January 21, 2014
Practice Group:
Insurance Coverage
The text of this article
was first published
by Law360 on
January 17, 2014.
Texas Supreme Court Holds “Contractual Liability”
Exclusion Inapplicable
By Roberta D. Anderson
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. i
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:
*****
“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”….ii
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. iii In contrast, in its 2010
decision in Gilbert Texas Const., L.P. v. Underwriters at Lloyd's London, iv 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. v 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. vi 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.vii 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. viii
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. ix In its decision, the district
court determined that Gilbert “stands for the proposition that the contractual liability exclusion
Texas Supreme Court Holds “Contractual Liability” Exclusion
Inapplicable
applies when an insured has entered into a contract and, by doing so, has assumed liability
for its own performance under that contract.” x 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.” xi
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….”xii The exclusion was triggered in Gilbert, the Court explained,
because “the first obligation Gilbert assumed … extended ‘beyond Gilbert’s obligations under
general law.’” xiii
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. xiv
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.” xv Applying Gilbert, the court found that “TMISD’s allegations that Ewing failed
2
Texas Supreme Court Holds “Contractual Liability” Exclusion
Inapplicable
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.” xvi
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.”
xvii
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.”
Author:
Roberta D. Anderson
roberta.anderson@klgates.com
+1.412.355.6222
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i
NO. 12-0661 (Tex. Jan. 17, 2014).
ISO Form CG 00 01 04 13 (2012), Section I, Coverage A, §2.b..
iii
See, e.g., Olympic, Inc. v. Providence Wash. Ins. Co. of Alaska, 648 P.2d 1008, 1011 (Alaska, 1982) (“Because ‘liability
assumed by contract’ refers to a particular type of contract-a hold harmless or indemnification agreement-and not to the
liability that results from breach of contract, the contractual liability exclusion applies only to hold harmless agreements.”).
iv
327 S.W.3d 118 (Tex. 2010).
ii
3
Texas Supreme Court Holds “Contractual Liability” Exclusion
Inapplicable
v
Id. at 132 (“We hold that the exclusion means what it says. It applies when the insured assumes liability for bodily injury
or property damages by means of contract, unless an exception to the exclusion brings a claim back into coverage or
unless the insured would have liability in the absence of the contract or agreement.”).
vi
Ewing, NO. 12-0661, at 2.
vii
Id.
viii
Id. at 3, n.3.
ix
Id. at 3.
x
Ewing Constr. Co. v. Amerisure Ins. Co., 814 F. Supp.2d 739, 747 (S.D. Tex. 2011).
xi
Ewing, NO. 12-0661, at 1 (quoting Ewing Constr. Co. v. Amerisure Ins. Co., 690 F.3d 628, 633 (5th Cir. 2012)).
xii
Id. at 9.
xiii
Id. at 10 (court’s emphasis, quoting Gilbert, 327 S.W.3d at 127).
xiv
Id. at 11.
xv
Id. at 12 (citations omitted).
xvi
Id.
xvii
Id. at 13.
4