Broad-Form Indemnity Eliminated in Construction-Related Contracts in Texas

INSURANCE LAW UPDATEFifth Circuit certifies to the Supreme Court of Texas:Is the contractual liability exclusion triggered bya general contractor's agreement to "performits work in a good and workmanlike manner"?

November, 2012

Authors:

Mike Logan

Joe Mira

Richard Hathaway

Two years ago, in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, the Texas Supreme Court held that the contractual liability exclusion in a general contractor’s CGL applied to exclude coverage when the insured assumed liability for property damages by means of contract.  Now the Fifth Circuit is asking the Supreme Court of Texas to determine whether Gilbert extends to a contractor’s agreement, without more specific provisions enlarging this obligation, to perform its work in a good and workmanlike manner.  If you or your clients are a general contractor with a Commercial General Liability policy (“CGL”), you will want to pay attention to this development.  If the contractual liability exclusion is expanded to include an agreement to perform its work in a good and workmanlike manner, an obligation commonly included in construction contracts, then general contractors will receive less coverage from CGL policies when sued for damages arising from their defective work.

How did we get here?

In the matter of Ewing Construction Co. v. Amerisure Insurance Co., Ewing Construction Co. (“Ewing”) entered into a contract with Tuloso-Midway Independent School District (the “School District”) to construct tennis courts at a school in Corpus Christi, Texas.  Ewing subcontracted most of the work on the tennis courts.  Shortly after the courts were complete, the School District complained that the courts were cracking and flaking such that they were unfit for playing tennis.    Almost two years later, the School District sued Ewing, the architect and the structural engineer as defendants.

The School District sued Ewing for defective construction and, among other things, breach of contract for failing to perform in a good and workmanlike manner and for its negligence or the negligence of its subcontractors including a failure to perform in a good and workmanlike manner.  Ewing tendered defense of the underlying lawsuit to its insurer, Amerisure Insurance Co. (“Amerisure”).  Citing the Contractual Liability Exclusion that denies coverage for property damage “for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement," Amerisure denied coverage of Ewing’s claim.

As a result of Amerisure’s denial, Ewing filed suit in the District Court for the Southern District of Texas contending Amerisure was obligated to defend it in the underlying lawsuit.  Ewing’s complaint sought declaratory relief, contract damages, relief under the Texas Prompt Payment of Claims Statute, and attorney’s fees.  Amerisure answered and counterclaimed.  The parties filed cross-motions for summary judgment.  The district court granted Amerisure’s Motion, denied Ewing's, and entered a final judgment dismissing the case.  The district court held that Amerisure owed no duty to defend or indemnify Ewing in the underlying lawsuit because the CGL’s contractual liability exclusion excluded coverage.  Ewing appealed the district court’s ruling.

The Fifth Circuit attempts to interpret the scope of the Contractual Liability Exclusion under Gilbert, but ultimately asks the Supreme Court of Texas to step in. 

On appeal, a divided panel of the Fifth Circuit initially vacated the District Court’s judgment with respect to the duty to indemnify and the Prompt Payment Claims Act, but affirmed the District Court’s ruling that Amerisure had no duty to defend.  Ewing petitioned for rehearing. On rehearing, the Fifth Circuit withdrew its ruling and certified the issue to the Texas Supreme Court.

Gilbert stands for the proposition that a CGL’s contractual liability exclusion, without a reviving exception, applies when an insured contractually agrees to assume liability for property damages by means of contract.  The reasoning in Gilbert has given the Fifth Circuit pause for concern.  In Gilbert, the Supreme Court of Texas reasoned that the contractor’s legal obligation to the third-party building owner that suffered flood damage caused by construction was based on the contractor’s express contractual agreement to pay for property loss to third parties, and that the contractual liability exclusion’s plain meaning  applied to exclude coverage.   The Fifth Circuit reasoned that the facts in Gilbert addressed an express contractual assumption of liability.  Gilbert did not, however, address whether a contractor’s agreement to expressly or impliedly perform its construction contract in a workmanlike manner constituted a contractual assumption of liability.  Recognizing that “this case could have a significant impact on an important area of Texas insurance law," the Fifth Circuit granted the parties request to certify the question to the Supreme Court of Texas.

The questions certified are as follows:

1. Does a general contractor that enters into a contract in which it agrees to perform its construction work in 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.”

The result of this case could have significant and far-reaching consequences in the construction industry.  Everyone involved in the construction industry should keep a watchful eye on this case as it proceeds.

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This Litigation Alert is a summary of recent developments in the law and is provided for informational purposes only.  It is not intended to constitute legal advice or to create an attorney-client relationship.  Readers should obtain legal advice specific to their situation in connection with topics discussed.

Copyright © 2012 Kane Russell Coleman & Logan PC.  All rights reserved.  Unless otherwise indicated, the authors are not certified by the Texas Board of Legal Specialization.

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