IN THE SUPREME = COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

════════&#= 9552;═══

No. 05-0832

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Lamar Homes, Inc., = Petitioner,

Mid Continent = Casualty=20 Company, Respondent

════════λ= 2;══════════&= #9552;═════════_= 52;══════════= ══════════ = 552;═

On Certified Questions from the = United States=20 Court of Appeals

for the Fifth Circuit

════════&#= 9552;═════════λ= 2;══════════&= #9552;═════════_= 52;══════════= ══

Argued February=20 14, 2006

Justice Brister, joined by = Justice Hecht and Justice Willett, = dissenting.

Selling=20 damaged property is not the same as damaging property. Among = other=20 differences, only the latter begets a claim for property damage. When = the=20 homebuyers here sued their builder for construction defects, they did = not claim=20 the builder damaged their property; instead, they alleged broken = promises and=20 breached duties connected with the sale. Those were not property damage = claims,=20 and thus were not covered by the builder=92s CGL policy.

&nbs= p;=20 The Court=92s conclusion to the contrary turns the construction industry = on its=20 head. Instead of builders standing behind their subcontractors=92 work = and making=20 necessary repairs, the Court shifts that duty to insurance companies. = Every=20 crack, stain, dent, leak, scratch, and short-circuit arising from a=20 subcontractor=92s work (which will be most of them) must be repaired by = the=20 builder=92s insurer, who may have to pay the builder to repair its own = home. Why=20 should builders avoid unqualified subcontractors if their insurers (and = other=20 policyholders) will pay the consequences? No one really believes this is = what=20 the parties intended =97 that for a $12,005 annual premium the insurer = agreed to=20 repair all damage to every home Lamar Homes had ever sold (at the rate = of almost=20 $3 million annually). As that is precisely what the Court holds today, I = respectfully dissent.

&nbs= p;=20 The CGL insurance policy provides coverage only for suits seeking = =93bodily=20 injury=94 and =93property damage,=94 the latter being defined to include = =93physical=20 injury to tangible property.=94 The homebuyers here certainly alleged = their home=20 suffered physical injury =97 foundation deflection, cracks in sheetrock = and=20 stonework, and doors that no longer worked properly. But the contract, = warranty,=20 fraud, DTPA, and negligence claims they brought against Lamar = Homes were for breaching its = promises and=20 legal duties as a seller.[1] Such claims are for economic = loss rather=20 than property damage, so the policy does not cover them.

Thirty years=20 ago in Nobility Homes of Texas, Inc. v. Shivers (a case involving = a=20 mobile home warranty claim), we held that =93economic loss is not = =91physical harm=92=20 to the user or his property.=94 [2] Ten years later in Jim = Walter Homes,=20 Inc. v. Reed, we applied the same rule to homebuyers suing a builder = for an=20 inadequate foundation (precisely the allegations here), holding that = such claims=20 were for economic loss rather than property damage:

When the=20 injury is only the economic loss to the subject of a contract itself, = the action=20 sounds in contract alone. The Reeds=92 injury was that the house they = were=20 promised and paid for was not the house they received. This can only be=20 characterized as a breach of contract. . . .[3]

The = distinction between claims for economic loss and property damage is by = no means=20 limited to Texas; federal law and most states = draw the=20 same sharp line between them.[4] As the = Restatement=20 (Third) of Torts states, =93harm to persons or property includes = economic loss if=20 caused by harm to . . . the plaintiff=92s property other than the = defective=20 product itself.=94 [5] As a tentative draft of the = Restatement=20 states the law:

When a=20 service provider is responsible for a latent physical defect in = property,=20 physical impairment of the property resulting from the defect is not = physical=20 harm to that property or to other property that is part of an integrated = whole=20 with that property.[6]

An = illustration in the tentative draft specifically applies it to = foundation=20 defects like the one at issue here.[7]

Granted, the=20 CGL policy does not distinguish between contract and tort claims, or = mention=20 economic loss. But it does limit coverage to =93property damage=94 = suits. Given the=20 extensive jurisprudence separating property damage from economic loss, = we cannot=20 presume this policy was drafted without knowing or recognizing the=20 difference.

&nbs= p;=20 Nor is the difference between property damage and economic loss claims = merely a=20 technical rule of pleading. While warranty claims generally pass to new=20 buyers,[8] property damage claims do not, = remaining=20 with the party that owned the property when the tort occurred.[9] Here, the homebuyers alleged = Lamar = Homes failed to design, = construct, and=20 market their foundation properly, actions that all took place before the = sale.=20 Thus, they brought warranty claims because they had to, having no = standing to assert a property damage claim.

&nbs= p;=20 Lamar Homes points out that the CGL policy = doesn=92t define=20 =93property damage=94 as physical injury to the tangible property of = others,=20 and thus argues it should cover property that was defective when = Lamar = Homes sold it. But like all = liability=20 policies, this policy covers only third-party claims, not first-party = claims. By=20 limiting coverage to property damage claims asserted against Lamar = Homes, the policy necessarily = covered only=20 property owned by a third party at the time it was damaged.

&nbs= p;=20 The Court relies on the subcontractor exception to the your-work = exclusion to=20 find coverage. This is a mistake for a simple reason: exclusions cannot = create=20 coverage. While an exception to an exclusion = preserves=20 any coverage that may exist, it cannot create coverage on its own.[10] Lamar Homes errs in asserting that = this=20 exception to an exclusion =93represents a = major extension=20 of coverage=94; extensions of coverage must be found in the policy=92s = coverage=20 provisions, not its exclusions. By finding coverage based on an = exception to an=20 exclusion, the Court now has the policy=92s tail wagging the dog.

I = agree the=20 subcontractor exception creates something of an anomaly when used in the = construction industry. For several policy reasons, it has long been = understood=20 that CGL insurance does not cover damage to an insured=92s own work.[11] But because construction today = is often=20 entirely the work of subcontractors,[12] the subcontractor exception = has=20 effectively rendered the CGL policy=92s your-work exclusion meaningless = when=20 issued to a general contractor. I would not compound the confusion by = allowing=20 it to render the policy=92s coverage provisions meaningless as well.

&nbs= p;=20 It is true that if the subcontractor exception preserves only claims = that no=20 homebuyer could ever bring, it is hard to see why it was added. But that = is not=20 the case here. The insurer concedes the exception preserves coverage for = damages=20 by or to work done by subcontractors that the insured causes after = the=20 sale, such as during a repair call or while working on a neighboring = property.=20 Once title to the home has passed, any damage a builder causes = thereafter would=20 give the buyers a claim for property damage rather than economic loss.=20 Lamar=20 Homes complains = that such=20 accidents are not very likely, and thus its CGL policy would not cover = very=20 much. But of course the policy did not cost very much, and still covers = all=20 bodily injuries and property damage (other than the house itself) that = might=20 occur after the sale. Had these same construction defects cracked a = grand piano=20 or someone=92s head (rather than the home=92s own walls), Lamar = Homes would undoubtedly feel = differently=20 about its value.

&nbs= p;=20 Finally, the Court=92s opinion obscures the fact that we are adopting a = minority=20 view. The high courts of only 5 states have taken the same view as the = Court,[13] a number the Court inflates by = including=20 cases in which =93property damage=94 was not contested on appeal,[14] coverage was limited to = property=20 other than the builder=92s work,[15] or that have nothing to do = with home=20 builders.[16] By contrast, the courts of 11 = states=20 have held the CGL policy does not cover property damage to the home the = insured=20 built;[17] while the policies in some of = these=20 cases did not contain a subcontractor=92s exception, = that=20 is relevant only if exclusions can create coverage. Given the ubiquity = of this=20 policy nationwide, uniform treatment in the courts is important; while = it is too=20 late for complete uniformity, we should try not to make matters worse. = The=20 current lack of uniformity does not, of course, render the policy = ambiguous; a=20 policy does not have two reasonable interpretations just because the = courts=20 cannot agree on one.[18]

&nbs= p;=20 Lamar=20 Homes was sued = for breaking=20 promises, not for breaking property. Indeed, under Texas law = that is the=20 only claim the homebuyers could possibly bring. Because their injuries = occurred=20 when the sale took place (though the cracks appeared five years later), = they did=20 not have a property damage claim under Texas law. Because that is all this = CGL policy=20 covered, I would answer the second certified question =93No.=94 As this = question=20 disposes of the pending claim, I would decline to decide the others.[19]

&nbs= p; = ; = &= nbsp; &n= bsp; =20 ___________________________________

&nbs= p; = ; = &= nbsp; &n= bsp; =20 Scott Brister

&nbs= p; = ; = &= nbsp; &n= bsp; =20 Justice

OPINION=20 DELIVERED: August 31, 2007

^[1]=20 Specifically, the homebuyers alleged that Lamar Homes breached express = and=20 implied warranties that their home would be designed and constructed in = a good=20 and workmanlike manner; breached the DTPA by breaching those warranties; = breached the DTPA by misrepresenting the reinforcement in their slab; = committed=20 fraud by making the same misrepresentations; and (along with its = subcontractors)=20 negligently designed their foundation.

^[2]=20 557 S.W.2d 77, 80 (Tex. 1977) (=93The courts of civil = appeals have=20 correctly reasoned that economic loss is not =91physical harm=92 to the = user or his=20 property. . . . We agree and hold that strict liability does not apply = to=20 economic losses.=94).

^[3]=20 711 S.W.2d 617, 618 (Tex. 1986) (citations omitted). For = a=20 description of the defects the Reeds asserted, see Jim Walters = Homes,=20 Inc. v. Reed, 703 S.W.2d 701, 705 (Tex. App.=97Corpus Christi 1985), = aff=92d in part and rev=92d=20 in part, 711 S.W.2d 617 (Tex. 1986).

^[4]=20 See Saratoga Fishing Co. v. J.M. Martinac = &=20 Co., 520 U.S. 875, 884=9685 (1997) (applying federal maritime law); = Robert A.=20 Sachs, Product Liability Reform and Seller Liability: A Proposal for=20 Change, 55 Baylor L. = Rev.=20 1031, 1115 n.372 (2003) (=93Property damage to the product itself and=20 consequential economic losses to the owner of the product are considered = in most=20 states to be recoverable under the law governing commercial transactions = and the=20 Uniform Commercial Code, not under tort law.=94) (citing = cases).

^[5]=20 Restatement (Third) of Torts = =A7 21=20 (1998) (emphasis added).

^[6]=20 Restatement (Third) of = Economic Torts=20 and Related Wrongs =A7 8 cmt. c(2) = (Council Draft=20 No. 1, 2006).

^[7]=20 Id. =A7 8=20 cmt. C(3), illus. 12:

Contractor negligently compacts fill dirt upon = which it=20 builds a house. Contractor sells the house to A who later sells the = house to B.=20 Noticing a crack in the house=92s slab, B=92s Broker asks Engineer to = inspect the=20 foundation on behalf of B before B contracts to buy the house. Engineer = gives=20 the house a clean bill. When the crack worsens and other problems = develop B=20 discovers the fill was improperly compacted. B sues Contractor and = Engineer. The=20 house, foundation, and fill are considered to be part of an integrated = whole so=20 the harm to the house resulting from the defect in the fill is a pure = economic=20 loss. There is no negligence action for the harm . . . = .

^[8]=20 See PPG Indus., Inc. v. JMB/Houston Ctrs. = Partners=20 Ltd. P=92ship, 146 S.W.3d=20 79, 88 (Tex.=20 2004).

^[9]=20 See Vann v. Bowie Sewerage Co., 90 S.W.2d 561, 562 (Tex. = 1936); Cook=20 v. Exxon Corp., 145 S.W.3d 776, 781 (Tex. App.=97Texarkana 2004, no = pet.);=20 Denman v. Citgo Pipeline Co., 123 = S.W.3d 728,=20 732 (Tex. App.=97Texarkana 2003, no pet.); Exxon Corp. v. Pluff, 94 S.W.3d 22, 27 (Tex. App.=97Tyler = 2002, pet.=20 denied); Senn v. Texaco, Inc., = 55 S.W.3d=20 222, 225 (Tex. App.=97Eastland 2001, pet. denied); Abbott v. City of=20 Princeton, 721 S.W.2d 872, 875 (Tex. App.=97Dallas 1986, writ ref=92d n.r.e.); = Lay v. Aetna=20 Ins. Co., 599 S.W.2d 684, 686 (Tex. Civ. = App.=97Austin 1980, writ ref=92d n.r.e.).

^[10] See Harken=20 Exploration Co. v. Sphere Drake Ins. P.L.C., 261 F.3d 466, 471 (5th = Cir.=20 2001) (=93The insured bears the initial burden of showing that the claim = against=20 her is potentially within the insurance policy=92s scope of = coverage.=94) (citations=20 omitted); see also Kvaerner Metals Div. = of Kvaerner U.S., Inc. v. Commercial Union Ins. = Co., 908=20 A.2d 888, 899-900 (Pa. 2006) (finding it unnecessary to consider policy=20 exclusions when there was no =93occurrence=94 under the CGL); = Auto-Owners Ins.=20 Co. v. Home Pride Cos., 684 N.W.2d 571, 576 (Neb. 2004) (=93[T]he = exception=20 contained within exclusion =911=92 is irrelevant until . . . [t]here is = an initial=20 grant of coverage . . . .=94); Corder v.=20 William W. Smith Excavating Co., 556 S.E.2d 77, 81 (W. Va. 2001) = (=93Before=20 any coverage can be found to exist under . . . any other portion of the=20 commercial general liability policy, an =91occurrence,=92 within the = policy=20 definition of that term, must be determined to have occurred.=94) = (footnote=20 omitted).

^[11] See, e.g., Stewart = Macaulay,=20 Justice Traynor and the Law of = Contracts, 13=20 Stan. L. Rev. 812, = 825-26=20 (1961):

Replacement and repair costs are to some = degree within=20 the control of the insured. They can be minimized by careful purchasing, = inspection of material, quality control and hiring policies. If = replacement and=20 repair costs were covered, the incentive to exercise care or to make = repairs at=20 the least possible cost would be lessened since the insurance company = would be=20 footing the bill for all scrap. Replacement and repair losses tend to be = more=20 frequent than losses through injury to other property, but replacement = and=20 repair losses are limited in amount since the greatest loss cannot = exceed the=20 cost of total replacement. If the insured will stand these losses, = insurance can=20 be provided more cheaply since the company will be freed from = administering many=20 small claims for repairs, and it can set a rate for the more unusual = risk of=20 injury to property other than the contractor=92s work or product. This = risk can be=20 the hazardous one since there are no natural limitations on the damage = the=20 contractor might do to a homeowner=92s or a neighbor=92s = property.

^[12] See Ronald J. Mann, The = First=20 Shall be Last: A Contextual Argument for = Abandoning=20 Temporal Rules of Lien Priority, 75 Tex. L. Rev. 11, 25 (1996) = (=93Usually=20 much of the work of actual construction will be provided by a general = contractor=20 through one or more tiers of subcontractors.=94); see, e.g., = Lennar Corp. v. Auto-Owners Ins. Co., 151 P.3d = 538, 541=20 (Ariz. Ct. App. 2007) (noting that builder of 105 homes = subcontracted all=20 actual construction work); see also Black=92s Law Dictionary 351 = (8th ed.=20 2004) (=93general contractor. One who contracts for the completion of an = entire=20 project, including purchasing all materials, hiring and paying = subcontractors,=20 and coordinating all the work.=94).

^[13] See Travelers Indem. Co. of Am. v. Moore & Assocs., = Inc., 216=20 S.W.3d 302 (Tenn. 2007); Am. Family Mut. = Ins. Co.=20 v. Am. Girl, 673 N.W.2d 65 (Wis. 2004); Corner Constr. Co. v. U.S. Fed. & Guar. Co., 638 = N.W.2d 887=20 (S.D. 2002); Fejes v. Alaska Ins. = Co.,=20 Inc. 984 P.2d 519 (Alaska 1999); High Country Assoc. v. New = Hampshire=20 Ins. Co., 648 A.2d 474 (N.H. 1994).

^[14] See Lee Builders, Inc. v. Farm = Bureau=20 Mut. Ins. Co., 137 P.3d 486, 495 (Kan. = 2006)=20 (noting insurer =93only petitioned for review on the occurrence = issue=94); Wanzek Constr., Inc. v.=20 Employers. Ins., 679 N.W.2d 322, 327 (Minn. 2004) (noting insurer = did not=20 contest that claim was an =93occurrence=94 resulting in =93property = damage=94); McKellar Dev. v. N. Ins. Co., 837 P.2d 858 = (Nev. 1992)=20 (failing to address whether claim involved an =93accident=94 or = =93property=20 damage=94).

^[15] See French v. Assurance = Co. of=20 Am., 448 F.3d 693, 706 (4th Cir. 2006) (predicting Maryland courts = would=20 find no coverage for repairing defective work, but would find coverage = for=20 damage to other parts of home).

^[16] See Ferrell v. West Bend = Mut. Ins. Co., 393 F.3d 786 (8th Cir. = 2005); Transportes Ferreos De = Venezuela=20 II CA v. NKK Corp., 239 F.3d 555 (3d Cir. 2001) (predicting New = Jersey=20 courts would find coverage for claim against supplier of boom installed = on cargo=20 vessel).

^[17] See Burlington Ins. Co. v. = Oceanic=20 Design & Constr. Inc., 383 = F.3d 940,=20 948=9649 (9th Cir. 2004) (predicting Hawaii courts would find no = coverage);=20 Travelers Indem. Co. v. Miller Bldg. = Corp., 97=20 Fed. Appx. 431, 434 = (4th Cir.=20 2004) (predicting North Carolina courts would find coverage only to = extent=20 defects damage carpet supplied by owner, not builder); Acuity v. = Burd & Smith, 721 N.W.2d 33, 39 (N.D. = 2006); Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. = Co., 908=20 A.2d 888, 899=96900 (Pa. 2006); L-J, Inc. v. Bituminous Fire & = Marine Ins.=20 Co., 621 S.E.2d 33, 36=9637 (S.C. 2005); Auto-Owners Ins. Co. v. = Home Pride=20 Cos., 684 N.W.2d 571, 577 (Neb. 2004); Corder v. William W. Smith Excavating = Co., 556=20 S.E.2d 77, 82 (W. Va. 2001); Pursell Constr. Inc. v. Hawkeye-Security Ins. Co., 596 = N.W.2d=20 67, 70 (Iowa 1999); Commerce Ins. Co. v. Betty Caplette Builders, Inc., 647 N.E.2d 1211, 1214 = (Mass.=20 1995); Dodson v. St. Paul Ins. Co., 812 P.2d 372, 378 (Okla. = 1991);=20 Peerless Ins. Co. v. Brennon, 564 A.2d = 383, 386=20 (Me. 1989).

^[18] = See City of Keller v. Wilson, 168 S.W.3d 802, 828 (Tex. 2005) = (=93It is=20 inevitable in human affairs that reasonable people sometimes disagree; = thus, it=20 is also inevitable that they will sometimes disagree about what = reasonable=20 people can disagree about.=94).

^[19] See, e.g., Flores v. = Millennium=20 Interests, Ltd., 185 S.W.3d 427, 434 (Tex.=20 2005).