Terra International, Inc. v. Commonwealth Lloyd's Insurance Co.
829 S.W.2d 270, 1992 WL 35154, 1992 Tex. App. LEXIS 1248 (1992)
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Rule of Law:
Economic losses, such as diminution in property value or loss of investment resulting from negligent misrepresentation or increased tax burdens, do not constitute "physical injury to tangible property" or "loss of use of tangible property" under a standard commercial general liability insurance policy.
Facts:
- A third party, Northlake Woodlands Joint Venture, purchased two tracts of land from Terra International, Inc.
- After the sale, Terra and other defendants caused Northlake's land to be included within a county flood control district.
- Terra and the other defendants then facilitated the sale of $7.2 million in flood control bonds, which resulted in substantial increases in the ad valorem (property) taxes on Northlake's land.
- Terra performed numerous work projects on other lands within the flood control district but did not perform any flood control work on the land it had sold to Northlake.
- Northlake alleged that the increased tax burden and lack of improvements rendered its property virtually worthless and unsalable.
Procedural Posture:
- A third party (Northlake Woodlands Joint Venture) sued the Insured (Terra International, Inc.) in a Texas trial court alleging deceptive trade practices, fraud, and negligence.
- The Insured requested a defense from its Insurers (Commonwealth Lloyd’s and U.S. Fire) under its liability policies.
- The Insurers filed a motion for summary judgment in the trial court, seeking a declaration that they had no duty to defend the Insured.
- The trial court granted the Insurers' motion for summary judgment.
- The Insured, as appellant, appealed the trial court's judgment to the Court of Appeals.
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Issue:
Does an insurer have a duty to defend an insured under a policy covering "property damage," defined as physical injury to or loss of use of tangible property, when the underlying lawsuit alleges only economic losses such as diminished property value resulting from increased taxes and failure to perform promised work?
Opinions:
Majority - Evans, Justice
No. The allegations in the underlying complaint do not constitute "property damage" as defined in the insurance policies, and therefore the insurers have no duty to defend. The court must focus on the factual allegations of the complaint, not the legal theories. The complaint alleges negligent misrepresentations and omissions that resulted in purely economic losses—specifically, the loss of the plaintiff's investment and a diminution in the land's value due to increased taxes. These financial harms do not amount to "physical injury to or destruction of tangible property" or "loss of use of tangible property." Because the factual allegations fall outside the policy's definition of property damage, the duty to defend is not triggered.
Dissenting - Kinkeade, Justice
Yes. A genuine issue of material fact exists as to whether the underlying complaint alleged a loss of use of tangible property, which should trigger the insurer's duty to defend. The complaint's allegations—that Terra negligently failed to perform flood control work on Northlake's property while performing work elsewhere—should be liberally construed. This raises a potential liability for causing physical injury or loss of use. Any doubt about whether the allegations reflect a potential liability must be resolved in favor of the insured. Therefore, the trial court erred in granting summary judgment for the insurer.
Analysis:
This decision reinforces the critical distinction between tangible property damage and purely economic loss in the context of commercial general liability insurance. By holding that diminution in value due to increased taxes or unfulfilled promises is not "property damage," the court narrows the scope of an insurer's duty to defend. This precedent makes it more difficult for insured parties to obtain a defense for lawsuits arising from business disputes, misrepresentations, or financial dealings, even when those dealings relate to real property. The ruling solidifies the principle that liability policies are intended to cover fortuitous physical events, not the financial consequences of business decisions.
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