IT’S FUNDAMENTAL: THE DUTY TO DEFEND – The Anomaly of D.R. Horton-Tex., Ltd. v. Markel Inter’l Ins. Co.

It is well-established that the duty to defend is broader than the duty to indemnify.  Often touted as being “axiomatic”, if there is a potential for coverage under the CGL policy, there is a duty to defend a suit. The duty to indemnify, on the other hand, is narrower because it depends on the insured proving that a loss is actually covered.

Is it possible to have a duty to indemnify but not a corresponding duty to defend? Is the duty to indemnify without a corresponding duty to defend an anomaly, or at least a bit illogical?  Or is it perfectly logical in the context of an “eight-corners” state, like Texas? 

The analysis of the duty to defend begins with an examination of the facts and the policy. It is necessary to determine, however, what facts an insurer must, or can, review when determining its defense obligation in a particular jurisdiction. Is the examination of the facts limited to those stated in the lawsuit or can information extrinsic to the lawsuit be consulted?

While it is universally accepted that the duty to defend is broader than the duty to indemnify, jurisdictions differ as to what information can be used to determine that duty. For instance, in an “eight-corners” state, the decision to defend must be based on a review of the policy and the lawsuit. Use of information outside of the complaint is generally not permitted. In other states, information extrinsic to the complaint must be considered.  In some cases, this information can be used to defeat coverage as well as afford it. In other cases, the information can be used only to afford coverage.

So, while it appears that the defense duty is broad because only a potential for coverage need be established, an eight-corners state restricts the amount of information that can be examined.  Does this restriction detract from the axiom that the duty to defend is broader than the duty to indemnify when only limited information can be used?

Common rationale for rejecting the eight-corners rule can be persuasive. First, the denial of a defense based on information restricted to the lawsuit would appear to be contrary to the broad duty to defend which is universally recognized; and, second, the decision to defend, or not, would be based on the pleadings which could be limited in its recitation of the facts and be subject to “the pleading strategies, whims, and vagaries of third party claimants to control the rights of parties to an insurance contract.”[1]

On March 21, 2013, a federal district court in Texas ruled that the duty to defend and duty to indemnify are distinct duties under Texas law and that one can exist without the other.  Colony Ins. Co. v. Price, 2013 U.S. Dist. LEXIS 38952 (N.D. Tex. Mar. 21, 2013).

Citing the Supreme Court of Texas in D.R. Horton-Tex., Ltd. v. Markel Inter’l Ins. Co, 300 S.W.3d 740, 743, the Colony court stated that “although the duty to defend is ‘strictly circumscribed by the eight-corners doctrine, it is well settled that the facts actually established in the underlying suit control the duty to indemnify.’” Colony 13-14

Is the duty to defend truly broader than the duty to indemnify if determination of the duty to defend is “strictly circumscribed by the eight-corners doctrine?”  To answer this question, it is helpful to distinguish the “potential v. actual” criterion for determining duties from any constraints on the information to which this criterion can be applied.

When the duty to defend must be determined from the lawsuit only and not from extrinsic information, it is possible that no duty to defend exists given the way the lawsuit is drafted.  On the other hand, there may be a duty to indemnify because it can be determined based on information outside of the complaint.

In D.R. Horton-Texas, Ltd., the Court ruled that the defense and indemnity duties are independent of each other and that an indemnity duty can exist without a defense duty: “We hold that even if Markel has no duty to defend D.R. Horton, it may still have a duty to indemnify… That determination hinges on the facts established and the terms and conditions of the CGL policy.” D.R. Horton 744.

Hence, the anomaly…the duty to defend is broader than the duty to indemnify, but in an eight-corners jurisdiction, the information used to determine the duty to defend is limited. And while the duty to indemnify is narrower, the information used to determine that duty is broad. Since the duties exist independent of each other, it is possible to have a duty to indemnify without a duty to defend.

[1] Randy Maniloff and Jeffrey Stempel quoting from M. Mooney Corp. v. U.S. Fid. & Guar. Co., 618 A.2d 793, 797 (N.H. 1992), General Liability Insurance Coverage/Key Issues in Every State (New York, NY: Oxford University Press, Inc. 2011) 71.


Construction material varies with types of construction, geographical location, amenities desired, and other factors.  Materials typically include concrete, wood, steel, stone, glass, drywall, brick, landscaping, etc.

Building Components and Life Expectancy

In February 2007, the National Association of Home Builders/Bank of America Home Equity issued a report, Study of Life Expectancy of Home Components.[i] The following describes the U.S. Housing Stock in 2005:

The 2005 American Housing Survey by the U.S. Census Bureau shows that there are more than 124 million homes in the housing stock, with a median age of 32 years.  About one-third of the housing stock was built in 1960 or earlier.  About 10 percent was built in the 1960s, and another 20 percent was built in the 1970s.  Of the remainder, 13 percent was built in the 1980s, another 13 percent was built in the 1990s, and 8 percent in the first years of the 21st century.

Of the total stock of 124.3 million housing units, about 109 million are occupied housing units, 11.6 million are vacant and about 4 million are seasonal.  Two-thirds of all units in the nation’s housing stock are single-family detached or attached, 8 percent are in buildings with 2 to 4 units, and about 17 percent are in buildings with 5 or more units.  The remaining 7 percent of the stock is in HUD-code homes.

About 18 percent of the occupied housing stock is in the Northeast, 23 percent is in the Midwest, 37 percent is in the South, and 21 percent is in the West.

Here are just a few of the study’s findings:

  • Concrete and Masonry

Masonry is one of the most durable components of a home.  Chimneys, fireplaces, and brick veneers can last a lifetime, and brick walls have an average life expectancy of more than 100 years.

  • Engineered Lumber

Floor and roof trusses and laminated strand lumber are expected to last a lifetime, and engineered trim is expected to last 30 years.

  • Footings and Foundations

Poured as well as concrete block footings and foundations last a lifetime, assuming they were properly built.  Termite proofing of foundations will last about 12 years if the chemical barriers put in place during construction are left intact.  Waterproofing and bituminous coating lasts 10 years, but if it cracks it is immediately damaged.  Concrete or cast iron waste pipes are expected to last 100 years or more.

  • Framing and Other Structural Systems

Framing and structural systems have extended longevities: poured-concrete systems, timber frame houses, and structural insulated panels will all last a lifetime.  Wall panels and roof and floor trusses will similarly last a lifetime.  Softwood, hardboard, and plywood last an average of 30 years, while OSB and particleboard are expected to function properly for 60 years.

  • Insulation and Infiltration Barriers

As long as they are not punctured, cut, or burned, and are kept dry and away from UV rays, the cellulose, fiberglass, and foam used in insulation materials will last a lifetime.  This is true whether the insulation was applied as loose fill, house wrap, or batts/rolls.

  • Roofing

The life of a roof depends on local weather conditions, proper building and design, material quality, and adequate maintenance.  Slate, copper, and clay/concrete roofs have the longest life expectancy – over 50 years.  Roofs made of asphalt shingles last for about 20 years while roofs made of fiber cement shingles have a life expectancy of about 25 years, and roofs made of wood shakes can be expected to last for about 30 years.

[i] National Association of Home Builders/Bank of America Home Equity, Study of Life Expectancy of Home Components, Prepared by the Economics Group of NAHB, February 2007,


At the outset, it is important to realize that structures can fail for reasons other than construction and design defects:

…all buildings have an expected lifespan and even the structures of the ancient world will erode into a mound of sand given enough time.  The eventual failure of a structure is an expected result rather than a manifestation of a construction defect.[i]

While design and construction professionals can fail to meet standards of care resulting in construction defects and damages, structures are simply not built to last forever and neither are they required to be perfect in design and construction.  The question, then, is whether the failure is due to normal wear and tear, the result of the expiration of the useful life of the structure, a maintenance problem, or one actually due to a construction and/or design defect.[ii]

Construction defects often are initially latent, with a later manifestation of symptoms of the defect.  They can also be patent, that is, they are readily apparent.[iii]  Timing is important for a number of reasons including the impact on statutes of limitations and repose, and the “trigger of coverage”.


Construction defects can be defined by statute.  For example, in Nevada, NRS 40.615 defines a constructional defect as…

… a defect in the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance and includes, without limitation, the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance:

1.  Which presents an unreasonable risk of injury to a person or property; or

2.  Which is not completed in a good and workmanlike manner and proximately causes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed.[iv]

Florida’s Chapter 558.002, defines a construction defect in this way:

…a deficiency in, or a deficiency arising out of, the design, specifications, surveying, planning, supervision, observation of construction, or construction, repair, alteration, or remodeling of a dwelling, any appurtenance to the dwelling, or the real property to which the dwelling or appurtenance is affixed resulting from:

(a)  Defective material, products, or components used in the construction or remodeling;

(b)  A violation of the applicable codes in effect at the time of construction or remodeling which gives rise to a cause of action pursuant to s.553.84;

(c)  A failure of the design of a dwelling to meet the applicable professional standards of care at the time of governmental approval; or

(d) A failure to construct or remodel a dwelling in accordance with accepted trade standards for good and workmanlike construction at the time of construction.[v]

A Working Definition

A “construction defect” can be defined as a failure of the construction to perform in an intended or expected way.  This failure to perform can, but not necessarily, cause physical injury to the work itself and/or other property or work.  “Construction defects” include defects in design, faulty work, defective building products/material, and various types of soil failure.

Design defects include:

  • Improper site selection
  • Building/system does not work as designed
  • Defective plans, specifications, selection of improper materials

Defective (physical) construction includes: 

  • Faulty workmanship
  • Poor quality
  • Noncompliance with codes, specifications, plans, product manufacturer instructions, buyer’s expectations, industry standards

Material or products used in a project may be defective, inferior, or inadequate.

Soil defects can be categorized separately and include expansive and saturated soils, and improper grading, fill, compaction, and defective testing.

Some “usual suspects” in construction defect claims include:

  • Saturated, expansive, and poorly compacted soil
  • Improper reinforcement of foundation systems, failure to properly prepare for utilities, failure to properly install anchor bolts, crawl space moisture, and improper foundation waterproofing
  • Defects in civil engineering and site drainage
  • Framing defects encompassing shear panels, absence of fire stopping, out-of- plumb and out-of-plane walls, and balcony deck framing
  • Plumbing defects that include the failure to ream ends of copper pipes that are cut and failure to isolate pipes from framing[vi]

Construction defects can be grouped into the following defect categories: site, building envelope, structural, heating/ventilation/air conditioning, electrical, plumbing, and fire/life safety systems.[vii]

Why do construction defects seem to be occurring more frequently?  A number of reasons have been offered: an abandonment of “the traditional design approach where the architect would utilize established…standards and details…that were similar and consistent, i.e. ‘tried and true’”;  untested new business materials that are limited in application; inadequate design detail; a change in the contractor’s role from “Master Builder” to “master broker” with the latter’s emphasis on “low initial cost and higher profits” overriding the goal of a product free of defects; the priorities of getting the project done as quickly as possible and maximizing profit; the overall “lack of quality assurance and quality control,” and the lack of effective coordination “resulting in scheduling and sequencing problems.”[viii]

[i] Frank Gatlin, AIA, NCARB, Identifying & Managing Design and Construction Defects (Construction/Insight from Hindsight: Issue 5, Winter 2013)

[ii] Gatlin.

[iii] Gatlin.

[iv], retrieved 1/23/20.

[v], retrieved 1/23/20.

[vi] Robert S. Mann, Defect-Free Buildings: A Construction Manual for Quality Control and Conflict Resolution (New York, NY: McGraw-Hill Companies, 2007) 92.

[vii] Gatlin.

[viii] Gatlin.


On December 11, 2019, an appellate court in the State of Illinois ruled that Liberty Mutual Fire Insurance Company had no duty to defend or indemnify its insured in the underlying litigation and also had a valid right to be reimbursed for defense expenses paid pursuant to a specific endorsement in the policy. Before discussing this further, let’s go back to 1997.

In February 2013, Dr. Jerry Buss, long-time owner of pro basketball’s Los Angeles Lakers and hall of famer, died at the age of 80. Aside from a legacy of world championships, he also left one for the insurance industry in the form of a California Supreme Court case decided in 1997, Buss v. Superior Court, 16 Cal. 4th 35 (Cal. 1997), probably the leading case supporting the right of an insurer to seek reimbursement for expenses incurred in the defense of causes of action that are not potentially covered under the policy.

It is common that the defense of an insured is conducted under a reservation of rights due to coverage issues. The reservations may include the right to seek reimbursement for defense expenses paid. Because the duty to defend is very broad, and because the insurer must defend the entire action, some jurisdictions provide for the right to reimbursement of defense expenses specific (solely) to causes of action that are not potentially covered in a mixed action.

The Buss case is probably the poster child for this right to reimbursement. In the underlying case against Buss and others, H&H Sports had contracted with Buss to provide advertising and other services. A dispute between the parties evolved into a lawsuit in which 27 causes of action were asserted, including count 23 for defamation. Buss’ insurer defended the entire lawsuit on the premise that only the defamation count was potentially covered.

The central issue was whether the insurer could recover the expenses incurred in the defense of its insured that were specific to the non-covered causes of action. The Supreme Court ruled that the insurer had the right to reimbursement of expenses in the defense of specific causes of action that are not potentially covered. Furthermore, the insurer has the burden to demonstrate that the expenses related solely to the uncovered cause of action. And this burden is by a preponderance of evidence. Buss 3940

Buss, then, provided that in a “mixed” action, or an action in which some of the causes are not potentially covered while others are, the insurer can seek reimbursement for expenses paid solely to defend the causes of action that are not potentially coverage, and the insurer has the burden, by a preponderance of evidence, of making the distinction.

But as a noted commentator points out, theory and practice are significantly different, and the burden on the insurer to make that distinction may not be an easy one:

the Buss rule is more valuable in theory than practice. The court held that “an insurer is only entitled to recover those defense expenses which can be fairly and reasonably allocated solely to non-covered claims for which there never was any potential for coverage.1

1 Randy Maniloff, Reimbursement of Defense Costs, An Insurer’s Duty to Defend or Duty to Lend, FC&S Online (the National Underwriter Company 2006, Ohio) M.28-3.

Of course, while California is a bellwether state in many instances, not every jurisdiction always follows its lead. For example, in 2010, the Supreme Court of Pennsylvania ruled in Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 606 Pa. 584 (Pa. 2010) that the right of reimbursement should be included in the insurance policy if the insurer wishes to preserve this right, as opposed to creating a new contractual obligation by way of an unilateral reservation of rights letter within which the insurer attempts to preserve its right to reimbursement and where the insured accepts the defense.2 The Court also rejected the insurer’s argument that the insured was unjustly enriched for receiving the defense:

…Royal cannot employ a reservation of rights letter to reserve a right it does not have pursuant to the contract…the policy here did not provide for a right of reimbursement of defense costs for non-covered claims. A reservation of rights letter asserts defenses and exclusions that are already set forth in the policy…We are persuaded that permitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract…A reservation of rights letter “does not relieve the insurer of the costs incurred in defending its insured where the insurer was obligated, in the first instance, to provide such a defense”…Absent the creation of a new contract through the reservation of rights letters, there is no contractual basis upon which to order Insured to reimburse Royal for defense costs. Am. & Foreign Ins. Co. 614-615

Nor are we persuaded that there are any equitable bases upon which to grant a right to reimbursement…

Insured was not unjustly enriched…Royal had not only the duty to defend, but the right to defend under the insurance contract. This arrangement benefited both parties. The duty to defend benefited Insured to protect it from the cost of defense, while the right to defend allowed Royal to control the defense to protect itself against potential indemnity exposure. Am. & Foreign Ins. Co. 615-616

2 Randy Maniloff and Jeffrey Stempel, General Liability Insurance Coverage/Key Issues in Every State (New York, NY, Oxford University Press, Inc. 2012, 2nd ed.) 164.

In Pennsylvania, then, an insurer’s right to recoupment of expenses incurred in the defense of a claim or cause of action that is not potentially covered must be provided for in the insurance policy, and cannot be preserved in a simple, unilateral reservation of rights letter extrinsic to the policy.

In Liberty Mutual Fire v. Ferrara Candy, 2019 IL App (1st) 181385-U Liberty Mutual prevailed on its duty to defend and indemnify its insured in the underlying case as well as in its pursuit of reimbursement of defense costs. Liberty initially agreed to defend subject to reservations which included its right to withdraw from the defense and to seek reimbursement of defense expenses should it be determined later that there was no coverage.

The second amended complaint prompted Liberty to assert that there was no coverage and withdrew from the defense. It subsequently filed a declaratory judgment action. As to the duty to defend, there was no coverage because no bodily injury or property damage, as defined, occurred during the policy periods. Nor was any personal and advertising injury caused by an offense during the policy periods. Any trade dress infringement occurred post-merger and post policy periods, and this was clear from the complaint. There was no duty to defend or indemnify.

The right to recoup defense expenses was also upheld given Liberty’s endorsement that it was entitled to reimbursement if it was determined that there was no duty to defend and subject to the parameters of that endorsement.

The take-away is that perhaps it is best in any state, but certainly in Pennsylvania and Illinois, to include an endorsement in the policy reserving the right to reimbursement as opposed to a unilateral reservation of rights contained in a letter.


Given the nature of latent, progressive, and cumulative injury or damage, and in the context of the definition of occurrence, it can be quite challenging to determine how many occurrences you are dealing with in a construction defect claim, providing a lot of fertile ground for controversy.  This is important because the limits of liability and deductibles or self-insured retentions are impacted by the number of occurrences. In addition, more than one occurrence can complicate an already-challenging allocation scheme (among the carriers and potentially the insured with respect to defense cost and indemnity sharing).

The “cause and effect” paradigm is useful, and, in fact, forms the basis of case law to determine how many occurrences there are in a construction defect claim.   But it must be applied with flexibility given the variety of fact situations in construction defect claims.  

The “cause test” determines the number of occurrences by focusing on the specific cause of property damage, and not on the number of effects of the cause.  A defective roof that is leaking, for example, can cause damage to attic insulation and personal property.  Using the “cause test”, there is one occurrence.  On the other hand, the “effects test” bases the number of occurrences on the number of effects.  In our example, the damaged insulation and personal property may constitute two occurrences.

Most jurisdictions look to the cause to determine number of occurrences but what constitutes a particular cause is highly fact-specific and not without controversy, the controversy existing generally in the application of the definition of occurrence to the underlying facts. (“Cause” can mean a couple of things.  The physical cause, or cause-in-fact, with a nearness, or not, in time or space to its effect, is distinguished from the legal or proximate cause.)

In the CGL policy, “occurrence” is defined as, “…an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  Some issues to consider:

  • Are the effects, e.g. property damage, the result of the same or substantially the same conditions?
  • Is the exposure of the property to these conditions repeated or continuous, and not unbroken by an intervening cause or causes?
  • Are the exposures, while substantially similar, separated by time or distance to such an extent that to conclude that there is one occurrence pushes the envelope of reason?
  • How many trades are potentially implicated as causes?
  • Doesn’t the determination of number of occurrences for insurance purposes depend on whose insurance you are evaluating, e.g. number of occurrences as to the general contractor whose scope of work is broad as opposed to a subcontractor whose scope his narrow?
  • Nature of the defect and legal theory, e.g. a product defect in windows throughout the development versus various different installation defects throughout the development.

Furthermore, there is a result-oriented consideration, the result being maximizing coverage where the claims are numerous and the damages are within the deductible, if applied on an effect basis.  Finding one occurrence with just one deductible would be advantageous to the insured.