Texas Supreme Court Reverses Lower Court’s Holding Excluding Construction Defect Claim From Coverage Under CGL Policy

by Snell & Wilmer

In a victory for contractors, the Texas Supreme Court recently held that a contractor does not lose coverage under its commercial general liability (“CGL”) policy merely because it entered into a contract agreeing to perform its work in a “good and workmanlike manner.” See Ewing Construction Co. v. Amerisure Insur. Co., _____ S.W.3d _____ (2014).  

In Ewing, an owner sued its general contractor claiming that its work was defective. The contractor then submitted the claim to its CGL carrier seeking coverage and a defense from the claim. The carrier denied coverage claiming that because the contractor agreed to perform its work in a “good and workmanlike manner,” it had “assumed liability” for the defective work. The contractor’s CGL policy (like most such policies) included a contractual liability exclusion, which stated that the policy excluded liability or damages the insured assumed by contract.

The trial court agreed with the insurance carrier and held that because the contractor entered into a contract that required it to perform in a workmanlike manner, the contractor had assumed liability for its defective work and the CGL policy did not cover such claims. 

On appeal, the Texas Supreme Court held that the contractor’s agreement was not an assumption of liability beyond its obligations under general law, and thus did not trigger the contractual liability exclusion. The Court compared the facts of Ewing to their prior decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, where the Court did find that the contractual liability exclusion was triggered because the contractor assumed liability outside the obligations of general law by contractually agreeing to repair or pay for damages to third-party property. 327 S.W.3d 118, 127 (Tex. 2010). 

Based upon the Court’s decision in Gilbert, contractors and insurance carriers around the country were especially interested in how the Court would address the Ewing case. Contractors feared a broad interpretation of the contractual liability exclusion would be detrimental. Therefore, contractors should be relieved by the Ewing decision which limited Gilbert, and narrowed its application. In fact, the Court noted that Gilbert involved “unusual circumstances.” 

The Court held that “assumption of liability” requires a finding that the insured assumed a liability for damages which exceeded the liability it would have under general law. In Ewing, the Court did not find an assumption of liability because: (1) the insurer’s claim that the contractor failed to perform in a good and workmanlike manner was substantively the same as its claim that the contractor negligently performed; and (2) the contractor already had a common law duty to perform its obligations with skill and care. As such, the Court ruled that a contractor’s obligation to perform in a good and workmanlike manner does not expand its duty to exercise ordinary care, and therefore, the contractor does not assume liability which would trigger the contractual liability exclusion.

This ruling is obviously important to contractors who faced the potential of uninsured liability from any claim for defective work that arose out of contract. But the decision is also significant because the alternative would have left consumers without an avenue for recovery from contractor’s negligence and misconduct.  

Based on the reasoning of Ewing, contractors would be wise to avoid including requirements in their construction contracts that exceed the obligations imposed on them by the common law. Knowledgeable construction attorneys can assist contractors in making this determination.

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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