The Fifth Circuit Court of Appeals recently ruled that Mid-Continent Casualty Company owes a duty to defend its insured, Lamar Homes Inc., against construction defect claims under its commercial general liability policy. Lamar Homes, Inc. v. Mid Continent Cas. Co., No. 04-51074 (October 5, 2007). The Federal Court of Appeals was acting on a ruling by the Texas Supreme Court on the question of whether construction defects claims were covered by a CGL policy.

The case arose from a litigation commenced by homeowners against Lamar alleging that Lamar had negligently "failed to design and/or construct [their home] . . . in a good and workmanlike fashion in accordance with implied and express warranties." Lamar commenced a declaratory judgment action in Texas state court seeking a determination that the claims were covered under a CGL policy issued by Mid-Continent. After removal of the case from state court to federal court, the U.S. District Court for the Western District of Texas ruled that CGL policies do not provide coverage for damages arising from construction errors.

Lamar appealed to the Fifth Circuit, which certified the question of coverage to the Texas Supreme Court, Texas' highest court. The Texas Supreme Court ruled that unintended construction defects may fall within the scope of an "accident" or "occurrence" under a CGL policy. The court rejected the argument that such claims were necessarily "foreseeable" and therefore not an "accident." The court also rejected the contention that providing coverage for claims of negligent workmanship would turn CGL policies into "performance bonds." The court also ruled that claims for loss of use of a home could also constitute a covered property damage claim under the policy.

Based on this ruling, the Fifth Circuit Court of Appeals ordered Mid-Content to defend Lamar in the underlying lawsuit. The Court of Appeals ruled that a determination of whether indemnity obligations existed under the CGL policy must be made following a trial.

This decision reflects the growing divide among jurisdictions as to whether claims for negligent workmanship are covered under standard-form CGL policies.

A full copy of the Lamar decision can be found here.