Texas Supreme Court Rules CGL Policy’s “Contractual Liability" Exclusion Does Not Bar Coverage for Claims Arising From Construction Defects

by Eversheds Sutherland (US) LLP

On January 17, 2014, the Supreme Court of Texas rejected a commercial general liability (“CGL”) insurer’s attempt to invoke the “contractual liability” exclusion to deny coverage under a standard CGL policy regarding a construction defect breach of contract claim.  The insurer denied coverage to the general contractor, arguing that the contractor had assumed liability in its contract to perform its work in a “good and workmanlike manner”, and that a breach of contract claim based on construction defects, arising out of the failure to perform the contract in a good and workmanlike manner, was not covered under the CGL policy due to the standard “contractual liability” exclusion.  The Supreme Court held that the general contractor did not contractually assume any liability beyond its common law duty to perform its contract with due skill and care, and thus the policy exclusion did not apply.  The case is Ewing Construction Company, Inc. v. Amerisure Insurance Company.1

Generally speaking, insurance coverage for construction defects works as follows:  the plaintiff alleges the existence of defective construction that is a breach of a construction contract and/or breach of a duty (i.e., negligence) causing “personal injury” or “property damage.” These allegations within the four corners of the complaint trigger the insurer’s duty to indemnify the insured pursuant to the four corners of the insurance policy if the allegations constitute an “occurrence.” In many states, such allegations can lead to a finding of an “occurrence” under the reasoning that contractors do not intend to perform defective work and the defects are thus “accidental” (this issue has been the subject of several recent high-profile court decisions and a majority of jurisdictions now follow this logic).2  This scenario further triggers the insurer’s duty to defend the insured in the lawsuit (this process is frequently referred to as the “eight corners” rule).3  The insurer, however, has multiple “business risk” exclusions in its standard insurance policy that may further erode its indemnity obligations, including the “your work” exclusion that limits coverage for a general contractor’s own work (but is usually subject to a notable exception for the work of subcontractors) and the “damage to impaired property” exclusion. Another important exclusion is the “contractual liability” exclusion, which is the subject of the Ewing case.

The typical contractual liability exclusion purports to remove coverage for damages for “‘[b]odily 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.” Ewing, 2014 WL 185035 at *3 (quoting standard policy language).  This exclusion has two critical exceptions:  “(1) where the insured’s liability for damages would exist absent the contract, and (2) where the contract is an insured contract.” Id. at *6.  Ewing Construction’s insurer, Amerisure, took the position that when Ewing Construction agreed in its construction contract to perform its work in a “good and workmanlike manner,” Ewing Construction assumed liability in the contract that obligated the insured to pay damages resulting from the contractor’s breach of that provision—triggering the contractual liability exclusion and leaving Amerisure with no duty to indemnify or defend. Id. The contractor countered that its agreement to perform its work in a “good and workmanlike manner” did not lead to Ewing Construction taking on any more liability than it already owed to its contractual privy, the project owner, because by law Ewing Construction had the obligation “to comply with the contract’s terms and to exercise ordinary care in doing so.” Id. 

The Supreme Court of Texas agreed with the contractor. “Assumption of liability” in the contractual liability exclusion “means that the insured has assumed a liability for damages that exceeds the liability it would have under general law.” Id. Agreeing to perform its work in a “good and workmanlike manner” does not create any more liability than the contractor already has under the common law. Id. The Court crucially noted that the allegations of breach of contract and negligence were substantively the same: the plaintiff alleged that the contractor “fail[ed] to use ordinary care, that is, fail[ed] to do that which a reasonable person or provider of the defendant’s type would have done under the same or similar circumstances” and these allegations of negligence were the same as allegations of failing to perform the work in a “good and workmanlike manner” in accordance with the construction contract. Without assuming any more liability than common law already required, the contractual liability exclusion did not apply, and Amerisure had the duty to defend, and indemnify, the claims against Ewing Construction for breach of contract. For the exclusion to apply without exception, the contractor must assume some liability that is beyond the standard liability required by law for a contractor performing a construction contract. See, e.g., Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010) (applying the contractual liability exclusion where the contractor undertook a specific obligation to repair or pay for damage to third-party property resulting from failure to comply with the contract, which the Supreme Court of Texas held was liability assumed beyond the contractor’s obligations under general law—or pursuant to an ordinary care/negligence standard).4

The Supreme Court of Texas included a brief corollary that is worth mentioning. Amerisure argued that the Court’s interpretation of the contractual liability exclusion would turn the insurance policy into a performance bond—essentially requiring the insurance company to guarantee the contractor’s performance of its contract.  The Court rejected this argument, noting two critical differences between an insurance policy and a performance bond: (1) the insurance policy’s requirement for resulting personal injury or property damage and (2) the existence of other common “business risk” policy exclusions not before the Court: “Because the policy contains exclusions that may apply to exclude coverage in a case for breach of contract due to faulty workmanship, our answer to the first certified question is not inconsistent with the view that CGL policies are not performance bonds.”  Id. at *7.

1 --S.W.3d --, 2014 WL 185035, No. 12-0661 (Tex. Jan. 17, 2014) (on certified question from the United States Court of Appeals for the Fifth Circuit).
See, e.g., Cherrington v. Erie Insurance Property and Casualty Company, 231 W.Va. 470 (2013); Taylor Morrison Services, Inc. v. HDI-Gerling America Insurance Company, 293 Ga. 456 (2013); see also Lamar Homes, Inc. v. Mid-continent Casualty Co., 242 S.W.3d 1 (Tex. 2007).
Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377, 380 (Tex. 2012).
In addition, it should be noted that the Ewing case does not address the other stated “exception” to the “exclusion” for “insured contracts.” “Insured contracts” are contracts where the insured assumes the tort liability of another—such as an indemnity agreement. Gilbert, 327 S.W.3d at 128. This exception typically would apply, for example, if Ewing Construction agreed to indemnify the owner for the owner’s tort liability to a third party.

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.

© Eversheds Sutherland (US) LLP | Attorney Advertising

Written by:

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.