On certified questions from the Fifth Circuit Court of Appeals, the Supreme Court of Texas recently held that, when a policy does not otherwise specify, damages under an occurrence-based general liability policy “occur”, and an insurer’s duty to defend is triggered, on the date when the injury happens and not on the date the injury is discovered. Don’s Building Supply, Inc. v. OneBeacon Ins. Co., No. 07-0639 (Tex. Feb. 7, 2008).
The insured was sued by various homeowners alleging that its product was defective and caused damage that was not discovered for some time after the damage began. The distributor was insured under a commercial general liability insurance that was in effect at the time the damage allegedly first occurred, but not when the damage was later discovered.
After initially providing a defense to the insured, the insurer filed suit seeking a declaratory judgment that it had no duty to defend and indemnify under the general liability policy. The district court granted summary judgment in favor of the insurer on the basis that no duty arises until the damage becomes identifiable. The insured appealed to the Fifth Circuit, which certified two coverage questions to the Supreme Court of Texas:
- Under an occurrence policy, does property damage occur when discovered or when it allegedly took place?
- Is an insurer’s duty to defend under an occurrence policy triggered by damage that allegedly occurred during the policy period, but was not discovered until after the policy expired?
As to the first question, the court adopted the “actual injury” or “injury-in-fact” approach. Therefore, it held that property damage occurs when actual physical damage to the property takes place and the date that the physical damage was or could have been discovered is irrelevant. In support of its holding, the court relied on the policy’s “straightforward” wording that coverage exists if the property damage “occurs during the policy period,” and that property damage means “[p]hysical injury to tangible property.” The court opined that “[t]he policy asks when damage happened, not whether it was manifest, patent, visible, apparent, obvious, perceptible, discovered, discoverable, capable of detection, or anything similar.” The court further noted that the policy links coverage to damage, not damage detection, and that engrafting a manifestation rule to limit coverage by conditioning coverage on the observations of a third-party claimant would blur the distinction between occurrence-based and claims-made policies.
The court then addressed whether an insurer’s duty to defend and indemnify under an occurrence policy is triggered when the pleadings allege that the actual damage was continuing and progressing during the policy period, but remained undiscoverable and not readily apparent until after the policy period ended. Based upon its answer to the first certified question, the court held that an insurer’s duty to defend is triggered when the claimant alleges that any property damage occurred during the policy period. Furthermore, the duty to defend is in no way affected if the property damage was undiscoverable, or not readily apparent or manifest, until after the policy period ended.