In Desert Mountain Properties Ltd. Partnership v. Liberty Mutual Fire Insurance Co., the Arizona Court of Appeals issued a decision holding an insurer liable for damages incurred prior to any duty to defend was triggered. 225 Ariz. 194, 236 P.3d 421 (App. 2010), aff’d 226 Ariz. 419, 250 P.3d 196 (Ariz. 2011). In Desert Mountain Prop., the insured contracted for construction of homes in Scottsdale, Arizona. Soil settlement caused cracks and other damage to the homes sold by the insured. Id. Prompted by customer complaints, the insured repaired the damage to the homes for an average of $200,000 per home. Id. at 197. After some, but not all, of the repairs were made, the insured tendered its claim to the insurer. Id. at 198. Ultimately, the insured sought reimbursement for all of its repair costs.
Liberty Mutual argued that the costs that its insured had voluntarily paid to repair these damages were not sums that it was “legally obligated to pay as damages,” since the insured had not been sued and had never been ordered to undertake the repairs. The Court disagreed, stating:
[A]lthough a court may enforce a legal obligation, in the usual case, no court action is required to create a legal obligation. For that reason, we conclude the better-reasoned rule is that coverage for sums an insured becomes “legally obligated to pay as damages” may be triggered even in the absence of a civil lawsuit against the insured or a court order requiring the insured to make payment.
Id. This decision was affirmed by the Supreme Court of Arizona sitting en banc. 226 Ariz. 419, 250 P.3d 196 (Ariz. 2011).
In almost identical circumstances, the Court of Appeals of Texas has taken the opposite approach. See Markel Am. Ins. Co. v. Lennar Corp., 2011 WL 1466494, at *6 (Apr. 11, 2011). In Markel, the insured used a faulty sealing product on 400-500 homes, which resulted in moisture damage to the homes. Id. at *1. Customer complaints began filtering in, and the insured undertook efforts to remedy the damage in the homes. Id. The insured put the insurer on notice, but the insurer issued a reservation of rights, and a declaratory action filed by the insured followed. Id. at 2. Though the lawsuit disposed of multiple issues, for purposes of this analysis, the focus will be on the insurer’s duty to indemnify absent legal action by the homeowners. The court held that because there was no adjudication, arbitration or compromise settlement with the consent of the insurer that the insured was not “legally obligated” to pay the claims, and therefore the insurer did not owe a duty to indemnify.
These major decisions came within a year of each other, yet present entirely different legal arguments for whether an insurer may have a duty to indemnify if the duty to defend has not yet been triggered. What trends are you seeing in your jurisdictions? Are these court decisions mutually exclusive, or can they be reconciled somehow?