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Greystone Multi-Family Builders, Inc. v. Gemini Insurance Co.

United States District Court, S.D. Texas, Houston Division

March 30, 2018

Greystone Multi-Family Builders, Inc., Plaintiff,
v.
Gemini Insurance Company, Defendant.

          MEMORANDUM OPINION AND ORDER

          Gray H. Miller Judge.

         Pending before the court is a Memorandum and Recommendation (“M&R”) filed by the Magistrate Judge. Dkt. 36. She recommends that the court grant in part and deny in part motions for summary judgment or partial summary judgment filed by plaintiff Greystone Multi-Family Builders, Inc. (“Greystone”) (Dkt. 16) and defendant Gemini Insurance Company (“Gemini”) (Dkt. 17). Id. Greystone has filed an opposed motion for clarification in which it seeks clarification on whether its motion for partial summary judgment is granted in part or fully granted (Dkt. 37), and both parties have filed objections to the M&R (Dkts. 38, 39). After reviewing the original motions and related filings, the M&R, the objections and related filings, the motion for clarification, and applicable law, the court is of the opinion that the M&R should be ADOPTED IN PART, Greystone's objections should be SUSTAINED IN PART and OVERRULED IN PART, Gemini's objections should be OVERRULED, and Greystone's motion for clarification should be DENIED AS MOOT.

         I. Background

         This is a duty-to-defend lawsuit arising out of the alleged breach of a construction contract. Dkt. 36 (citing Dkt. 1). Greystone entered into a contract with TPG (Post Oak) Acquisition, LLC (“TPG”) to perform services as a general contractor on a construction project. Dkt. 1. It did not fully perform its obligations under the contract, and it asserts that this failure was based in part on TPG's failure to make timely payments. Id. TPG eventually terminated the construction contract and hired Allied Realty Advisors (“Allied”) to complete the construction. Id. Greystone sued TPG and Allied in state court. Id. TPG filed a counterclaim against Greystone and alleged that Greystone breached the construction contract. Id. When requested, Gemini denied coverage to Greystone, asserting that it was not obligated to indemnify or defend Greystone for property damage that occurred while Greystone was performing operations and for property damage caused by mold. Id. In response to Greystone's second request, Gemini took the position that it had no duty to defend or indemnify Greystone because Greystone never completed its work and the property damage alleged therefore occurred during Greystone's operations. Id. Greystone contends that TPG's claims in the underlying suit satisfy the requirements under the insurance policy for coverage and that none of the exclusions relied upon by Gemini operates to negate all potential coverage under the policy. Id. Greystone thus initiated this lawsuit against Gemini alleging (1) breach of contract; and (2) failure to timely provide a defense as required by the Texas Insurance Code. Id. Greystone seeks attorneys' fees and a declaratory judgment stating that Gemini has a duty to defend in the underlying lawsuit. Id.

         Greystone filed a motion for partial summary judgment. Dkt. 16. Greystone sought an order finding that Gemini breached the insurance policy by failing to defend Greystone in the underlying case, Greystone is entitled to recover its defense costs and expenses in the underlying lawsuit, and Greystone is entitled to recover 18% penalty interest and attorneys' fees incurred pursuing Gemini pursuant to the Prompt Payment of Claims Act. Id.

         Gemini filed a motion for summary judgment in which it argued that the counterclaims in the underlying case do not allege a covered occurrence and, alternatively, that certain exclusions in the policy preclude any duty to defend. Dkt. 17.

         The Magistrate Judge issued an M&R in which she made recommendations regarding both motions. Dkt. 36. The M&R sufficiently set forth all of the relevant policy provisions, and the court incorporates the portion of the M&R entitled “The Insurance Policy” into this order. The M&R also set forth relevant portions of the first amended counterclaim in the underlying case in the portion of the M&R entitled “The Underlying Lawsuit (the ‘Underlying Action').” Id. The court also incorporates this portion of the M&R into this order.

         II. Legal Standard

         A party may file objections to an M&R on a dispositive motion within fourteen days of being served with a copy of a written order. Fed.R.Civ.P. 72(b)(2); see also 28 U.S.C. § 636(b)(1)(C). The district court judge then “must determine de novo any part of the magistrate judge's disposition that has been properly objected to.” Fed.R.Civ.P. 72(b)(3). The judge may “accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate judge with instructions.” Id.

         III. Analysis

         The Magistrate Judge correctly stated and applied the summary judgment standard, and the court need not restate it here. This order will instead discuss each objection and whether the court should accept or reject the Magistrate Judge's recommendations as they relate to each objection.

         A.Occurrence”

         Gemini objects to the Magistrate Judge's determination that the allegations in the underlying complaint are an “occurrence” under the Policy. Dkt. 38 at 2. In its motion for summary judgment, Gemini argued that the counterclaims in the underlying case do not allege an “occurrence” under the policy and, as such, since the policy only covers property damage caused by an “occurrence, ” Gemini has no duty to defend Greystone. Dkt. 36 at 17 (discussing the parties' arguments). Gemini specifically contended that an “occurrence” must be an “accident” and the allegations do not support a finding that Greystone's actions were an accident or occurrence. Id. The Magistrate Judge considered a Texas Supreme Court case interpreting a contract with language almost identical to the policy that found that “‘a claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury . . . or circumstances confirm that the resulting damage was the natural and expected result of the insured's actions, that is, was highly probable whether the insured was negligent or not.'” Id. at 18 (quoting Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 4-5, 7 (Tex. 2007)). The Magistrate Judge then considered the allegations in the underlying counterclaim and determined that there was no allegation that Greystone intended its work to cause the damage or that the damage was the natural and expected result of Greystone's actions and that the allegations thus fall under the definition of “occurrence.” Id. at 20. She took note of the “argumentative statements in the counterclaim that it was ‘not surprising' that the work was mediocre due to the timing of payments” but determined that these statements were not sufficient for a conclusion that Greystone's conduct was intentional or that the alleged damages were the natural and expected result of Greystone's actions. Id.

         The main issues Gemini highlights in the counterclaim to support its contention that the events outlined in the counterclaim do not qualify as an “occurrence” are the allegations that Greystone hid costs so that it could continue to collect its contractor's fees, paid subcontractors up front so that it could collect higher contractor's fees resulting in lower incentive for them to complete their work, and withheld information from TPG, all of which Gemini contends resulted in predictably poor workmanship. Id. at 19.

         Under the policy, an “occurrence” is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Dkt. 17, Ex. C. Both parties relied primarily on Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007) to support their arguments with regard to “occurrence.” See Dkts. 17, 31. In Lamar Homes, the Texas Supreme Court held that “a claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury . . . or circumstances confirm that the resulting damage was the natural and expected result of the insured's actions, that is, it was highly probable whether the insured was negligent or not.” 242 S.W.3d at 9. The court noted that the “determination of whether an insured's faulty workmanship was intended or accidental is dependent on the facts and circumstances of a particular case.” Id. In this case, Greystone contended that there was not any allegation in the counterclaim that Greystone intended the defective work or resulting damage and that, while the counterclaim asserts Greystone intended deficiencies, this does not mean it intended for any damage to occur. Dkt. 31. Gemini argued that the counterclaim indicates the injury was the “predictable result” of Greystone's actions. Dkt. 17.

         The court has reviewed the counterclaims and agrees that the inflammatory language highlighted by Gemini may lead one at first glance to conclude that the alleged damages were the “natural and expected result” of Greystone's actions. For instance, the counterclaim states that it was “not surprising” that the subcontractors failed to complete work after Greystone paid them in advance, and that the “predictable result of these management failure . . . was that the work performed on the Project has been besought with deficiencies.” Dkt. 16, Ex. B. However, when one reviews the entire counterclaim, it becomes clear that many of the alleged damages were not predictable based on Greystone's alleged mismanagement. For instance, the framing subcontractor allegedly failed to construct frames with the required amount of studs, often using only one when the plans called for two or three; Greystone installed power conduits under the building's garage and these were later lost or destroyed when concrete was poured over them; the masonry subcontractor installed the trash-chute walls without leaving access to install the trash chutes, which required retrofitting of the doors; Greystone builders “forgot to install” pipe; and the emergency exit door was literally installed backwards. Id. Because many of these deficiencies were clearly not the “natural and expected result” of Greystone's alleged mismanagement, the court finds that the Magistrate Judge correctly determined that some of the allegations in the counterclaim fall under the definition of “occurrence.” Gemini's objection to this finding is OVERRULED.

         B.“Property ...


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