AUSTIN, TexasóA commercial liability insurer must defend any claim of physical property damage that occurs during the policy term regardless of when the damage is actually discovered, the Texas Supreme Court has ruled in a construction defect case on appeal before the 5th U.S. Circuit Court of Appeals.

The federal appeals court asked the Texas Supreme Court to define when property damage occurs under Texas law for purposes of an occurrence-based commercial general liability insurance policy. The court also was asked to determine whether an insurer's duty to defend is triggered when damage is alleged to have occurred during the policy period but was not discovered until after the policy expired.

The Texas Supreme Court late last month ruled that property damage occursóand coverage is therefore triggeredówhen the actual physical damage occurs, not when it is discovered.

The case, Don's Building Supply Inc. vs. OneBeacon Insurance Co., stems from lawsuits brought by various Texas homeowners against Don's Building Supply Inc., a Dallas-based retailer and distributor of a synthetic stucco siding product. The homeowners alleged that DBS' siding product was defective and not weather-tight and thus allowed moisture to seep into wall cavities behind the siding, causing wood rot and other damage.

The siding was installed on various homes from Dec. 1, 1993, through Dec. 1, 1996. During that period, DBS was covered by a comprehensive general liability policy underwritten by Hamilton, Bermuda-based OneBeacon Insurance Co.

OneBeacon initially provided a defense to DBS but then filed suit in federal district court in Texas seeking a ruling that it had no duty to defend or indemnify DBS under the CGL policies because that duty arises after damage is identified, which in this case was after the policies had expired.

The district court agreed with OneBeacon. On appeal, the 5th Circuit asked the state's high court to define when property damage occurs and when an insurer's duty to defend is triggered.

While the state Supreme Court acknowledged that most Texas courts have ruled that an insurer's duty is triggered only when the damage manifests itself during the policy term or that coverage is limited to claims in which damage was discovered or discoverable during the policy period, it said this case provides no basis for such a ruling.

"The policy in straightforward wording provides coverage if the property damage 'occurs during the policy period,' and further provides that property damage means 'physical injury to tangible property,"' the high court wrote in its opinion. "This policy links coverage to damage, not damage to coverage."

At least one attorney who represents insurers said the decision is significant."The court's analysis of the construction-defect trigger issue was one of the most thorough I've ever seen, which means that other courts around the country are likely to look at it for guidance," said Randy Maniloff, an attorney with White & Williams L.L.P. in Philadelphia, noting that the duty to defend trigger arises frequently in coverage disputes. "This case will have legs."

OneBeacon declined comment. DBS was not available for comment.

Don's Building Supply Inc. vs. OneBeacon Insurance Co., Texas Supreme Court, 07-0639, Aug. 29, 2008.