Cozen O’Connor: Contractual Liability Exclusion Clarified by Texas Supreme Court in Ewing Constr. v. Amerisure [Global Insurance Alert]

Contractual Liability Exclusion Clarified by Texas Supreme Court in Ewing Constr. v. Amerisure

Global Insurance Alert

January 27, 2014

In Ewing Construction Co. Inc. v. Amerisure Ins. Co., No. 12-0661, 2014 WL 185035 (Tex. Jan. 17, 2014), the Texas Supreme Court held that a general contractor who agrees to perform construction work in a “good and workmanlike manner” does not “assume liability” for damages arising out of the contractor’s defective work so as to trigger the contractual liability exclusion1 in a commercial general liability policy. This holding substantially clarifies the Texas Supreme Court’s prior holding in Gilbert Texas Construction LP v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010).

In Gilbert, the Dallas Area Rapid Transit Authority hired Gilbert Texas Construction (contractor) to act as general contractor on a light rail system. The contract required the contractor not only to exercise reasonable care in performing its work, but also to protect adjacent property from damage resulting from the failure to comply with contract’s requirements. During construction, unusually heavy rains flooded the surrounding property. The damaged property owners sued under various contract and tort liability theories. The trial court dismissed the tort theories, leaving only contractual claims, which the contractor settled. The contractor requested reimbursement of the settlement from the insurer, which the insurer denied based on its contractual liability exclusion. Ultimately, the Texas Supreme Court held that the contractual liability exclusion applied because the contractor’s obligation to repair or pay for damages extended “beyond [contractor’s] obligations under general law and incorporates contractual standards to which [the contractor] obligated itself.” The court rejected the contractor’s argument that the phrase “assumption of liability in a contract” as contained in the exclusion meant the “assumption of another’s liability.” The court noted that if the parties intended the exclusion to be so limited, they could have used different language.

Three years later, the court again confronted this exclusion in the Ewing case. Ewing Construction Co. Inc. contracted with Tuluso-Midway Independent School District (TMISD) to build a tennis court and other additions to a school. The contract called for Ewing to perform its work in a “good and workmanlike manner.” After construction was completed, TMISD complained that the courts were flaking, crumbling and cracking. TMISD sued, alleged that Ewing’s work fell below the “good and workmanlike” standard called for in the contact, and asserted claims for negligence and breach of contract.

Ewing tendered the suit to its insurer, Amerisure Insurance Company (insurer) for both defense and indemnity under its commercial package policy, but the insurer denied coverage. According to the insurer, when Ewing contracted to perform work in a “good and workmanlike manner,” Ewing assumed liability for substandard performance, and that liability was not covered due to the contractual liability exclusion.

Ewing then sued for a declaration that the insurer had breached its duties to defend and indemnify. The district court granted summary judgment to the insurer based on the court’s view that Gilbert “stands for the proposition that the contractual liability exclusion applies when an insured has entered into a contract and, by doing so, has assumed liability for its own performance under that contract.” On appeal, the 5th Circuit, after initially affirming the district court on the duty to defend and remanding on the duty to indemnify, certified two questions to the Texas Supreme Court, beginning with this one: “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.”

In arriving at its “no” answer to this question,2 the Texas Supreme Court clarified its holding in Gilbert by focusing on the term “assumption.” Specifically, the court held that the phrase “assumption of liability” as used in the contractual liability exclusion meant the enlargement of duties beyond those that the insured would ordinarily have. Thus, because Ewing was obligated by common law to perform its work in a “good and workmanlike manner,” the inclusion of such a standard in the contract with TMISD did not enlarge its already existing duties. As a result, Ewing did not “assume liability” under the meaning of the exclusion and the contractual liability exclusion did not apply. Stated differently, Ewing did not “assume liability” to act in a “good and workmanlike manner” because it was already obligated to act that way, regardless of the language contained in the TMISD contract, thus rendering the contractual liability exclusion inapplicable.

Beyond its discussion of the exclusion, in dicta, the Texas Supreme Court revisited the “performance bond” issue addressed in Lamar Homes v. Mid-Continent Cas. Co., and observed that “more often, faulty workmanship will be excluded from coverage by specific exclusions” such as the business risk exclusions.

The holding in Ewing substantially clarifies the Gilbert decision and, in doing so, removes the implication that the mere presence of a contractual agreement will trigger the contractual liability exclusion in a general liability policy. Determining coverage in light of Gilbert, Lamar Homes and Ewing will require a careful analysis of the insured’s duties under common law as compared with the insured’s contractual obligations. Finally, careful consideration will need to be given to the facts of an underlying claim, as there will be greater attention given to the “business risk” exclusions, including the exceptions to those exclusions for completed operations and the work of subcontractors.

1 The contractual liability exclusion precluded coverage for: “’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.” It includes an exception for liability that the insured would have in the absence of the contract or agreement.

2 Because the Texas Supreme Court answered the first question “no,” it did not answer the second question.

 


Authors

Gregory S. Hudson

Member

ghudson@cozen.com

(832) 214-3909

Alicia G. Curran

Member

acurran@cozen.com

(214) 462-3021

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To discuss any questions you may have regarding the issues discussed in this Alert, or how they may apply to your particular circumstances, please contact Gregory Hudson in Houston at (832) 214-3909 or ghudson@cozen.com or Alicia Curran in Dallas at (214) 462-3021 or acurran@cozen.com.