On January 17, 2014, the Texas Supreme Court handed down its long-awaited decision in Ewing Construction Company v. Amerisure Insurance Company.1 The case involved interpretation of the Contractual Liability Exclusion found in most commercial general liability (“CGL”) policies. The Exclusion, which takes away coverage otherwise granted by the general insuring agreement, precludes coverage 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.”2
On certified questions from the Fifth Circuit Court of Appeals—which had interpreted the Exclusion to apply much broader than previously thought by insureds and insurers alike—the Court confirmed that the Exclusion only applies in those instances where “the insured has assumed a liability for damages that exceeds the liability it would have under general law.” Accordingly, “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 contracts, thus it does not ‘assume liability’ for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.”
Texas has been at the forefront of the interplay between insurance coverage and construction defect claims in recent years and its Supreme Court’s decisions have influenced courts around the country. The Court’s decision in Ewing is an important decision to the United States’ construction industry in particular, but also to myriad of others who rely upon the limited scope of the Contractual Liability Exclusion—as well as its important exceptions—in contracting every day. Insurance is an often-used and beneficial risk transfer mechanism and, had the Fifth Circuit’s original decision been upheld, there could have been significant doubt nationwide over the effectiveness of CGL policies when the issue is a claim arising out of work done pursuant to a contract.
Ewing – and the prior decision on which the Court spent much of its discussion (Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London3) – highlights the need for contractors and others to carefully review the language of their agreements to determine whether they contain obligations that go above and beyond obligations already imposed by general principles of law, like negligence. If so, and if a claim arises out of those additional obligations, the Contractual Liability Exclusion—and, therefore, CGL coverage as a whole—may be of little use.
I. The Ewing Decisions
The underlying case involved an agreement by Ewing Construction Company to renovate and build additions to a school, including constructing a tennis court. In the contract between Ewing and the School District, Ewing broadly agreed (as many contractors do) to perform its work in a good and workmanlike manner. After Ewing completed its work, the School District complained that the tennis courts were cracking and flaking, and generally unfit for use. It sued Ewing for breach of contract and negligence.
Ewing tendered defense of the lawsuit to Amerisure Insurance Company, its CGL insurer. Amerisure denied coverage, taking the position that the policy’s Contractual Liability Exclusion negated its duty to defend and indemnify Ewing. Ewing then sued Amerisure in federal court.
The district court and the Fifth Circuit found that the Contractual Liability Exclusion applied, that the exception to the Exclusion did not, and, therefore, that Amerisure had no duty to defend Ewing. According to the Fifth Circuit, “[t]he School District’s complaint in the underlying lawsuit reflects that the insured, Ewing, assumed liability for defective construction by agreeing in a contract to complete a construction project, specifically to build tennis courts. Whether the breached promise was implied or express, the promise was of a contractual nature, all the same. We therefore hold that the CGL policy’s contractual liability exclusion excludes coverage in the instant case.”4
Upon Ewing’s petition for a rehearing, however, the Fifth Circuit withdrew its decision and instead sought certification of the following question to the Texas Supreme Court: “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 its obligation, ‘assume liability’ for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion?”5 The Texas Supreme Court answered the certified question with a resounding “no.” In doing so, the Court first discussed its prior decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, a case involving insurance coverage for a defective construction matter and the case that provided insurers the impetus to argue for a broader interpretation of the Contractual Liability Exclusion.
In explaining the factual background in Gilbert, the Ewing Court began by explaining that a general contractor’s contractual obligation to exercise reasonable care mirrored its “duty under general law principles that would have made it liable for damages it negligently caused” and, therefore, the Contractual Liability Exclusion does not apply to such an obligation. Importantly, however, in Gilbert the general contractor also undertook to repair or pay for damages to property of third parties (not parties to the contract) “resulting from a failure to comply with the requirements” of the contract. The Court noted that this obligation extended beyond the contractor’s obligations under general law, rendering applicable the Contractual Liability Exclusion. The Court also explained that the exception to the Exclusion (for liability the insured would have in the absence of the contract) did not apply given the “unusual circumstances” of the case (i.e., because the underlying plaintiff’s tort claim was dismissed based on sovereign immunity, which left breach of contract as the only basis for liability).
In Ewing, then, the Texas Supreme Court reaffirmed the guiding principles of Gilbert, but applying them to the case at hand concluded that the Contractual Liability Exclusion was not applicable. The Court agreed that Ewing’s contractual promise “to construct the [tennis] 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.” Accordingly, because Ewing’s obligations under the contract and its obligations under general principles of tort law were “substantively the same,” the Court found that the Contractual Liability Exclusion did not defeat coverage.
Ewing is notable for its interplay with another significant Texas Supreme Court decision, Lamar Homes, Inc. v. Mid-continent Casualty Company.6 In that decision, the Court held that a claim arising out of an insured’s own faulty workmanship can constitute an “occurrence,” thereby triggering coverage under standard CGL policies. The pro-insured case opened the doors to coverage in many faulty workmanship cases, and was on the leading front of a nationwide turn-around in the acceptance that a CGL policy can be triggered by allegations of an insured’s own faulty workmanship (which the majority of courts previously had held was not insurable, often times citing the “business-risk doctrine”). While Amerisure argued that the combined effect of Ewing and Lamar Homes would be to transform CGL policies into performance bonds covering an insured’s own work, the Texas Supreme Court disagreed. The Court stressed that it is the policy terms that control the analysis, and that other exclusions found in the standard CGL policy (such as the so-called “business risk” exclusions like the “Your Work” Exclusion) may still negate coverage for one’s own faulty workmanship.
Given the criticism of Lamar Homes, and other cases of its kind, some saw the Fifth Circuit’s broad reading of the Contractual Liability Exclusion in Ewing as a path to limiting coverage for faulty workmanship cases. That path has been dealt a significant, if not fatal, blow by Ewing.
1 2014 WL 185035 (Tex. Jan. 17, 2014).
2 The Exclusion contains two important exceptions—thereby restoring coverage—for “liability for damages” “(1) [a]ssumed in a contract or agreement that is an ‘insured contract;’ or (2) [t]hat the insured would have in the absence of the contract or agreement.”
3 327 S.W.3d 118 (Tex. 2010).
4 Ewing Constr. Co. v. Amerisure Ins. Co., 684 F.3d 512, 519 (5th Cir. 2012).
5 Ewing Constr. Co. v. Amerisure Ins. Co., 690 F.3d 628, 633 (5th Cir. 2012).
6 242 S.W.3d 1 (Tex. 2007).