The recent decision by the Texas Supreme Court in Ewing Constr. Co., Inc. v. Amerisure Ins. Co., No. 12-0661, 2014 WL 185035 (Tex. Jan. 17, 2014), has insureds in Texas and throughout the country breathing a sigh of relief. The decision confirms the limited scope of the Texas Supreme Court’s earlier decision in Gilbert Texas Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), and makes clear that the contractual liability exclusion in general liability policies does not preclude coverage where an insured contractually undertakes to perform its work in a good and workmanlike manner.
Ewing Construction Company served as the general contractor to renovate and build additions to a school in Corpus Christi, Texas, which work included the construction of tennis courts. Shortly after the tennis courts were completed, they began to flake, crumble and crack, rendering them unusable. Ewing was sued by the school district that hired it for breach of contract and negligence.
Ewing tendered the suit to its liability insurer, who denied coverage. The insurer argued that the claims, which were all tied to Ewing’s breach of contract for failure to perform its work in a good and workmanlike manner, were precluded by the contractual liability exclusion. The district court, relying in large part on Gilbert, 247 S.W.3d 118, agreed with the insurer. The district court explained that Gilbert “stands for the proposition that the contractual liability exclusion applies when an insured has entered into a contract and, by doing so, has assumed liability for its own performance under that contract.” Ewing Constr. Co. v. Amerisure Ins. Co., 814 F. Supp.2d 739, 746-48 (S.D. Tex. 2011).
The case of Gilbert involved the construction of a light rail system for the Dallas Rapid Transit Authority (“DART”), with Gilbert Texas Construction serving as the general contractor. The contract between Gilbert and DART required Gilbert to protect adjacent property, including property of a third party, and to repair any damage to that property resulting from a failure to comply with the requirements of the contract or a failure to exercise reasonable care in performing the work. Heavy rains during construction caused flooding to a building adjacent to the work site. The building’s owner, RTR, sued Gilbert for, among other claims, breach of contract as a third-party beneficiary of Gilbert’s contract with DART. After motions for summary judgment, only RTR’s claim for breach of contract remained.
Gilbert then settled with RTR and sought indemnification from its liability insurer. Gilbert’s general liability insurer denied Gilbert’s request based on the contractual liability exclusion. Agreeing with the insurer’s denial of coverage, the Texas Supreme Court explained:
The obligation to repair or pay for damage to RTR’s property “resulting from a failure to comply with the requirements of this contract” extends beyond Gilbert’s obligations under general law and incorporates contractual standards to which Gilbert obligated itself. The trial court granted summary judgment on all RTR’s theories of liability other than breach of contract, so Gilbert’s only potential liability remaining in the lawsuit was liability in excess of what it had under general law principles. Thus, RTR’s breach of contract claim was founded on an obligation or liability contractually assumed by Gilbert within the meaning of the policy exclusion.
Gilbert Texas Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 127 (Tex. 2010).
The Texas Supreme Court found that the facts in Ewing were different from those in Gilbert. The court explained that Ewing’s agreement to construct the tennis courts in a good and workmanlike manner did not enlarge Ewing’s obligations beyond any general common-law duty Ewing already had. By contrast, the obligation assumed by Gilbert – to protect adjacent property and to repair or pay for damage to property of third parties “resulting from a failure to comply with the requirements of this contract” – did enlarge and extend beyond Gilbert’s obligations under general law. Ewing, 2014 WL 185035 at *6.
In short, the court held that the contractual liability exclusion applies only where the “insured has assumed a liability for damages that exceeds the liability it would have under general law.” Id. The 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.” Id. at *7.