On Friday, January 17, 2014, the Texas Supreme Court issued the long awaited and much anticipated Ewing Construction v. Amerisure Insurance opinion. You may have heard that the ruling was a big victory for contractors, but you are probably wondering what that means for contractor’s insurance coverage for construction defects. In a few words, the Texas Supreme Court told insurance companies that they cannot deny coverage for contractors based upon the “Contractual Liability Exclusion” unless the contractor has assumed liability in the contract over and above the duties they would have in the absence of a contract.
The primary question that the court answered 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 court’s answer was simple. No.
Essentially, insurance companies like Amerisure were attempting to argue that simply by entering into a construction contract and agreeing to construct projects in a good and workmanlike manner that the “Contractual Liability Exclusion” excludes insurance coverage for construction defects. The Contractual Liability Exclusion that Amerisure relied upon in Ewing provided:
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” . . . .
In response, Ewing argued that the Contractual Liability Exclusion only comes into play when a contractor assumes liability that it did not have under general common law and that contractors already have a duty to construct projects in a good and workmanlike manner regardless of contractual language. The Texas Supreme Court agreed.
Bottom line: Contractors still have coverage for construction defects on construction projects where the contractor agrees to perform the work in a good and workmanlike manner unless some other exclusion or exception applies.
So when does a Contractual Liability Exclusion like the one above apply? Only when an insured assumes liability outside a duty that it would already have. This was the factual scenario presented in the Gilbert opinion that the Texas Supreme Court issued in 2010. In Gilbert, the Contractual Liability Exclusion applied because the contractor in that case agreed to assume liability for damage to property adjacent to the project that it ordinarily would not have in the absence of the contract provision.
If you are a contractor and you have been denied coverage based upon this exclusion, you should consider re-examining the claim that you made by contacting an attorney. Contractors should also review their liability coverage with their risk advisors, not only to determine whether they have contractual liability covered or excluded, but also to get a detailed understanding of their coverage.