In a long and highly anticipated decision issued today, the Texas Supreme Court held that a standard “contractual liability” exclusion does not void coverage for claims alleging that a contractor failed to construct a project in a “good and workmanlike manner” as required by the construction contract. The case is Ewing Construction Company, Inc. v. Amerisure Insurance Company. [1]

The standard commercial general liability (CGL) “contractual liability” exclusion and its exceptions -- which are identical to those at issue in Ewing -- state:

This insurance does not apply to:

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“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”…. [2]

Most jurisdictions have limited the scope of this exclusion by interpreting the exclusion as precluding coverage only in circumstances in which the insured assumes the liability of another, such as in an indemnity or hold harmless agreement. [3] In contrast, in its 2010 decision in Gilbert Texas Const., L.P. v. Underwriters at Lloyd's London, [4] the Texas Supreme Court significantly broadened the potential reach of the exclusion under Texas law to any circumstance in which an insured assumes liability as part of a contractual undertaking. [5] Ewing threatened to expand Gilbert and broaden the exclusion’s reach even further.

In Ewing, the insured, Ewing Construction Company, Inc. (Ewing), entered into a standard contract with the underlying claimant, Tuluso-Midway Independent School District (TMISD), to serve as general contractor to renovate and build additions to a school in Corpus Christi, including constructing tennis courts. [6] Shortly after completion of the tennis courts, TMISD complained that the courts started flaking, crumbling, and cracking, rendering them unusable for their intended purpose of hosting competitive tennis events. TMISD filed suit against Ewing in Texas state court, alleging breach of contract and negligence. [7] Ewing tendered the defense of this suit to its CGL insurer, Amerisure Insurance Company, which denied coverage based on a standard-form contractual liability exclusion and other exclusions. [8] Coverage litigation ensued.

Relying in large part on the Gilbert decision, the district court granted Amerisure’s motion for summary judgment based on the contractual liability exclusion. [9] In its decision, the district court determined 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.” [10] Finding that Ewing had assumed liability for its own construction work pursuant to the contract, the district court concluded that the exclusion was applicable and entered a final judgment dismissing the entire case.

On appeal, the Fifth Circuit, in a 2-1 opinion, initially affirmed the district court’s judgment. After Ewing petitioned for rehearing, however, the Fifth Circuit withdrew its opinion and certified 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.” [11]

The Texas Supreme Court answered the first certified question “no” -- obviating the need to answer the second.

The Texas Supreme Court began its analysis by clarifying that, under Gilbert, the standard contractual liability exclusion applies only where the insured’s assumption of liability in a contract would expand the insured’s “liability for damages… under general principles of law–such as negligence….” [12] The exclusion was triggered in Gilbert, the Court explained, because “the first obligation Gilbert assumed… extended ‘beyond Gilbert’s obligations under general law.’” [13]

Turning to the facts before it, the Court agreed with the insured that, in contrast to the facts of Gilbert, the contract at issue in Ewing did not expand upon Ewing’s liability under general principles of law. As stated by the Court:

Ewing… argues, in part, that this case is distinguishable from Gilbert because Ewing’s agreement to construct the courts in a good and workmanlike manner does not enlarge its obligations beyond any general common–law duty it might have. That is, Ewing posits, its agreement to construct the courts in a good and workmanlike manner did not add anything to the obligation it has under general law to comply with the contract’s terms and to exercise ordinary care in doing so. That being so, Ewing argues, its express agreement to perform the construction in a good and workmanlike manner did not enlarge its obligations and was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion. We agree with Ewing. [14]

The Court reiterated that it “determined in Gilbert that ‘assumption of liability’ means that the insured has assumed a liability for damages that exceeds the liability it would have under general law,” since “[o]therwise, the words ‘assumption of liability’ are meaningless and are surplusage.” [15] Applying Gilbert, the court found that “TMISD’s allegations that Ewing failed to perform in a good and workmanlike manner are substantively the same as its claims that Ewing negligently performed under the contract because they contain the same factual allegations and alleged misconduct.” [16]

The Texas Supreme Court concluded “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.” [17]

Had the Texas Supreme Court answered “yes” to the first certified question, this would have resulted in a radical expansion of the standard contractual liability exclusion under Texas law that would have been unsupported by -- indeed, would have been contrary to -- Gilbert. The implications to the construction industry may have been severe. Coverage for a wide range of construction defects and other mistakes would have effectively disappeared under Texas law. Many contractors would have faced the concern of potential uninsured liability resulting from the contract work. And many consumers would have been left without realistic compensation for construction mistakes.

Fortunately, the Texas Supreme Court correctly answered “no.”

Notes:
[1] NO. 12-0661 (Tex. Jan. 17, 2014).