The insurer's duty to defend a developer sued by purchasers of homes for damages for diminution in value of homes was at issue in Mid-Continent Cas. Co. v. Academy Dev., Inc., 2012 WL 1382459 (5th Cir. April 20, 2012).
In the underlying action, plaintiffs alleged the developer knew when it sold the homes that the lake walls were falling and that water was leaking from the lakes onto adjacent home sites. They sought damages for diminution in the value of their homes resulting from the defective lakes. The action was tried in 2008, and the jury returned a verdict for the developer.
Mid-Continent initially defended under a reservation of rights. But believing that the ninth amended petition no longer alleged "property damage" as defined in the policy, Mid-Continent refused to continue defending.
Mid-Continent filed for a declaratory judgment that it had no duty to defend. The district court granted summary judgment to the developer, concluding the ninth amended petition's allegation of diminution in the value of their homes caused by defective lakes constituted "damages because of . . . 'property damage'".
On appeal, the Fifth Circuit affirmed. The duty to defend was triggered because the alleged diminution in value was attributable to "property damage." The underlying ninth amended petition alleged the lakes and wall were not properly designed and constructed, allowing water to escape through cracks in the walls.
Under Texas law, allegations of unintended construction defects or faulty-workmanship constituted allegations of "property damage" sufficient to trigger an insurer's duty to defend. Therefore, the petition alleged property damage to the lakes that resulted in diminution in the value of the homes. The policy did not require the underlying plaintiffs to have an ownership interest in the property allegedly damages in order for Mid-Continent to have a duty to defend.
