Texas Supreme Court to decide scope of “liability assumed under contract” exclusion found in typical commercial general liability insurance policies

by Jay Pate

Ewing Construction Company, Inc. entered into a contract with a school district to construct tennis courts. Soon after the tennis courts were completed, the school district complained that the courts were cracking and flaking, rendering them unfit for playing tennis. The school district filed a lawsuit against the construction company, seeking damages for defective construction.

The construction company tendered defense of the underlying lawsuit to its insurance carrier under a Commercial General Liability policy. When the insurance carrier denied coverage, the insured filed suit, claiming the insurer was obligated to defend the construction company in the underlying lawsuit filed by the school district. The suit is Ewing Construction Company, Incorporated v. Amerisure Insurance Company (“Ewing”).

The Commercial General Liability at issue contains a “contractual liability exclusion,” which provides:

2. Exclusions

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.

The insurance company 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.

There is, however, an exclusion to this exclusion in the insurance policy:

This exclusion does not apply to liability for damages:

(1) That the insured would have in the absence of the contract

or agreement . . . .

The construction company asserted that, even assuming liability based on the contractual obligation to build tennis courts was excluded, the school district was also asserting claims that the construction company breached common-law duties that should be considered “liability for damages … the insured would have in the absence of the contract.”

The district court agreed with the insurance company. It held that the insurer owed no duty to defend or indemnify the construction company in the underlying lawsuit because the general liability’s policy’s contractual liability exclusion excluded coverage and no exception to that exclusion revived coverage.

The construction company appealed. A divided panel of the federal Fifth Circuit court initially affirmed the district court’s judgment holding that the insurance carrier had no duty to defend. However, on rehearing, the Fifth Circuit withdrew that ruling to certify the following questions to the Texas Supreme Court.

  1. 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.
  2. If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.”

The Texas Supreme Court has now granted the request and will resolve the certified questions.

The questions ultimately concern the scope of an earlier case, Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010). In Gilbert, the Dallas Area Rapid Transit Authority contracted with Gilbert, a construction company, to construct a light rail system. The contract required Gilbert to protect the area surrounding its work site, and included a promise by Gilbert to repair damage to the property of third parties. During construction, heavy rains caused flooding in a building near the work site, and the third party building owner sued the construction company under several theories. Only one claim survived summary judgment: the third party owner’s claim as a third party beneficiary of the Gilbert contract against Gilbert based on Gilbert’s agreement to repair damage to property of third parties.

Gilbert’s primary insurer provided a defense to Gilbert and Gilbert ultimately settled the claim. Gilbert then sought indemnity from its excess insurer, and sued when the insurer denied coverage. The Texas Supreme Court held that the excess insurer had not breached its insurance contract or violated Texas insurance law because the policy’s contractual liability exclusion applied to exclude coverage.

In certifying questions in Ewing to the Texas Supreme Court, the Fifth Circuit noted that “[t]he correct application of this Texas precedent to the facts before us is unclear.” On the one hand, the Gilbert court reasoned that the insured’s legal obligation to the third-party building owner was based on its contract, and therefore the exclusion applied by its plain meaning. In Ewing, the School District’s complaint in the underlying lawsuit in this case alleges liability based on contract; it alleges that the construction company assumed contractual liability arising from express and implied promises to complete the contract in a good, workmanlike manner. Thus, if Gilbert should be read as holding that the exclusion applies if the insured’s liability is predicated on express or implied warranties in a construction contract, the contractual liability exclusion excludes coverage for the claims in the instant case.

On the other hand, the liability of the contractor in Gilbert was not based on its express or implied obligation to perform its construction contract in a workmanlike manner. Rather, in Gilbert, the construction contract contained an express contractual assumption of liability for damage to third party property. The question in Gilbert was whether the obligation undertaken in this paragraph of the contract fell within the contractual liability exclusion. In Ewing, the contract with the school district does not include any similar undertaking in excess of the undertaking common to all contracts. Thus, if Gilbert requires such additional undertakings to trigger the contractual liability exclusion, the exclusion does not apply here. Furthermore, if the exclusion does apply, then the parties have also raised the question of whether an exception to the exclusion applies for “liability that would exist in the absence of contract.”

We will keep an eye on this case and let you know how the Texas Supreme Court rules.

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