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Legal - What to do if you suddenly become involved in a multi-party construction defect lawsuit?

image Andres Gonzalez, Principal, Cokinos | Young, San Antonio, TX

SAN ANTONIO - Times are changing. Around Texas, there is an onset of multi-party construction defect lawsuits. In the Valley and recently in Bexar County, various school districts have filed lawsuits. In the current climate of public owners or owners of multi-family housing units, construction defect lawsuits are becoming prevalent. When public owners are involved, the two or four year statutes of limitation do not apply. Instead, lawsuits may be brought ten to twelve years after substantial completion of a project.

    If your company becomes involved in this type of lawsuit, you need to understand how to manage the unexpected legal costs of defending the lawsuit. Your commercial general liability policy should cover your legal costs.

    Usually, a commercial general liability insurer owes its insured a duty to defend the lawsuit and a duty to indemnify for a judgment when the insured becomes legally liable to pay (assuming it is a loss covered by the policy). The duty to defend is a very important and valuable benefit. The cost of defending the lawsuit may exceed any amounts the insurer pays to ultimately settle the lawsuit or indemnify the insured against the loss.

    This is a quick how-to guide for when you realize that your company is a party in the construction defect lawsuit or arbitration:

    You want to put your insurance company on notice immediately. If you are aware of a project where your company will likely get sued, notify your insurance company or agent. Even if you do not yet have a copy of the citation or original petition, you may want to inform the insurance company of the pending lawsuit. By doing so, you will get some time to make sure that you are covered for the alleged property damage and to get an attorney lined up.

    Once you have been served with a copy of the citation and original petition, send the copy to your insurance agent or adjuster. The insurance adjuster should hire competent legal counsel to represent you and pay the costs of defense. Those costs include attorney’s fees and the costs of hiring expert witnesses, copying charges, arbitration and mediation expenses, court reporters, and miscellaneous lawsuit-related charges. Most commercial general liability policies give the insurance company the right to select your defense counsel. If there is a particular law firm you would rather use, you should ask your adjuster if the insurance company will approve your selected defense counsel.

    Lately, several Plaintiff’s lawyers have been filing very vague petitions. Your company will be named in the lawsuit but there is very little detail about why you were sued. In fact, you may feel it is a frivolous filing simply because it is unclear. It does not matter what causes of action are in the pleading. The pleading may identify negligence, breach of contract, or something entirely different. What does matter are the damages alleged to have occurred as a result of the acts or omissions of the insured or its subcontractors. That pleading, however, is very important to trigger your insurance company’s duty to defend you under the insurance policy. In Texas, an insurers’ duty to defend the insured is triggered based on the “eight corners rule.” This refers to the four corners of the insurance policy and the four corners of the lawsuit. A court will examine the facts in the pleadings, the language in the insurance policy, and determine if the facts could potentially be covered by the insurance policy. The factual allegations are considered without regard to their truth or falsity, and all doubts regarding the duty to defend are resolved in the insured’s favor. If a petition potentially includes a covered claim, the insurer owes the insured the duty to defend and must defend the entire lawsuit.

    If you are a general contractor, you will want to make sure you have copies of the subcontract agreements and the certificates of insurance from the various subcontractors. You will want to make additional insured tenders to the subcontractors that have work implicated in the lawsuit. You will also want to tender the lawsuit to the subcontractor’s insurance agent and the insurance companies listed on the certificates of insurance. Often times, a subcontractor may still owe the general contractor a defense and indemnity based on the written subcontract agreement. This may apply even if the subcontractor’s work is not directly implicated in the pleadings. The subcontract agreement may require the subcontractor to defend and indemnify the general contractor for any lawsuit arising from the project.

    At times, you may receive a reservation of rights letter from an insurer. This generally means that the insurer will provide you with a defense while reserving its right to deny coverage for the reasons set out in the letter, which often includes the application of various exclusions in the policy. For example, if your policy has coverage for property damage, only certain forms of property damage may be covered, depending on the provisions in your policy. You would need to discuss the reservation of rights letter and its implications with your attorney.


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