The Texas Supreme has answered a question certified to it by the federal Fifth Circuit Court of Appeals concerning the scope of the contractual liability exclusion in a Commercial General Liability insurance policy. The question answered by the court was:
Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion.
The Texas Supreme Court answered “no.” Ewing Constr. Co., Inc. v. Amerisure Ins. Co., No. 12-0661 (Tex. January 17, 2014).
The insurance dispute arose out of a lawsuit filed against Ewing Construction. Ewing entered in a standard American Institute of Architects contract with a school district to serve as general contractor to renovate and build additions to a school, including constructing tennis courts. Shortly after construction of the tennis courts was completed, the school district complained that the courts started flaking, crumbling, and cracking, rendering them unusable for their intended purpose of hosting competitive tennis events. The school district filed suit in a Texas state court against Ewing and others. The school district’s claims against Ewing were based on faulty construction of the courts and its theories of liability were breach of contract and negligence.
Ewing tendered defense of the underlying suit to Amerisure Insurance Company, its insurer under a commercial package policy that included CGL coverage. Amerisure denied coverage. Ewing filed suit against Amerisure in federal court seeking a declaration that Amerisure had, and breached, duties to defend Ewing and indemnify it for any damages awarded to the school district in the underlying suit. The federal district court agreed with Amerisure that there was no coverage. On appeal, the Fifth Circuit asked the Texas Supreme Court to resolve the issue.
The contractual liability exclusion and exceptions at issue in the case provided as follows:
This insurance does not apply to:
. . .
b. Contractual Liability
“Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or agreement; or
(2) Assumed in a contract or agreement that is an “insured contract” . . . .
Amerisure argued the school district’s claims against the construction company were excluded because the company was being sued for “damages by reason of the assumption of liability in a contract” with the school district to build the tennis courts. Ewing countered the case fit within the exception to the exclusion for “liability for damages … [t]hat the insured would have in the absence of the contract or agreement.”
The Texas Supreme Court had previously interpreted such a contractual liability exclusion in a CGL policy in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010). The Gilbert opinion considered whether a CGL policy’s contractual liability exclusion applied to exclude indemnity coverage for a third party’s property damage claim where the only basis underlying the claim was the insured’s contractual agreement to be responsible for the damage.
The underlying suit in Gilbert involved an agreement for Gilbert Texas Construction, L.P., as a general contractor, to build a light rail system for the Dallas Area Rapid Transit Authority (DART). The contract between DART and Gilbert required Gilbert to protect adjacent property and to repair or pay for damage to any such property resulting from “a failure to comply with the requirements of the contract.” The Supreme Court determined that Gilbert, in its contract with DART, undertook a specific contractual obligation to repair or pay for damage to third-party property that enlarged Gilbert’s obligations beyond any general common–law duty it might have had. Under the “unusual circumstances” presented by the case, the only basis for Gilbert’s liability to the underlying plaintiff RTR was RTR’s claim for Gilbert’s breach of the contract with DART. Thus, because Gilbert’s only liability for damages was for breach of an obligation assumed in a contract that was beyond any common-law duty Gilbert might have had, the contractual liability exclusion applied and thus there was no coverage.
In answering the certified question in Ewing, the Texas Supreme Court rejected the insurer’s argument that Gilbert compelled the same result. Instead, the court agreed with Ewing that the case was distinguishable from Gilbert because Ewing’s agreement to construct the courts in a good and workmanlike manner did not enlarge its obligations beyond any general common–law duty it might have. The court noted that the school district’s allegations that Ewing failed to perform in a good and workmanlike manner were substantively the same as its claims that Ewing negligently performed under the contract because they contained the same factual allegations and alleged misconduct.
According to the court, an “assumption of liability” for purposes of the contractual liability exclusion means that the insured has assumed a liability for damages that exceeds the liability it would have under general law. In the case before the court, Ewing’s agreement to construct the courts in a good and workmanlike manner did not add anything to the obligation it had under general law to comply with the contract’s terms and to exercise ordinary care in doing so. Because Ewing’s agreement to perform the construction in a good and workmanlike manner did not enlarge its obligations, it was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion. Ewing Constr. Co., Inc. v. Amerisure Ins. Co., No. 12-0661. Rather, the court explained, “a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not ‘assume liability’ for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.” Id.
Commercial Litigation at Heygood, Orr & Pearson
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* Michael Heygood, James Craig Orr, Jr. and Eric Pearson are all Board Certified in Personal Injury Trial Law — Texas Board of Legal Specialization.
** Michael Heygood, James Craig Orr, Jr. and Eric Pearson were selected to the Super Lawyers List, a Thomson Reuters publication, for the years 2003 through 2014.