Tejas Specialty Grp., Inc. v. United Specialty Ins. Co.

TEJAS SPECIALTY GROUP, INC.AND TEJAS SPECIALTY CONCRETE COATINGS, LLC, Appellants v. UNITED SPECIALTY INSURANCE COMPANY, Appellee

No. 02-20-00085-CV

Court of Appeals Second Appellate District of Texas at Fort Worth

June 3, 2021

On Appeal from the 17th District Court Tarrant County, Texas

Trial Court No. 017-313064-19

Before Sudderth, C.J.; Womack and Wallach, JJ.

Memorandum Opinion by Justice Wallach MEMORANDUM OPINION

This is a general liability insurance coverage dispute involving the duty to defend and duty to pay arising from an underlying construction defect case. Appellants Tejas Specialty Group, Inc. and Tejas Specialty Concrete Coatings, LLC (collectively "Tejas") sued their liability insurer, United Specialty Insurance Company ("United"), asserting claims for declaratory relief and breach of contract for United's refusal to defend and indemnify Tejas in the underlying case as well as claims for violations of the Texas Insurance Code and for attorney's fees. Tejas filed a motion for partial summary judgment, seeking a ruling on United's duty to defend the underlying case. United filed a cross-motion for summary judgment, seeking dismissal of all of Tejas's claims. Following a hearing, the trial court granted United's motion and denied Tejas's motion. Tejas now seeks reversal of the trial court's summary judgment in favor of United and of the trial court's denial of Tejas's motion for partial summary judgment.

We hold that United had a duty to defend the third-party claim against Tejas in the underlying lawsuit, and it breached that duty. We therefore reverse the trial court's summary judgment in favor of United and the trial court's denial of Tejas's motion for partial summary judgment. We render judgment that United had a duty to defend Tejas in the third-party claim in the underlying lawsuit and that it breached that duty, and we remand this case for proceedings consistent with this opinion.

I. Factual Background

The third-party claim against Tejas originated in the First Amended Third Party Petition ("Third-Party Petition") of Icon Builders, LLC ("Icon") filed in the 55th District Court of Harris County. In that petition, Icon alleged that Avenue Community Development Corporation ("ACDC") and Avenue Station, LP ("Avenue") (collectively "Plaintiffs") had sued Icon, as general contractor, alleging breach of a construction contract, breach of express warranty, breach of performance bond, and negligence in the construction of Avenue Station, a multi-family affordable housing development in Houston, Texas (Project or Avenue Station Project), and that Icon was entitled to indemnity or contribution from Tejas if Icon was found liable to ACDC or Avenue for any work that Tejas had performed as a subcontractor on the Avenue Station Project. In addition to Tejas, Icon sued five other subcontractors raising similar claims of indemnity or contribution.

The six subcontracts were allegedly executed in 2014, 2015, and 2016, with Tejas's contract allegedly executed on December 21, 2015. Under the terms of the subcontract, Tejas agreed to provide labor and materials to "install lightweight and gypsum" on the Project and to "water-proof[] the balconies." No further terms or details of the general contract or the Tejas subcontract were stated. Icon alleged that the Avenue Station Project was "certified as substantially comp[l]ete on March 9, 2017." However, the Third-Party Petition did not allege when any of Tejas's work, or any of the other subcontractor defendants' work, was performed, either before or after March 9, 2017.

According to Icon's Third-Party Petition, Plaintiffs alleged that in mid-2017, they

began to receive reports of and or observe numerous concerning conditions at the Project. The non-conforming and/or defective work items manifested at the Project include the following: (1) improperly sealed and/or nonfunctioning weep gaps at window heads; (2) installation of a non-specified and otherwise unapproved weather-resistive barrier; (3) improper construction of vertical transition between the Project's stucco cladding and the lower-level brick wall; (4) exposed sheathing; (5) exposed weather-resistive barrier; (6) lack of proper integration of the weather-resistive barrier; (7) lack of properly installed door flashing and trim[;] (8) a failed and collapsed landscape masonry retaining wall[;] and (9) balcony flashing and drainage systems failures.

21. Further, with regard to the windows, Plaintiffs allege: (1) the presence of sealant within the drainage gap at the window heads has likely resulted in excessive moisture buildup within the Project's exterior cladding; and (2) the absence of a functional weep at the window heads has likely caused or contributed to the observed bulk water infiltration around the Project's windows as evidenced by the widespread distress visible around the interior finished at the windows.

22. Additionally, with regard to the Project's exterior cladding[,] Plaintiffs allege an absence of the necessary vertical gap at the vertical transition between the Project's stucco cladding and the lower level brick masonry wall which has caused or contributed to distress and damage along the length of that transition, including: (1) brick masonry delamination at the horizontal mortar joint below the row-lock; (2) reverse sloping of flashing above the brick masonry row-lock; and (3) reverse sloping of the flashing above the brick masonry row-lock.

Icon's Third-Party Petition alleges the following regarding indemnity or contribution against Tejas:

5. CONTRIBUTION AND INDEMNITY-[TEJAS]

38. Plaintiffs allege [Icon's] breach of contract-construction contract, breach of express warranty, breach of contract-[]performance bond, and negligence on the construction project known as Avenue Station was the proximate cause of Plaintiffs' allegedly sustained injuries.

39. In the unlikely event a judgment is rendered for Plaintiffs against [Icon] based upon a finding that damages were the result of work completed by Third-Party Defendant [Tejas], [Icon] is entitled to contribution and indemnity from [Tejas] under section 33.016 of the Texas Civil Practice and Remedies Code, to recover any payments [Icon] may be required to make to Plaintiffs as a result of [Tejas's] acts or omissions.

40. [Icon] contends they are not liable to Plaintiffs for their alleged damages, if any. However, to the extent that Plaintiffs establish that the proximate cause of the damages arose from work that was contained in the scope of work for Third-Party Defendant [Tejas], [Icon] asserts causes of action against [Tejas] for negligence and breach of contract.

Finally, Icon's Third-Party Petition damage allegation states:

DAMAGES

Plaintiffs' live Petition asserts [a] claim for damages allegedly caused by . . . Icon . . . . This Petition is not an endorsement of the existence, validity, recoverability, admissibility, credibility, or amount of those damages. However, to the extent the Court rules any of the alleged damages are valid, recoverable damages, and to the extent a jury awards Plaintiffs these damages, these damages were caused by the actions and omissions of the Third-Party Defendants. The damages sought by Plaintiffs are incorporated and alleged herein against the Third Party-Defendant.

Tejas tendered the defense of Icon's claim against it to its commercial general liability insurer, United. The inception date for United's policy was October 1, 2017. United denied coverage, claiming, among other things, that Icon's claim was excluded under United's "Pre-Existing Injury or Damage Exclusion," sometimes known as the "Montrose Exclusion."¹

Tejas sued United and Maxum Indemnity Company,² alleging breach of the duty to defend and indemnify from Icon's Third-Party Petition and seeking declaratory relief. Tejas also alleged violations of the Texas Insurance Code, Sections 541.010(a)(2)(A), (3), 542.051, and 542.060(A), seeking recovery of damages, attorney's fees, and statutory penalties.

United answered with a general denial and several affirmative defense policy exclusions, including the "Montrose exclusion" or "Pre-existing Injury of Damage Exclusion." The relevant policy provisions are:

COVERAGE A BODILY INJURY AND PROPERTY DAMAGE LIABILITY

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for . . . "property damage" to which this insurance does not apply. . . .

. . . .

b. This insurance applies to . . . "property damage" only if:

(1) The . . . "property damage" is caused by an "occurrence" that takes place in the "coverage territory"; [and]

(2) The . . . "property damage" occurs during the policy period[.]

. . . .

SECTION V—DEFINITIONS

. . . .

13. "Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

. . . .

17. "Property damage" means:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it...

. . . .

PRE-EXISTING INJURY OR DAMAGE EXCLUSION

This endorsement modifies the Conditions provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE PART

This insurance does not apply to:

1. Any ["]occurrence["], incident or "suit" whether known or unknown to any officer of the Named Insured:

(a) which first occurred prior to inception date of this policy (or the retroactive date of this policy, if any); or

(b) which is, or is alleged to be, in the process of occurring as of the inception date of the policy or the retroactive date of this policy, if any; even if the "occurrence" continues during this policy period.

2. Any damages arising out of or

...