self-insured retention (SIR) amount of $250,000 specified in its policy. Lennar must satisfy a $250,000 deductible per occurrence before coverage is triggered under the Gerling policy, the company argues. Though Lennar argues that all of the EIFS complaints constitute one occurrence, which would satisfy the $250,000 per occurrence amount, the court finds instead that each home constitutes a separate occurrence. Therefore, Lennar would have to meet the $250,000 threshold amount for each house before it could collect under the Gerling policy. This Lennar cannot do, and the trial court was correct in granting summary judgment for Gerling. Next, RLI, ICSOP and Westchester � excess carriers to Gerling who issued umbrella policies to Lennar � argue that they have no duty to indemnify because Lennar has not exhausted the underlying policy limits. The court says it doesn’t need to decide this issue because of the court’s conclusion above that the Gerling policy limits will not be paid by either Gerling or Lennar. Lennar must satisfy a $250,000 per occurrence minimum before the amounts of the underlying policy limits are triggered. “As we have already determined, the EIFS claim for each home is a separate occurrence, and Lennar has not paid damages in excess of $250,000 for any home. Therefore, Lennar’s payments will not even trigger, much less, exhaust the underlying policy limits. . . . Therefore, because Lennar effectively concedes that the underlying policy limits cannot be exhausted by either an underlying carrier or Lennar, RLI, ICSOP, and Westchester have no duty to indemnify Lennar for the EIFS claims.” The court reviews American Dynasty’s coverage arguments next, which were made in a no-evidence summary judgment. The court disagrees with American Dynasty that there was no evidence that Lennar met the $1 million aggregate SIR. Lennar presented evidence that it paid out $5 million for repair and replacement costs. Though some of those costs may be associated with the replacement of EIFS � which is not an “occurrence” as decided above � it is premature to decide at this point whether Lennar has or hasn’t exhausted the $1 million aggregate SIR. American Dynasty also argues that several exclusions in its policy apply. The court finds that one exclusion does not apply because it applies only while Lennar is currently working on a project and here the damage was discovered after the homes were built. Another exclusion for impaired property doesn’t apply to the costs incurred for repairing the water-damaged homes. A third exclusion, called the “sistership” exclusion, similarly does not apply to the repair of the water-damaged homes. The court next addresses American Dynasty’s summary judgment argument that the “known loss” and “loss in progress” doctrines preclude coverage. The court points out that though Lennar did not officially conclude that EIFS was a defective product until September 1999, it had some knowledge of EIFS-related problems before June 1, which is when Lennar bought the American Dynasty policy. Consequently these two doctrines do preclude coverage for homes on which Lennar was aware of damage and/or had made repairs by June 1. There is a genuine issue of material fact, however, as to whether Lennar should have known of the ongoing property damage, if any, to the rest of the homes. The court next rejects American Dynasty’s argument that Lennar did not notify American Dynasty of EIFS claims until Jan. 28, 2000, by which time Lennar had already settled some of the claims. The court finds American Dynasty was not prejudiced by the lack of notice of these settlements. The court, therefore, rules that summary judgment as to all of American Dynasty’s policy-related arguments was improper. Next, the court addresses arguments made by Markel, who is the excess carrier to American Dynasty. An endorsement cited by Markel as precluding coverage applies only to damage arising to property while it is occupied, used or owned by Lennar, which was not so in any of the cases. An exclusion cited by Markel does not apply because the EIFS claims did not result from Lennar’s contractual assumption of a third party’s liability. Two other exclusions did not apply for the same reasons cited in the discussion of the American Dynasty policy exclusions. As with American Dynasty, the court finds that the known loss and loss-in-progress doctrines preclude coverage on some cases, but not on others, based on the date of purchase of the Markel policy. The court rejects the rest of Markel’s arguments, some of which are duplicative of the issues found in Lennar’s favor, so summary judgment for Markel was improper, too. Finally, the court discusses American Dynasty’s motion for summary judgment on the extra-contractual claims. First, the court holds that the evidence doesn’t support Lennar’s claim that American Dynasty’s agent misrepresented that EIFS claims would be covered. Two letters Lennar cites in support of this cause of action did not affirmatively state that such coverage was being considered. Lennar asserts that American Dynasty made misrepresentations regarding termination and rescission, too. The court agrees that American Dynasty accused Lennar of making untrue statements regarding its use of EIFS. Nonetheless, Lennar’s claim must fail because it did not present evidence of any pecuniary loss from this action. The court rejects Lennar’s arguments on his causes of action under Insurance Code art. 21.21 and art. 21.55. Consequently, summary judgment for American Dynasty on all of Lennar’s extra-contractual claims was proper. OPINION:Charles W. Seymore, J.; Fowler, Edelman and Seymore, JJ.

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