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Click here for the full text of this decision FACTS:Lennar Corp. and two other related corporate entities were in the home construction business. From 1996 to 1999, Lennar built more than 400 homes in the Houston area using synthetic stucco called Exterior Insulation and Finish System (EIFS). Lennar received complaints from some homeowners about EIFS, which caused water and mold damages, and for a while, Lennar dealt with these on an individual basis. By September 1999, however, Lennar determined that EIFS was a defective product and stopped using it in new construction. Lennar proceeded to remove the EIFS from all of the houses where it had been used, and repaired the water damage where needed. Lennar sought indemnification from its insurance carriers: Great American Insurance Co., American Dynasty Surplus Lines Insurance Co., Gerling America Insurance Co., RLI Insurance Co., Insurance Company of the State of Pennsylvania (ISCOP) and Westchester Fire Insurance Co. All refused. Lennar sued for a declaration that all of the insurers had a duty to indemnify. Lennar also alleged breach of contract, and violations of the former Insurance Code Article 21.55 and current Article 21.21. Lennar filed one motion for summary judgment against all of the carriers, and the carriers made cross-motions for summary judgment on coverage issues, which the trial court granted. The trial court also granted American Dynasty’s motion for summary judgment on Lennar’s extra-contractual claims. HOLDING:Affirmed in part; reversed and remanded in part. This court previously rendered an opinion June 2, 2005, and replaces it with a substitute majority opinion. Even though there are six separate motions for summary judgment on coverage, the court notes that many of them share the same issues. Common to all six is whether there was an “occurrence” under Texas Law for which Lennar would be entitled to coverage, and also whether there was “property damage” the carriers should cover. The court notes that an “occurrence” is defined, among other things, as “an accident,” and that two factors bearing on the determination of whether an action is an accident are the insured’s intent, and the reasonably foreseeable effect of its conduct. The court confirms that this is an unsettled area of law and that the Texas Supreme Court has recently accepted a certified question on the same issue from the 5th U.S. Circuit Court of Appeals. Reviewing various cases cited by both sides, the court first finds that when considering whether defective construction can ever constitute an “occurrence,” the relevant inquiry is not whether Lennar, as the insured, damaged its own work, but whether the damage is unintended and unexpected. The general principle is that a commercial general liability policy does not cover the insured’s defective construction that results in damage to its own work. This is known as the “business risk” doctrine. The court finds, however, that in a case like this, defective construction can constitute an occurrence because coverage for “business risks” is ordinarily eliminated through exclusions not through the “occurrence” requirement in the initial “insuring agreement,” and coverage for some “business risks” is not eliminated when the damaged work, or the work out of which the damage arose, was performed by subcontractors. “Reading the standard CGL policy as a whole, we hold that negligently created, or inadvertent, defective construction resulting in damage to the insured’s own work that is unintended and unexpected can constitute an”occurrence.’ Nonetheless, the”your work’ or other”business risk’ exclusions may preclude coverage for the damage. However, in some instances, coverage will be restored if the damaged work, or the work out of which the damage arose, was performed by subcontractors.” With this holding in mind, the court then holds that Lennar’s construction of the homes with the EIFS, a defective product, was inadvertent, or maybe negligent, because Lennar was unaware of the defect when it first began using EIFS. The damage was not the intended or expected result if the homes had been constructed with a properly working product. The court says it does not have to engage in a choice-of-law analysis to see if Florida law applies instead of Texas law, because Florida law is equally unsettled. There is valid precedent in Florida that mirrors the court’s holding, so regardless of which state’s law applied, the holding would be the same. Having decided that Lennar’s defective construction (due to the EIFS) was an “occurrence” under the insurance policies, the court next turns to whether Lennar established that it paid to rectify “property damage” that would necessitate indemnification by the carriers. The court quickly holds that Lennar’s costs to repair the homes that sustained water damage constitutes “damages because of . . . property damage.” The court takes a harder look, though, at whether the removal and replacement in the non-water-damaged homes is “property damage.” The court finds that while Lennar may have made a good business decision in offering to remove and replace the EIFS in the nondamaged houses, “we cannot conclude that it was necessary.” Consequently, the costs incurred by Lennar for removal and replacement of EIFS as a preventative measure are not “damages because of . . . property damage.” Nor are the costs for overhead, inspection, personnel and attorneys’ fees. The court next turns to the specific coverage issues raised by some of the individual carriers. For instance, Gerling argues that it does not have a duty to indemnify Lennar because Lennar cannot satisfy the self-insured retention (SIR) similar to a deductible, defined as “the limit of insurance the insured agrees to assume responsibility for in attempting settlement and/or in payment of all claims resulting from any”occurrence’” of $250,000 per occurrence. The court rejects Lennar’s argument that all of the EIFS claim constituted one occurrence, and agrees with Gerling’s argument that each house where EIFS was removed was a separate occurrence. The court then confirms that Lennar has not demonstrated that it paid damages exceeding $250,000 for any one home. Therefore, Lennar cannot satisfy the SIR and summary judgment for Gerling on this basis was proper. The same ruling applies to issues raised by RLI, ICSOP and Westchester in their summary judgment motions. Next, the court reviews the specific issues raised by American Dynasty. American Dynasty argues Lennar has not satisfied the $250,000 per occurrence SIR or the $1 million annual aggregate for the SIR. The court notes that Lennar claims it has incurred more than $5 million total, but the portion attributable to repair water damage, versus removal from nondamaged homes, has not been ascertained. The trial court erred, then, in granting summary judgment on this issue because a fact issue remains over whether Lennar failed to exhaust the $1 million aggregate SIR. American Dynasty also claims that several exclusions preclude coverage, but the court finds the trial court erred in finding that they applied. Similarly, there is a genuine issue of material fact on whether the “known loss” and “loss in progress” doctrines preclude coverage for all the EIFS claims. Finally, with respect to American Dynasty, the insurer could not show evidence that it was prejudiced by Lennar’s failure to notify American Dynasty before notifying the insurer that it was settling certain EIFS claims on its own. Summary judgment on this ground, then, was improper, too. Turning to Merkel, the court finds the trial court again erred in granting summary judgment based on a particular endorsement and three propounded exclusions. The court next addresses summary judgment for American Dynasty on Lennar’s extra-contractual claims. The court rules that American Dynasty’s underwriter did not misrepresent that EIFS claims would be covered. On the other hand, there is a genuine issue of material fact on whether American Dynasty made false representations by accusing Lennar of lying in its statements regarding use of EIFS. Nonetheless, Lennar still cannot prevail on this issue because it did not show that it suffered any pecuniary loss by relying on those representations. In rejecting all of Lennar’s arguments that it was entitled to summary judgment under Article 21.21, the court notes that there is no relief under this section for wrongful termination or rescission of an insurance policy. Lennar’s Article 21.55 argument fails, too, as Lennar was asking as a third-party for indemnification; it wasn’t asking as a first party for a defense. OPINION:Seymore, J.; Fowler, Edelman and Seymore, JJ. Edelman, J., concurs and dissents, but his opinion was not released by press time.

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