Texas Supreme Court Takes on Issue of ‘Fully Adversarial Trial’

Texas’ high court justices recently ruled that a judgment against an insured defendant is not enforceable against that defendant’s insurer if the judgment was reached outside of a “fully adversarial trial.”

The underlying case in Great American Insurance Company, et al v. Glen Hamel, et al, Case No.14-1007 (Tex. June 16, 2017) is one in which the plaintiffs, Glen and Marsha Hamel, sued their builder for failing to construct their single-family home in Flower Mound, Texas, in a “good and workmanlike manner,” according to the Texas Supreme Court.

Terry Mitchell Builders Inc. was not the original builder of the home but was hired to finish it when the original builder pulled out. Terry Mitchell, president and sole owner of the company, conceded he had the duty to inspect the original builder’s work, as well as the work of Mitchell’s own subcontractors and ensure the work of both was performed in “good and workmanlike manner.”

After the home was built, the Hamels noticed water damage in the home.

“Several construction-related defects resulted in water entering the residence,” the Supreme Court wrote in its ruling.

The Hamels sued the builder, Mitchell, “for breach of implied warranty, negligence, Deceptive Trade Practices Act violations, Residential Construction Liability Act violations.”

The home was finished with a type of synthetic stucco cladding (Exterior Insulation and Finish System, or Exterior Stucco) that was known to cause wood rot and other water-damage-related problems if improperly installed or if defective materials are used, according to the Court’s opinion.

Mitchell was insured by Great American Insurance Co. under commercial general liability insurance policies that were renewed annually. The first three policies, which were effective May 3, 1996, through May 3,1999, didn’t exclude Exterior Stucco-related damage. But “the fourth and fifth policies, effective May 3, 1999, to May 3, 2001, excluded property damage ‘arising out of’ Exterior Stucco,” the Court wrote.

Mitchell informed Great American about the suit, but the insurer refused to defend. The Hamels had discovered the damage in August 2000 and Great American maintained that the discovery fell within the period that the Exterior Stucco-related damage was excluded in Mitchell’s policies.

Before trial, Mitchell and the Hamels came to an agreement under which the Hamels would enforce any judgment against Mitchell’s company and not Mitchell himself. Mitchell agreed to testify at trial and stipulated he was responsible for the defects.

The trial court found in favor of the Hamels and awarded them $365,089.70, plus interest and court costs. Mitchell’s business had no assets beyond a truck and “tools of the trade,” and the Hamels had agreed not to go after Mitchell’s personal assets. Mitchell subsequently assigned to the Hamels most of his company’s rights against Great American.

The Hamels filed suit against the insurer, seeking to recover the judgment against Mitchell under the builder’s CGL policy. They ultimately prevailed at trial and were awarded damages of $355,838, plus interest, court costs and attorney’s fees.

Great American appealed, citing the Texas Supreme Court’s ruling in “State Farm Fire & Casualty Co. v. Gandy prohibiting enforcement of such judgments if rendered without a fully adversarial trial,” the Court wrote.

The appeals court upheld most of the trial court’s decision, finding that Great American had breached its duty to defend, the trial had been fully adversarial, and that the assignment of the builder’s claims against Great American to the Hamels was valid.

In Gandy, the Court held that a “defendant’s assignment of his claims against his insurer to a plaintiff is invalid if (1) it is made prior to an adjudication of plaintiff’s claim against defendant in a fully adversarial trial, (2) the defendant’s insurer has tendered a defense, and (3) either (a) defendant’s insurer has accepted coverage, or (b) defendant’s insurer has made a good faith effort to adjudicate coverage issues prior to the adjudication of plaintiff’s claim.”

On appeal to the Supreme Court, Great American conceded that it had wrongly refused to defend Mitchell in the damage suit but maintained that the suit against Mitchell was not fully adversarial because the pre-trial agreement between the Hamels and Terry Mitchell ensured that the builder “had no real stake” in the outcome of the trial.

An adversarial trial is one in which the opposing sides present evidence, examine witnesses and conduct cross-examinations.The Texas Supreme Court agreed that the damages trial had not been fully adversarial, stating that when parties reach a pre-trial agreement that “deprives one of the parties of its incentive to oppose the other, the proceeding is no longer adversarial.”

The Court declined to enforce the judgment against Great American for that reason. However, it also stated it would “not preclude the parties from property litigating the underlying liability issues in a subsequent coverage suit,” and remanded the case to the trial court for a new trial.