Construction Defect Resource Guide

I. Statute of Limitations
II. Statute of Repose
III. Economic Loss Doctrine
IV. Contracts for Indemnity and Contract Interpretation/Enforcement
V. What constitutes an “occurrence”
VI. What constitutes “property damage”
VII. Property damage trigger
VIII. Miscellaneous Issues and Answers to Questions

I. Statute of Limitations

A negligence claim has a two-year statute of limitations. Tex. Civ. Prac. & Code § 16.003(a); KPMG Peat Marwick vs. Harrison Cty. Hous. Fin. Corp., 988 S.W.2d 746, 750 (Tex. 1999). It is well-settled law that an action for negligence accrues when the wrongful act causes an injury, regardless of when the plaintiff learns of that injury or whether all resulting damages have already occurred (the “general accrual rule”). See Childs v. Haussecker, 974 S.W.2d 31, 16 (Tex. 1998); Atkins v. Crosland, 417 S.W.2d 150, 153 (Tex. 1967); Bayou Bend Towers Council of Co- Owners v. Manhattan Constr. Co., 866 S.W.2d 740, 742 (Tex. App. - Houston [14th Dist.] 1993, writ denied); also see Zidell v. Bird, 692 S.W.2d 550, 554 (Tex. App. – Austin 1985, no writ); Blondeau v. Sommer, 139 S.W.2d 223, 225 (Tex. App. – Galveston 1940, writ ref’d). The cause of action accrues even if the injury is not immediately apparent and the plaintiff is unaware of the breach. Zidell, 692 S.W.2d at 554.
In some cases, however, the “discovery rule” is an exception to the “general accrual rule.” Bayou Bend, 866 S.W.2d at 742. “When applied, the discovery rule operates to toll the running of the period of limitations until the time that the plaintiff discovers, or through the exercise of reasonable care and diligence should have discovered, the nature of his injury.” Id. (citing Moreno v. Sterling Drug, Inc., 787 S.W.2d 348, 351 (Tex. 1990)). In Texas, “the discovery rule imposes a duty on a plaintiff to exercise reasonable diligence to discover facts of negligence or omission.” Id. (citing Southwestern Bell Media, Inc. v. Lyles, 825 S.W. 2d 488, 492-93 (Tex. App. – Houston [14th Dist.] 1993, no writ). As such, “all that is required to commence the running of the limitations period is the discovery of an injury and its general cause, not the exact cause in fact and the specific parties responsible” Id. (citing Russell v. Ingersoll-Rand Co., 841 S.W.2d 343, 344 n.3 (Tex. 1992) (emphasis added).
In Texas, a party need not know the full nature and extent of the damages to begin the running of limitations. Instead, limitations begins to run once a party is put on notice to investigate the nature of the injury. In Cornerstone Municipal District vs. Monsanto, 889 S.W.2d 570, the plaintiff, a municipal utility district, brought suit for a broken underground sewer line. Defendant argued plaintiff’s claims were barred by the statute of limitations and the court agreed. “Limitations are not tolled until Cornerstone Municipal District knew it had system-wide sewer problems, but instead ‘limitations ran from the time the MUD was put on notice to diligently investigate and discovery the nature of its injury.’” Additionally, in the Cornerstone case, the court specifically noted that plaintiff argued that the failed pipes were different than the original damaged pipe(s). However, the court found the plaintiff’s claims were still barred because the pipes were of the same type and were allegedly damaged in the same backfilling process as to the original pipes which had been damaged. Id.
In Bayou Bend Towers Counsel v. Manhattan Constr. Co., 866 S.W.2d 740, 747 (Tex. App. – Houston [14th Dist. 1993, writ denied), a condominium association brought suit against the general contractor and various subcontractors for a construction project. The condominiums suffered from water leaks around the roof, windows, and the pre-cast concrete walls. The condo leaked as early as 1983. Plaintiff brought suit in 1992. Plaintiff’s suit was dismissed due to the expiration of the statute of limitations. The Court of Appeals affirmed the trial court’s findings in holding that although plaintiff contends it was unaware of the source or cause of the leaks, it had sufficient notice of any injury and its general cause to start of the statute of limitations running. Id. Accrual of a cause of action occurs when facts come into existence which authorize a claimant to seek a judicial remedy. Robinson v. Weaver, 550 S.W.2d 18, 19 (Tex. 1977).

II. Statute of Repose

Texas law contains statutory provisions providing for a statute of repose which benefits certain construction defendants in construction defect cases. As you know, a statute of limitations sets forth the time by which the lawsuit must be filed after the cause of action accrues. In contrast, the statute of repose also serves to limit the time by which a legal action must be brought but is unrelated to when the cause of action accrues. A statute of repose absolutely bars a lawsuit after a specified time frame. Stated another way, a statute of limitations bars a cause of action if not brought within a certain time frame. A statute of repose, on the other hand, prevents a cause of action from ever arising after a given time frame.
Texas has a statute of repose which benefits architects, engineers, interior designers, and landscape architects. The statute, found at Section 16.008 of the Texas Civil Practice and Remedies Code, provides that a person must bring suit for damages against the persons listed above who designed, planned, or inspected the construction of and improvement to real property or equipment attached to real property not later than ten years after the substantial completion of the improvement or the beginning of the operation of the equipment if the action is one arising out of a defective or unsafe condition of the real property, the improvement, or the equipment. If the claimant presents a written claim for damages to the architect, engineer, interior designer, or landscape architect within the ten year time frame, the period is extended for two years from the day the claim is presented. Texas also has a statute of repose in favor of a person who constructs or repairs an improvement to real property. Section 16.009 of the Texas Civil Practice and Remedies Code provides that a claimant must bring suit for damages for a claim against a person listed above not later than ten years after the substantial completion of the improvement in an action arising out of a defective or unsafe condition of the real property or a deficiency in the construction or repair of the improvement. If the claimant presents a written claim for damages during the ten year time frame, the period is extended for two years from the date the claim is presented. Also, if the damage occurs during the tenth year of the period, the claimant may bring suit not later than two years after the day the cause of action accrues.
Please note that under Texas law a statute of repose has no discovery rule.

III. Economic Loss Doctrine

This rule generally precludes recovery in tort for contract damages in the form of economic losses resulting from the failure of a party to perform under a contract. Southwestern Bell Telephone Company v. DeLanney, 809 SW2d 493 (Tex. 1991). The rule restricts contracting parties to contractual remedies for those economic losses associated with the contractual relationship, even when the breach might reasonably be viewed as a consequence of a contracting party’s negligence. It is a rule of liability defense or of remedies and can successfully be used by way of motion for summary judgment or other motion for disposition on the merits to eliminate certain claims for damages alleged by a plaintiff in a construction defect case.
I have provided the following summary of the important Texas cases and relevant holdings on the subject. Where a party performs services under a contract, the party is not liable for damages in negligence, unless the negligence caused damage beyond the subject matter of the contract.
Thomson v. Espey Huston and Assocs., Inc., 899 S.W.2d 415, 421 (Tex. App.– Austin 1995, no writ); Goose Creek Consol. Indep. School Dist. v. Jarrar’s Plumbing, 74 S.W.3d 486 (Tex. App.– Texarkana 2002, pet. denied). Economic loss means damages for inadequate value, costs or repair and replacement of the defective products, or consequent loss of profits, without any claim of personal injury or damages to other property. Bass v. City of Dallas, 34 S.W.3d 1, 9 (Tex. App.– Amarillo 2000, no pet.) The Texas Supreme Court has applied the economic loss rule to bar a home buyer’s negligence claim for damages arising from construction defects in a home. In Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986), the Court held that the home buyers had no tort claim, stating in its opinion, “When the injury is only the economic loss to the subject matter of a contract itself, the action sounds in contract alone.” Id. at 618. There is no tort claim for construction defects because the party has only suffered damage to the subject matter of the contract.

IV. Indemnity Contract Interpretation and Enforcement

In construction cases in general and certainly in construction defect cases, issues of indemnity contract interpretation and enforcement often arise. These contractual provisions can and do often require contractors and their insurers to assume the defense of and/or indemnify other contractors in connection with a particular project and litigation arising therefrom. Accordingly, as Texas law is very settled in this arena, I have provided a summary of the important cases and holdings on these subjects.
Indemnity clauses in contracts that purport to remove for a party the burden of its own negligence and shift this burden to another party to the contract must comply with the “fair notice” doctrine. Dresser Industries v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993). The “fair notice” doctrine has two parts: (1) the “express negligence” test, and (2) the conspicuousness requirement. Id. The “express negligence” test requires that the intent of a party seeking indemnity for its own negligent acts and/or omissions must be put in clear and specific terms within the four corners of the contract. Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705, 707-708 (Tex. 1987). The conspicuousness element requires that the indemnity clause be printed in such a way that is noticeable to a reasonable person. Dresser Industries, Inc. at 508. If a contractual provision does not meet both parts of the “fair notice” doctrine, the provision is unenforceable under Texas law. Conspicuousness as it relates to the “fair notice” doctrine requires that the language of an indemnity clause be printed in such a way that is noticeable to a reasonable person. Id. Conspicuousness is defined in the Texas Business & Commerce Code as follows:
(10) “Conspicuousness,” with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it. Whether a term is "conspicuous" or not is a decision for the court. Conspicuous terms include the following: (A) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and (B) language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language. TEX. BUS. & COM. CODE §1.201(10). If the contract provision is not conspicuous as defined by the statute, it is not enforceable. Dresser Industries v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993).

V. What constitutes an “occurrence”

The Supreme Court of Texas recently ruled upon this issue in Lamar Homes, Inc. v. Mid- Continent Casualty Company, (not yet released for publication). The Court held that allegations of unintended construction defects may constitute an “accident” or “occurrence” under the CGL policy. For CGL carriers, this means that when a home buyer sues a contractor for construction defects and alleges only damage to or loss of use of the home itself, such allegations are sufficient to trigger the duty to defend. I have enclosed a copy of this opinion for your review. We expect this holding to be released for publication soon. However, the opinion was delivered in August of 2007, and was held up by certain dissenters on the court who were in the process of preparing a formal dissenting opinion. A new dissenting opinion was delivered in December of 2007. Again, we anticipate that the opinion will be released for publication soon. Since it has not yet been released, I have provided a summary of the relevant cases and holdings below. The following discussion sets forth the law in Texas prior to Lamar Homes.
The CGL provides coverage for damages as a result of “property damage” caused by an “occurrence.” “Property damage” is defined as:
“Property damage” means:
1 A much earlier Texas case commented that “the allegedly defective performance of the work itself might or might not be considered an accident.” Travelers Ins. Co. v. Volentine, 578 S.W.2d 501 (Tex. Civ. App. – Texarkana 1979, no writ). a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the “occurrence” that caused it. The term “occurrence” is defined to mean: “Occurrence” means an accident, including continuous or repeated exposure to substantially the same generally harmful conditions.
Numerous Texas courts have confronted the issue of whether a merely defective product or defective work constitutes “property damage” caused by an “occurrence.” Unfortunately, prior to Lamar Homes there was some disagreement among those courts as to the proper resolution of the question. In general, allegations of negligence in a petition, standing alone, do not necessarily require the finding of an “occurrence.” Under Texas law, it is the factual allegations giving rise to damages, not the labels placed on the causes of action, which determines the duty to defend. Merchants Fast Motor, 939 S.W.2d at 141. But even assuming that the petition alleges facts which would support a negligence claim (i.e., an accident), without an indication in the petition as to an unintended and separate injury as a result of the negligence, there may be no “occurrence” pled. Two relatively recent federal opinions express the view that such claims do not invoke coverage. In Jim Johnson Homes, Inc. v. Mid-Continent Casualty Co., 244 F. Supp.2d 706 (N.D. Tex. 2003), the court held that mere construction defects alleged against a builder did not constitute an “occurrence” even though allegations of negligence were made. The court held that such allegations did not rise to the level of an “occurrence” because there were no claims of accidental injury to property. Id. at 716-17.
In Tealwood Constr., Inc. v. Scottsdale Ins. Co., 2003 WL 22790856 (N. D. Tex. Nov. 19, 2003), the court held that the mere allegation of a negligence claim is insufficient to constitute an “occurrence.” Rather, the court looked to the factual allegations that the insured was responsible for performing renovation work, including replacement of old siding and repainting the exterior of the project, and that “various problems developed in connection with the Renovation Work.” Relying upon the Jim Johnson Homes case, the court held that the facts alleged were nothing more than a failure of performance by the contractor. Thus, it found that the insurer had no obligation to defend.1 A contrary result was reached in Gehan Homes, Ltd. v. Employers Mut. Cas. Co., 2004 WL 2384253 (Tex. App. – Dallas 2004, pet. filed). In that case, a home builder was sued for alleged problems resulting from a faulty foundation. The court disagreed with the Jim Johnson and Tealwood cases, holding that alleged physical injury to the home itself was sufficient to state a claim for “property damage” caused by an “occurrence.” However, this result might be explained by the indication that the faulty foundation work damaged another part of the structure, thereby satisfying the insuring agreement.

VI. What constitutes “property damage”

The Supreme Court of Texas also addressed this issue in the case cited above in Section V. See Lamar Homes, Inc. v. Mid-Continent Casualty Company, (not yet released for publication). The Court specifically held that allegations of damage to or loss of use of the home itself may constitute “property damage” sufficient to trigger the duty to defend under a CGL policy. Since this opinion has not yet been released for publication, I have included a discussion of prior Texas law on this issue in Section V. as well.

VII. Property Damage Trigger

The trigger of coverage for property damage which takes place over time under a CGL policy is an issue which is not completely settled in Texas. If a particular suit alleges “property damage” caused by an “occurrence,” or if the true facts ultimately reveal such a result, the issue becomes where the loss is placed. A majority of Texas courts has held that for purposes of liability insurance coverage, property damage occurs when it first manifests or could be discovered. The first Texas case to clearly state that rule was Dorchester Dev. Corp. v. Safeco Ins. Co., 737 S.W.2d 380, 383 (Tex. App. – 1987, no writ) (“no liability exists on the part of the insurer unless the property damage manifests itself, or becomes apparent, during the policy period”). Since that time, numerous other Texas cases have reached the same conclusion. Cullen/Frost Bank v. Commonwealth Lloyd’s Ins. Co., 852 S.W.2d 252, 257 (Tex. App. – Dallas, 1993, writ denied) (“coverage is not afforded unless an identifiable damage or injury, other than merely causative negligence, takes place during the policy period”); State Farm Mut. Auto Ins. Co. v. Kelly, 945 S.W.2d 905, 910 (Tex. App. – Austin, 1997, writ denied) (“property loss occurs when the injury or damage is manifested”). See also, State Farm Fire & Cas. Co. v. Rodriguez, 88 S.W.3d 313 (Tex. App. – San Antonio 2002, no pet.); Closner v. State Farm Lloyds, 63 S.W.3d 51 (Tex. App. – San Antonio 2001, no pet.). In Martinez v. Allstate Tex. Lloyd’s, No. M-02-091 (S.D. Tex., October 7, 2002), the court followed a manifestation trigger in a case where the insureds discovered mildew before policy inception, but were unaware of its implications. The insureds had experienced leaks before the inception of their coverage with Allstate. The insureds also acknowledged that black spots, which they perceived to be mildew, had appeared prior to the inception of their coverage and prior to the time any claim was reported. Over time, the insureds attempted to repair the leaks and clean the mildew. In their third year of coverage, the insureds made their first claim under the policy. Allstate moved for summary judgment claiming that there was known loss or loss in progress at the time of the commencement of the coverage. The court agreed and noted that it was not determinative that the insureds may not have realized the scope of the problem or that the mildew was actually black mold. The court also noted, however, that there was no evidence that there had been any new water loss or ensuing mold which began within the policy period.
In Flores v. Allstate Tex. Lloyds Co., 278 F.Supp.2d 810 (N.D. Tex. 2003), the court distinguished between an initial leak and subsequent mold damage. The court concluded that the failure to notify an insurer of the leak did not preclude coverage for a later manifestation of mold. The evidence showed that the leaks which caused the mold, occurred months to years prior to the claim. The claim, however, was only for the mold and not for the original leak. Under the manifestation theory, the court found there was no duty to notify until the mold became “apparent” or “capable of being easily perceived, recognized, and understood.”
One court, however, has questioned the “manifestation” rule. In Pilgrim Enterprises, Inc. v. Maryland Cas. Co., 24 S.W. 3d 488 (Tex. App. – Houston [1st Dist.] 2000, no pet.), the Houston Court of Appeals questioned whether the Dorchester line correctly stated Texas law, or whether an exposure theory might apply to property damage claims arising from continuous or repeated exposure to the same or similar conditions. After reviewing the status of Texas law, the court stated:
In short, the case law governing when harm occurs under CGL policies is far from settled. The Texas Supreme Court has declined to adopt any test or fashion its own. The Dallas Court of Appeals has adopted a “relaxed” manifestation rule, the Austin Court of Appeals has arguably adopted the Dallas court's approach, and other appellate courts have not yet addressed the subject. Furthermore, no Texas appellate court has addressed what test should be used to determine when harm occurs in toxic tort suits involving CGL policies that specifically include “continuous or repeated exposure to conditions” within the definition of an “occurrence.”

VIII. Miscellaneous Issues

Texas law allows for participation by multiple insurance carriers for a single claim. This notion is based, at least in part, upon the factual circumstances of certain claims in which property damages are manifested during separate policy periods. For this reason, Plaintiff’s attorneys who are experienced in handling construction defect lawsuits seldom include a “date of loss” or “date of incident” in their pleadings. Instead, the various defendants, contractors, and insurance carriers are left to their own investigations in determining when the damages first manifested themselves. In typical construction defect cases against private contractors and subcontractors, there are no particular notice requirements either by date or in form. However, Texas law does have a Residential Construction Liability Act in place for lawsuits between homeowners and home builders. This statute does provide for notice requirements as well as statutory response time frames for responding to settlement demands. There are consequences and remedies created by timely responses. The RECLA statute in Texas also provides for administrative remedies as well. Should you need further information regarding the RECLA statute, please let me know.
Courts in Texas have the authority to appoint special masters, umpires, and referees in appropriate cases. However, the appointment of these individuals is not a common practice in construction defect cases in Texas.
There is no unique or divided litigation process within the Texas court system. We do have a three-tiered system for civil cases which governs the nature and extent of discovery and depositions which may be conducted as well as the time frames for expert disclosure. However, Texas does not have a bifurcated litigation process or system for construction cases. The primary system of bifurcated litigation in Texas is used in cases with claims for punitive or exemplary damages.