Homeowners sued the Town of Huntsville after basement flooding due to Building Code non-compliance and deficient building inspections.
A first action was settled with a payment from the Town's insurer (Lloyd's) and an agreement for repairs, with releases held in escrow.
When the repairs failed, homeowners brought a second action.
The Town applied for a declaration that its insurers (Lloyd's and AIG) had a duty to defend the second action.
The court found that Lloyd's had a duty to defend because the first action was not fully settled, the second action was a continuation of the first, and the Town's exposure to contractual claims arose from counsel retained by Lloyd's.
AIG had no duty to defend as the damage was manifest before its policy period and the second action was primarily contractual.
