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Great American Insurance Co. v. Hamel

Supreme Court of Texas

June 16, 2017

Great American Insurance Company and Great American Lloyds Insurance Company, Petitioners,
Glen Hamel and Marsha Hamel, Respondents

          Argued February 28, 2017

         On Petition for Review from the Court of Appeals for the Eighth District of Texas


          Debra H. Lehrmann Justice

         In this 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.

         I. Background

         A. The Damage Suit

         Glen 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.[1]Terry Mitchell is the president and sole owner of this company.

         The 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.[2] 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.

         Great 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.

         The 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 . . . .").

         Without 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 after trial.

         In May 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.

         The day 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 manner.

• 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 "honest mistake."
• 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 workmanlike manner."
• The construction defects identified as the cause of the water damage were not related to Exterior Stucco.

         These 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."

         The 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.

         Donald 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.

         The 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.

         B. The Insurance Suit

         The 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.[3] 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.

         The trial court rendered judgment for the Hamels and entered findings of fact and conclusions of law, including, in pertinent part:

• 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 workmanlike manner.
• 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 ...

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