Ewing Construction Co. Inc., v. Amerisure Insurance Company, 2014 WL 185035 (Tex. 2014)
The Texas Supreme Court recently rendered an important opinion regarding two questions certified by the Fifth Circuit regarding the interpretation of the “contractual liability exclusion” typically found in commercial general liability (“CGL”) insurance policies. Ewing Construction v. Amerisure arose out of a construction contract entered into by Ewing Construction Company (“Ewing”) and Tuloso-Midway Independent School District (“the School District”) to construct tennis courts at a school in Corpus Christi, Texas. Ewing engaged several subcontractors to perform all or part of the work of constructing the tennis courts. Soon after completion, the School District notified Ewing the tennis courts were cracking and flaking, rendering them unfit for playing tennis. Eventually, the School District filed suit against Ewing, the architect and the structural engineer. Ewing made a claim with its commercial general liability insurer, Amerisure Insurance Company (“Amerisure”) for defense and indemnity with respect to the School District’s claims. Amerisure declined to provide a defense or indemnity.
Amerisure contended the “contractual liability exclusion” of the CGL policy applied to exclude coverage. The exclusion stated as follows:
2. Exclusions
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 ….
The district court ruled in favor of Amerisure. Ewing appealed and the Fifth Circuit originally affirmed the district court’s opinion with respect to the duty to defend, but vacated and remanded with respect to the duty to indemnify pending the result of the underlying suit. However, in response to a motion for rehearing, the Fifth Circuit withdrew its prior 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.”
On January 17, 2014, the Texas Supreme Court issued its ruling. The Court answered “no” to the first question and did not answer the second. The Court agreed with Ewing’s argument that its agreement to construct the tennis courts in a good and workmanlike manner did not enlarge its obligations beyond any general common-law duty. The Court reasoned that Ewing’s 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. According to the Court, “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. The Court distinguished a prior Texas Supreme Court case, Gilbert Texas Constr., L.P. v. Underwriters at Lloyd’s, 327 S.W.3d 118 (Tex. 2010) in which the Court held the Contractual Liability Exclusion excluded coverage for claims against the general contractor arising out of the general contractor’s assumption in a contract to pay for damages to the property of third parties (i.e., individuals or entities who are not a party to the contract between the owner and the general contractor). The ruling in Ewing does not overrule or diminish the Court’s decision in Gilbert and the Contractual Liability Exclusion still applies where the contractor agrees to assume a specific contractual obligation to repair or pay for damage to third party property “resulting from a failure to comply with the requirements of the contract” between the contractor and the owner.
We believe this is a significant decision as the vast majority of construction contractors perform their work pursuant to some type of contract. The Texas Supreme Court essentially held that a contractor who enters into a contract to build a building or other type of structure does not “assume liability” for purposes of the Contractual Liability Exclusion because the duty to perform work in a workmanlike manner is a duty imposed by law. Under Texas law, contractors may seek coverage under the CGL policy for lawsuits alleging “negligent workmanship,” which is the primary allegation in almost all construction defect disputes. The applicability of the “contractual liability” exclusion is a heavily litigated and largely undecided issue in most states and it is likely that other state courts, including Louisiana, will likely look to the Texas Supreme Court’s decision in Ewing Construction for guidance if faced with the same issue.
Author: Jeffrey Seimann
The opinion is available here: Ewing Const Co Inc v Amerisure Ins Co