Opinion
NO. 3-99-CV-1385-BD(P)
June 20, 2000
MEMORANDUM OPINION AND ORDER
Defendant Assurance Company of America has filed a motion for summary judgment in this declaratory judgment action. For the reasons stated herein, the motion is denied.
I.
Plaintiff Encore Homes, Inc. is in the business of developing residential property and building homes for sale to the general public. (Petition ¶ II). From February 24, 1997 through February 24, 1998, Encore was insured under a Specialty Contractors Policy issued by Assurance Company of America. ( Id.; Def. App. at 8). The policy provides coverage for bodily injury and property damage caused by an "occurrence" during the policy period. (Def. App. at 28, § I, ¶ 1(b)). An "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same harmful conditions." ( Id. at 39, § III, ¶ 13).
On August 25, 1997, Encore was sued by Kathleen Petroff in state district court for breach of contract, negligence, misrepresentation, breach of warranty, and violations of the Texas Deceptive Trade Practices Act. ( Id. at 1-5). Petroff claims that she bought a home from Encore that was defectively designed and constructed. ( Id. at 1). Her petition alleges that:
As part of the inducement to purchase the residence, [Encore] and their authorized agents represented that the home was built to last by a fine, experienced craftsman. [Encore] represented that the home was of a substantial quality and had been built to last. These representations were false, and the home is literally falling apart after Plaintiff lived in the residence less than three years. Numerous defects continue to become evident on almost a daily basis. The home is not of the quality and construction that it was represented it would be.
( Id. at 2). Encore tendered the defense of this lawsuit to Assurance and demanded coverage under the policy. However, Assurance did not respond to this demand. (Petition ¶ V). Plaintiff then filed a declaratory judgment action to determine the respective rights and duties of the parties under the terms of the insurance policy.
Encore originally filed suit in state district court. Assurance removed the case to federal Court because the parties are citizens of different states and the amount in controversy exceeds $75,000, exclusive of interest and costs. See 28 U.S.C. § 1332.
The case is before the Court on defendant's motion for summary judgment. Assurance contends that it has no duty to defend or indemnify Encore for damages allegedly sustained by Petroff because: (1) the loss occurred outside the policy period; and (2) Encore knew about the loss prior to the date the policy commenced. The issues have been fully briefed by the parties and this matter is ripe for determination.
II.
Summary judgment is proper when there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. FED.R.Civ.P.56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). A dispute is "genuine" if the issue could be resolved in favor of either party. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); Thurman v. Sears, Roebuck Co., 952 F.2d 128, 131 (5th Cir.), cert. denied, 113 S.Ct. 136 (1992). A fact is "material" if it might reasonably affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); Matter of Gleasman, 933 F.2d 1277, 1281 (5th Cir. 1991). Cases involving the interpretation of an insurance policy are particulary appropriate for summary judgment. See Principal Health Care of Louisiana v. Lewer Agency, Inc., 38 F.3d 240, 242 (5th Cir. 1994); SnyderGeneral Corp. v. Great American Insurance Co., 928 F. Supp. 674, 677 (N.D. Tex. 1996), aff'd, 133 F.3d 373 (5th Cir. 1998).
The disposition of the pending motion rests on an interpretation of the coverage provisions of the Specialty Contractors Policy. Under Texas law, Encore has the burden to prove that coverage exists. Wallis v. United Services Automobile Association, 2 S.W.3d 300, 303 (Tex.App.-San Antonio 1999, pet. denied). It may satisfy this burden by pointing to evidence in the summary judgment record that creates a genuine issue of material fact for trial. See Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir.), cert. denied, 113 S.Ct. 82 (1992). All the evidence must be viewed in the light most favorable to the party opposing the motion for summary judgment. Rosado v. Deters, 5 F.3d 119, 122 (5th Cir. 1993). However, conclusory statements and testimony based merely on conjecture or subjective belief are not competent summary judgment evidence. Topalian, 954 F.2d at 1131.
III.
The threshold issue in this case is whether Assurance has a duty to defend Encore in the Petroff litigation. All parties agree that the resolution of this issue is governed by the "eight corners test," also known as the "complaint allegation rule." Under Texas law, the duty to defend is determined solely by reference to the allegations of the complaint and the terms of the policy. Lafarge Corp. v. Hartford Casualty Insurance Co., 61 F.3d 389, 393 (5th Cir. 1995); American Alliance Insurance Co. v. Frito-Lay, Inc., 788 S.W.2d 152, 153-54 (Tex.App.-Dallas 1990, writ dism'd). The allegations of the underlying complaint must be taken as true. Gulf Chemical Metallurgical Corp. v. Associated Metals Minerals Corp., 1 F.3d 365, 369 (5th Cir. 1993); Continental Savings Association v. United States Fidelity Guaranty Co., 762 F.2d 1239, 1243, (5th Cir.), as amended, 768 F.2d 89 (5th Cir. 1985). The duty to defend "is not affected by facts ascertained before suit, developed in the process of the litigation, or by the ultimate outcome of the suit." American Alliance, 788 S.W.2d at 1.54; see also Colony Insurance Co. v. H.R.K., Inc., 728 S.W.2d 848, 850 (Tex.App. — Dallas 1987, no writ). The insurer must provide a defense if the complaint contains at least one claim that is facially within the policy's coverage. Lafarge, 61 F.3d at 393; Rhodes v. Chicago Insurance Co., 719 F.2d 116, 119 (5th Cir. 1983).
Assurance has denied coverage and refused to defend Encore in the Petroff lawsuit on two grounds: (1) the loss occurred outside the policy period; and (2) Encore allegedly knew about the loss before the policy commenced. The Court will address these issues in turn.
A.
Assurance first argues that the damages claimed by Petroff arise out of an occurrence that took place long before the policy was issued. Petroff alleges that she purchased her home from Encore sometime in 1994. (Def. App. at 1). However, Encore is only insured against losses due to bodily injury or property damage that occurred between February 24, 1997 and February 24, 1998. ( Id. at 8, 28, § I, ¶ 1(b)). Consequently, Assurance maintains that the loss occurred outside the policy period.
Under Texas law, "[t]he time of the occurrence is when the complaining party actually was damaged, not the time that the wrongful act was committed." American Home Assurance Co. v. Unitramp Limited, 146 F.3d 311, 313 (5th Cir. 1998), quoting Cullen/Frost Bank v. Commonwealth Lloyd's Insurance Co., 852 S.W.2d 252, 257 (Tex.App.-Dallas 1993), writ denied per curiam, 889 S.W.2d 266 (Tex. 1994). Actual damage occurs when the damage becomes apparent or manifest. Id. Damage is considered apparent when it is "capable of being easily perceived, recognized and understood." Id. at 314. Although Petroff bought her home in 1994, she alleges that "[a]dditional defects and problems with the home continue to arise on an almost daily basis" and that "defects continue to become evident on almost a daily basis." (Def. App. .at 2 3). Given that the lawsuit was filed while the policy was still in effect, this allegation is sufficient to suggest that at least one occurrence became manifest during the policy period. See Cullen/Frost Bank, 852 S.W.2d at 258 (finding under similar facts that petition alleged occurrence within coverage period). Accordingly, summary judgment is not proper on this ground.
Encore objects to the extrinsic evidence submitted by Assurance to prove that the loss occurred outside the policy period. (Def. App. at 41-48, 49-51, 52-54, 55-67, 68-79, 80-82, 83-91). Ordinarily, the duty to defend must be determined only by reference to the underlying petition and the provisions of the policy. Western Heritage Insurance Co. v. River Entertainment, 998 F.2d 311, 313 (5th Cir. 1993). However, extrinsic evidence may be considered when the petition does not contain enough facts to enable the court to determine if coverage exists. Id. The facts alleged in Petroffs petition are sufficient to suggest that at least one occurrence became manifest during the policy period. Therefore, it would be improper to rely on the extrinsic evidence tendered by Assurance.
B.
Assurance further contends that there is no coverage or duty to defend under the "known loss" or "loss-in-progress" doctrine. This recognized principle of insurance law precludes coverage "where the insured is, or should be, aware of an ongoing progressive loss or known loss at the time the policy is purchased." Two Pesos, Inc. v. Gulf Insurance Co., 901 S.W.2d 495, 501 (Tex.App.-Houston [14th Dist.] 1995, no writ), citing Inland Waters Pollution Control, Inc. v. National Union Fire Insurance Co., 997 F.2d 172, 175-77 (6th Cir. 1993). Stated differently, "[a]n insured cannot insure against something that has already begun and which is known to have begun." Id., citing Summers v. Harris, 573 F.2d 869, 872 (5th Cir. 1978).Assurance maintains that the problems with the Petroff house were caused by inadequate steel shims in the primary girders at the time of construction. This defect resulted in cracks in the sheetrock, door malfunctions, and separations of the trim and cabinetry. As evidence that Encore knew about these problems before it purchased the policy, Assurance relies on several documents: (1) a "punch list" prepared by a real estate agent when the house was sold in 1994; (2) letters from the Petroffs to Encore in 1994 and 1995 detailing problems with their home; and (3) reports from two engineering firms regarding structural problems with the house. (Def. App. at 41-44, 49-51, 55-67, 68-79, 80-82).
Encore objects to this evidence on two grounds. First, it contends that the evidence constitutes inadmissible hearsay. The Court disagrees. Assurance does not rely on the documents and correspondence to prove the truth of the matters asserted therein. Rather, the evidence is offered to show that Encore had notice of the loss before it purchased the insurance policy. Accordingly, the hearsay objection is overruled. See FED.R. EVID. 801(c); United States v. Central Gulf Lines, Inc., 747 F.2d 315, 319 (5th Cir. 1984).
Encore further objects that the evidence is not properly authenticated. Although this objection is well-taken, the Court determines that Assurance is not entitled to summary judgment even if its considers this evidence. T. Blake Wilson, a consulting engineer, states that "numerous complaints of cracks throughout a structure would give knowledge of some kind of structural problem to a reasonable person regularly engaged in the construction of that type of structure." (Def. Reply, Exh. 2 at 2, ¶¶ 4-5). However, the President of Encore Homes maintains that these problems were only cosmetic and that his company was unaware of any major structural defects until the Petroffs filed suit in August 1997. (Plf. App. at 6-7, ¶¶ 3-10). This conflicting evidence creates a genuine issue of material fact for trial.
None of the evidence submitted by Assurance in its original appendix was properly authenticated. Assurance cured this defect with respect to the "punch list" and engineering reports by obtaining affidavits from the real estate agent and consulting engineer who prepared the documents. (Def. Reply, Exhs. 1 2). However, the correspondence between the Petroffs and Encore remains unauthenticated. The mere fact that these documents were produced during discovery does not establish that "the matter is question in what its proponent claims." See FED.R.EVID. 901(a).
CONCLUSION
Defendant's motion for summary judgment is denied. The Court will set this case for trial by separate order.
SO ORDERED.