In Crownover v. Mid-Continent Casualty Co., 2014 WL 5473084 (5th Cir. Oct. 29, 2014), the U.S. Fifth Circuit Court of Appeals recently granted a motion for reconsideration and withdrew and reversed an earlier opinion. The suit arose out of the Crownover’s contract with Arrow Development, Inc. (“Arrow”) for the construction of a new home in Texas. The Crownovers alleged Arrow performed defective work and then failed to repair the defective, work causing the Crownovers to hire another contractor to fix the defective work. The Crownovers and Arrow went to arbitration and the arbitrator found Arrow liable for breaching the express warranty in the construction contract to repair non-conforming work. Arrow filed bankruptcy and the Crownovers then sought damages from Arrow’s insurers
The contract between the Crownovers and Arrow contained a provision that obligated Arrow to repair its work where that work failed to conform to the requirements of the construction contract. The central issue in the case was whether this contractual provision was an “assumption of liability” that exceeded Arrow’s liability under Texas law, thereby triggering the “contractual-liability exclusion” contained in Arrow’s CGL policy. The original opinion of the Court held that this provision was an “assumption of liability” that exceeded the contractor’s liability under general Texas law, thereby triggering the contractual liability exclusion in the CGL policy.
On rehearing, the Court reversed itself. The Court cited recent cases decided by the Texas Supreme Court, Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W. 3d 30 (Tex. 2010), and Ewing Construction v. Amerisure Insurance Co., 420 S.W. 3d 30 (Tex. 2014) in support of its opinion that Arrow’s agreement in the construction contract to repair defective work was not an assumption of liability that exceeded Arrow’s obligation under general Texas law. In Gilbert, the Texas Supreme Court held that a contractual-liability exclusion applied to bar recovery where the only viable claim was for breach of contract, since all other claims were barred by governmental immunity. In Ewing, the court held that 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, does not “assume liability” for damages that exceed its obligations under general Texas law.
In this case, the arbitrator found that Arrow breached an express warranty in the construction contract with the Crownovers to “promptly correct work…failing to conform to the requirements of the Contract Documents.” The Court noted that the key issue is not whether the relevant duty is contractual; it is whether the contractual duty represents an expansion of liability. Here, the Court held that Texas law generally provides a duty to repair or pay for work that was not carried out in a good and workmanlike manner and that the general law creates a duty to perform under the terms of a contract with reasonable care. The Court held that Arrow’s agreement to correct work that failed to conform to the requirements of the construction contract did not expand or exceed its obligations under general Texas law. Therefore, the “contractual liability exclusion” of the policy did not apply.
This decision should be noted by any insurers in the business of issuing CGL policies to those in the construction business. The contractual liability exclusion has been subject to much scrutiny and interpretation over the years; however, the Fifth Circuit’s opinion here clearly indicates that the contractual liability exclusion will not automatically apply where the claims against the insured/contractor arise out of a contract. Rather, at least under Texas law, the exclusion applies when the contract gives the insured more liability than it would have in the absence of a contract.
Author: Jeffrey Siemann