Insurers regularly argue that commercial general liability (“CGL”) policies are not performance bonds and therefore there is no coverage for claims seeking damages for defective or faulty workmanship. Insurers also argue there is no coverage for so-called “tear-out” or “rip-and-tear” damages, where fixing property damage requires replacing defective work that has not itself been damaged. Fortunately, in a newly decided case, a Texas federal district court rejected both arguments by an insurer. Amerisure Mutual Insurance Company v. McMillin Texas Homes, LLC, No. SA-20-CV-01332-XR, 2022 WL 686727 (W.D. Tex. Mar. 8, 2022).
As with most construction-defect claims, this case involved homeowner claims against a residential developer, McMillin Texas Homes (“McMillin”). After the homes were completed, homeowners complained about defects in the artificial stucco exterior finish and filed suit. McMillin tendered to its insurer, Amerisure Mutual Insurance Company (“Amerisure”). Amerisure then sued McMillin for declaratory relief, arguing that it had no duty to defend or indemnify the homeowner claims. McMillin filed a counterclaim alleging Amerisure breached its policies by refusing to defend or indemnify McMillin.
Amerisure moved for summary judgment, arguing that because its CGL policies are not performance bonds, claims arising out of McMillin’s faulty workmanship on the stucco are not covered. The insurer also made a number of other arguments, including that so-called “rip-and-tear” damages are not covered under Texas law.
The court rejected each of Amerisure’s arguments. First, the court explained, citing Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 10 (Tex. 2007), that coverage turns on the precise language used in the policy and not on arguments that simply compare a CGL policy to a performance bond. After reviewing the policy and homeowner allegations, the court ruled that the underlying complaints alleged the potential for a covered claim for damage to property other than the faulty stucco work. Second, the court held that because the faulty stucco work is alleged to have damaged other property, the “rip-and-tear” costs of replacing the faulty but undamaged stucco was potentially covered, since replacing stucco was necessary to fix the damaged property that lay beneath the stucco.
Takeaways
Policyholders can breathe a collective sigh of relief knowing that Texas courts continue to find coverage for construction-defect claims under CGL policies, and Texas courts continue to issue common-sense rulings that benefit policyholders that operate in the home-building and construction industries. Amerisure also gives policyholders a big win on the hotly contested issue of coverage for “rip-and-tear” costs by clearly stating that such costs are at least potentially covered where there are allegations of damage to property other than the faulty work and replacing the faulty work is necessary to fix the damaged property. This is an issue that is frequently litigated, and Texas continues to do a splendid job of explaining when and why “rip-and-tear” damages are covered under CGL policies.
