Straight Talking in Texas: The Contractual Liability Exclusion Means What It Says and Says What It Means

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According to prominent insurance commentator, Randy Maniloff, Ewing Construction Co., Inc. v. Amerisure Insurance Co. was “probably the most closely watched coverage case in the country” in 2013.  This is no longer, as the Texas Supreme Court issued its opinion today, reversing the Southern District of Texas’ 2011 decision and holding that the contractual liability exclusion found within the standard CGL policy does not apply to a general contractor’s contractual promise to perform its work in a good and workmanlike manner. Ewing Const. Co., Inc. v. Amerisure Ins. Co., — S.W.3d —- (Tex. Jan 17, 2014) (NO. 12-0661).

Ewing was the general contractor hired by the Tuloso-Midway Independent School District to renovate and build additions to a school in Corpus Christi, Texas, including the construction of tennis courts at the school.  Shortly after Ewing’s completion of the tennis courts, the District complained that the courts were flaking crumbling and cracking.  It eventually sued Ewing for faulty construction, asserting claims for breach of contract and negligence, among others. Ewing tendered the lawsuit to its CGL carrier, Amerisure, seeking a defense and indemnity. Amerisure denied any duty to defend arguing, in part, that coverage was precluded by the “contractual liability” exclusion in its policy because Ewing had agreed in its contract with the District to build the tennis courts in a good and workmanlike manner, and failed to do so.  As a result, Ewing filed suit against Amerisure seeking a declaration that it had an obligation to defend Ewing, and in failing to do so Amerisure breached its duty to defend and violated Texas’ Prompt Payment of Claims Act. Amerisure counterclaimed, seeking a declaration that it had no duty to defend or indemnify Ewing.

Judge Janis Graham Jack of the Southern District of Texas broadly construed the Texas Supreme Court’s decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), and held that the contractual liability exclusion applied to preclude coverage for the claims against Ewing because “Ewing assumed liability with respect to its own work on the subject matter of the contract, the tennis courts, such that it would be liable for failure to perform under the contract if that work was deficient.” Ewing appealed that decision to the Fifth Circuit Court of Appeals which initially affirmed, but then on rehearing changed course, and withdrew its opinion and certified two questions to the Supreme Court of Texas:

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 Supreme Court answered “no” to the first question, thereby mooting the second.

The contractual liability exclusion in the Amerisure policy excluded claims for damage premised upon an insured’s contractual assumption of liability except when: (1) the insured’s liability would exist absent the contract, and (2) the contract is an “insured contract.”  Ewing maintained that its agreement to construct the tennis courts in a good and workmanlike manner did not add anything to its general obligation to comply with the contract’s terms and exercise ordinary care in doing so.  As a result, it argued that its express agreement to perform the construction in a good and workmanlike manner was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion.  The Supreme Court agreed, concluding that the allegations that Ewing failed to perform in a good and workmanlike manner were substantively the same as its claims that it negligently performed under the contract. The court ultimately held that “[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.”

The Supreme Court’s message in the Ewing decision is clear: the contractual liability exclusion will not apply to exclude coverage for a contractor’s violation of duties generally owed to its clients, irrespective of its contract.  Rather, it will only apply in cases where the contractor assumed atypical liabilities more akin to the contractual duties at issue in Gilbert.

 

Topics:  Limitation of Liability Clause

Published In: General Business Updates, Construction Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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