Great American Insurance Company and Great American Lloyds Insurance Company, Petitioners,
Glen Hamel and Marsha Hamel, Respondents
February 28, 2017
Petition for Review from the Court of Appeals for the Eighth
District of Texas
H. Lehrmann Justice
case, we examine whether a judgment against an insured
defendant was the product of a "fully adversarial
trial" and is thus enforceable against the
defendant's insurer. Homeowners sued their builder for
failing to construct their home in a good and workmanlike
manner, and the builder's commercial general-liability
insurer wrongfully refused to defend the builder in that
suit. The case went to trial, resulting in a judgment in the
homeowners' favor. The builder subsequently assigned most
of its claims against its insurer to the homeowners, who now
seek to recover the judgment from the insurer under the
applicable insurance policy. We are asked whether the
judgment against the builder is binding on the builder's
insurer in this suit. In the event it is not, we are also
asked whether the deficiencies in the underlying trial were
effectively remedied by this subsequent insurance litigation.
The court of appeals answered yes to the first question and
affirmed the trial court's judgment in the
homeowners' favor. We answer no to the first. As to the
second, we hold that this insurance litigation may serve to
determine the insurer's liability, although the parties
in this case understandably focused on other issues during
the trial. Accordingly, we reverse the court of appeals'
judgment and, in the interest of justice, remand to the trial
court for a new trial.
The Damage Suit
and Marsha Hamel own a single-family home in Flower Mound,
Texas. The Hamels hired a contractor, GSM Corporation (the
Original Builder), to build the home in the mid-1990s, but
the Original Builder abandoned the project before completion.
The Hamels then hired Terry Mitchell Builders, Inc. (the
Builder) to finish the home, which was completed in October
1995.Terry Mitchell is the president and sole
owner of this company.
home's exterior was finished with an Exterior Insulation
and Finish System (Exterior Stucco), which is a type of
synthetic stucco cladding that can cause wood rot and other
problems relating to water damage if installed improperly or
if defective materials are used. In August 2000, the Hamels
noticed signs of water damage in the home, including stained
walls and warped baseboards. They sued the Builder in April
2002 for breach of implied warranty, negligence, Deceptive
Trade Practices Act violations, and Residential Construction
Liability Act violations, alleging that the Builder failed to
perform its services in a good and workmanlike
manner. In their original petition, the Hamels
alleged that the water damage resulted from the improper use
or installation of the Exterior Stucco. They subsequently
amended the petition to attribute the water damage to the
home's improper construction or, alternatively, the use
of Exterior Stucco on the home.
American Insurance Company insured the Builder under
commercial general-liability insurance policies, issued on an
annual basis. The first three policies, effective May 3,
1996, to May 3, 1999, did not exclude damage relating to
Exterior Stucco. However, the fourth and fifth policies,
effective May 3, 1999, to May 3, 2001, excluded property
damage "arising out of" Exterior Stucco.
Builder notified Great American of the Hamels' suit (the
Damage Suit), but Great American declined to defend the
Builder, citing the fifth policy's Exterior-Stucco
exclusion (effective May 3, 2000, to May 3, 2001). Great
American took the position that this was the applicable
policy because the Hamels' August 2000 discovery of the
damage fell within that period. See Don's Bldg.
Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 26
(Tex. 2008) (explaining that some Texas courts had chosen to
follow "a 'manifestation rule' that imposes a
duty to defend [on insurers] only if the property damage
became evident or discoverable during the policy term").
However, Great American now concedes that this position was
erroneous. See id. at 25 (clarifying that Texas
follows the "'actual injury' or
'injury-in-fact' approach, [under which] the insurer
must defend any claim of physical property damage that
occurred during the policy term"). Great American also
concedes that, in light of the Hamels' allegations in the
Damage Suit, Great American wrongfully refused to defend the
Builder in that suit. See GuideOne Elite Ins. Co. v.
Fielder Rd. Baptist Church, 197 S.W.3d 305, 310 (Tex.
2006) ("A plaintiff's factual allegations that
potentially support a covered claim is all that is needed to
invoke the insurer's duty to defend . . . .").
the benefit of insurance coverage, the Builder had limited
assets to fund its defense. In fact, shortly before trial,
the Builder terminated its counsel, Robert Hudnall, for
financial reasons, and Hudnall prepared a motion to withdraw.
However, the trial court apparently never heard that motion,
and Hudnall continued to represent the Builder during and
2005, a week before trial, the Hamels entered into a Rule 11
agreement with the Builder. The Hamels agreed that, in the
event they obtained a judgment against the Builder, they
would not attempt to pierce the corporate veil and enforce
the judgment against the Builder's owner, Mitchell,
individually. They essentially agreed to enforce any judgment
only against assets in the company's name, excepting any
"personal tools of the trade and truck, " which the
Hamels agreed not to pursue "even if in [the
company's] name." Mitchell would later testify that,
at the time the agreement was executed, the company had no
assets beyond the excepted "tools of the trade and
truck." For his part, Mitchell agreed to appear at the
scheduled trial and not to seek a continuance, and the Hamels
contend that securing Mitchell's trial appearance was the
reason they entered into this agreement.
before trial, the Builder executed stipulations of fact in
lieu of responding to the Hamels' outstanding requests
for admissions. The stipulations included, inter alia:
• Because the Builder stepped in to substitute for the
Original Builder after construction began, the Builder had
a duty to inspect the Original Builder's work and
ensure that it was performed in a good and workmanlike
• The Builder had a duty to inspect its own
subcontractors' work and ensure it was performed in a
good and workmanlike manner.
• Several construction-related defects resulted in
water entering the residence.
• The Builder did not discover these defects during
its inspection of the home, and this failure was an
• Had the Builder inspected the home more closely and
noticed the problems, it could have fixed them and prevented
the resulting damages. "Because this problem was
present, the Residence was not built in a good and
• The construction defects identified as the cause of
the water damage were not related to Exterior Stucco.
stipulations demonstrate a shift from the position the
Builder took in discovery responses served earlier in the
suit, in which the Builder had asserted that the Hamels'
claims "relate to areas or matters for which [the
Builder] was not paid . . . by [the Hamels] and for which
[the Builder] had no responsibility or control."
Damage Suit proceeded to a bench trial on May 26, 2005.
Neither the stipulations nor the Builder's written
construction contract with the Hamels was offered as an
exhibit. The Hamels called Mitchell, who testified
consistently with the stipulations that the Builder
"agreed to make sure the house was finished in a good
and workmanlike manner, " which included an
"obligation to inspect all of [the Original
Builder's] work and make sure there weren't any
problems." He also testified that, in inspecting and
completing the home, he did not notice the "issues that
the Hamels have had with their house, " including steel
nails in the roofing system, a short roof deck, lack of a
drip edge, inadequate securing of a fascia board to the
framing, improper framing of the roof ridge and second-floor
window opening, improper roof sloping and drainage, and
shower leaks. He testified that these were "honest
mistake[s]" and that the failure to discover such
problems would amount to a failure to complete the home in a
good and workmanlike manner. He further testified that these
problems had nothing to do with the Exterior Stucco.
Yeandle, a contractor whom the Hamels hired in 2002 to
inspect the home and evaluate the extent of the water damage,
testified about the existence of the various problems laid
out during Mitchell's questioning and the resulting water
damage. He also testified that these problems were unrelated
to Exterior Stucco or its components and opined that the
Builder should have noticed the problems or at least
performed a more thorough inspection. He concluded that the
Builder did not complete the home in a good and workmanlike
manner. Both Yeandle and Glen Hamel testified about damages.
The Builder presented no witnesses.
trial court accepted the Hamels' attorney's
suggestion that the parties submit proposed findings of fact
and conclusions of law in lieu of closing arguments; however,
only the Hamels submitted proposed findings. The trial court
rendered judgment in the Hamels' favor and adopted their
proposed findings without modification, awarding them $365,
089 in damages-composed of $169, 089 in repair costs, $100,
000 in loss of market value due to stigma, $50, 000 in
mental-anguish damages, $15, 000 in costs to repair
landscaping that would be damaged during the home repair,
$24, 000 in temporary housing costs, and $7, 000 in moving
costs-plus prejudgment interest and court costs. The Builder
subsequently assigned most of its rights against Great
American to the Hamels.
The Insurance Suit
Hamels, as the Builder's assignees and judgment
creditors, brought the current suit (Insurance Suit) against
Great American for breach of contract and declaratory relief,
seeking to recover the judgment from the Damage Suit under
the Builder's insurance policy. They also initially asserted
claims for Texas Insurance Code violations, but abandoned
those claims before trial. The Insurance Suit was tried to
the bench. The entire record from the Damage Suit was
introduced into evidence, as were the stipulations, the Rule
11 agreement, and the contract between the Builder and the
Hamels. Excerpts from the depositions of Mitchell, Glen
Hamel, and their respective attorneys were also admitted. The
trial court heard live testimony from both the Hamels'
and Great American's expert witnesses.
trial court rendered judgment for the Hamels and entered
findings of fact and conclusions of law, including, in
• The Builder had a contractual and common-law duty to
inspect the construction performed by the Original Builder
and its subcontractors, and to identify any defects in the
home's construction by subcontractors of the Builder or
the Original Builder.
• The Builder had a contractual and common-law duty to
finish construction and complete improvements in a good and
• The Original Builder, the Builder, and their
respective subcontractors did not perform their work in a
good and workmanlike manner.
• The Builder breached its duties to the Hamels by
failing to adequately inspect the Original Builder's
work, failing to discover construction defects, and failing
to complete the home in a good and workmanlike manner.
• The Builder was negligent.
• Great American waived its right to control the