Mid-Continent Casualty Company v. Castagna
Dallas Court of Appeals, No. 05-12-00383-CV (August 20, 2013)
Justices O’Neill, Francis, and Fillmore (Opinion)

The Court of Appeals affirmed in part and reversed in part a summary judgment for a homeowner on her claim against her homebuilder’s insurer for payment of an arbitration award against the builder. The court agreed with the homeowner that continuing damage to her home over the course of multiple years triggered coverage under the builder’s liability insurance policy for each of those years, and that coverage of the arbitration award, which was based on an implied-warranty claim, was not excluded by the policies’ contractual-liability exclusion. The court concluded, however, that the builder was not an insured under one of the three policies at issue. It therefore affirmed the trial court’s summary judgment with respect to coverage under two of the policies and reversed and rendered with respect to the third.

Vanessa Castagna hired McClure Brothers Custom Homes, LP to build her house in 1999. In 2001, Castagna noticed a hairline crack in a wall, and McClure made a cosmetic repair. In 2002 or 2003, the crack returned, and McClure again made a repair. At that time, McClure attributed the cracks to normal settling. In 2007, more severe cracks appeared, and McClure determined the foundation was “heaving.”

Castagna commenced arbitration against McClure and its general partner, McClure Brothers Homes, LLC, and obtained an award against them for breach of the implied warranty of good workmanship. After confirmation of the award, Castagna sued McClure’s insurer, Mid-Continent Casualty, for payment of the award pursuant to liability policies Mid-Continent issued in 2001, 2002, and 2006. Castagna and Mid-Continent filed cross-motions for summary judgment; the trial court granted Castagna’s motion and denied Mid-Continent’s.

The Court of Appeals first addressed Mid-Continent’s argument that the 2001 and 2002 policies were not applicable because no “property damage” caused by an “occurrence” (as those terms are defined in the policies) occurred until 2006. Mid-Continent contended there was no evidence that the cracks in 2001-03 were caused by anything other than normal settling, which is not an “occurrence” under the policies. The court disagreed, relying on the arbitrator’s findings that property damage “commenced in 2001 and progressed through late 2006 to early 2007,” and that such damage resulted from McClure’s failure to properly design and build the foundation. The court also rejected Mid-Continent’s related argument that Castagna could not recover under all three policies without allocating her damages among the three policy years. The court distinguished case law addressing concurrent causes and apportionment of covered losses and non-covered losses, and found no authority for the proposition that an insured has a burden to prove an allocation of covered property damage to particular policy periods.

Mid-Continent also argued that coverage was precluded by the contractual liability exclusion contained in each of the policies, which excluded coverage for damages the insured became obligated to pay “by reason of the assumption of liability in a contract or agreement.” Mid-Continent argued the implied warranty under which McClure was liable was created by the construction contract, the damages were to the subject of the contract, and the arbitrator “treated” Castagna’s claim as a contract claim, in part by awarding her attorneys’ fees. The court disagreed, concluding the implied warranty under which McClure was liable arose from the common law, and the construction contract did not expand McClure’s common-law liability such that the contractual liability exclusion would be triggered.

The Court of Appeals agreed with Mid-Continent, however, that Castagna could not recover under the 2006 policy because neither McClure nor its general partner was an insured under that policy. Several affiliates of McClure were named insureds under the 2006 policy, but McClure was not. McClure’s general partner was a named insured, but the policy provided that no organization would be an insured “with respect to the conduct of any current or past partnership” not shown as a named insured. Because McClure was not a named insured under the 2006 policy, and because its general partner’s liability was derivative of McClure’s liability, neither of them was an insured under the policy.