Articles

Texas Supreme Court Rules Faulty Workmanship Alone Does Not Fall Within Contractual Liability Exclus

Case:
Ewing Constr. Co. v. Amerisure Ins. Co.
Texas Supreme Court
No. 12-0661, 2014 Tex. LEXIS 39 (Tex. Jan. 17, 2014)

In response to certified questions from the Fifth Circuit Court of Appeals, the Texas Supreme Court held the contractual agreement of a general contractor to merely perform its construction work in a good and workmanlike manner – without more specific provisions enlarging that obligation – does not trigger the contractual liability exclusion of a commercial general liability insurance policy. Thus, a contractor will be covered for damages on account of his faulty workmanship as long as none of the policy’s other exclusions operate to preclude coverage for such claims.

At issue in this case was Ewing’s contract with the Tuluso-Midway Independent School District (TMISD) to build tennis courts, which began flaking, crumbling, and cracking shortly after construction was completed. TMISD filed suit against Ewing and others (the underlying suit) alleging breach of contract and negligence for the faulty construction. Ewing tendered its defense to its CGL insurer, Amerisure, who denied coverage based on various exclusions, including the contractual liability exclusion, prompting Ewing to file a declaratory judgment action. Amerisure argued the exclusion applied because Ewing contractually undertook the obligation to construct tennis courts in a good and workmanlike matter and thereby assumed liability for damages if the construction did not meet that standard. Ewing countered, arguing that the agreement to construct the courts in a good and workmanlike manner did not enlarge its obligations beyond any general common-law duty it may have already had and, thus, was not an “assumption of liability” within the meaning of the exclusion.

The district court agreed with Amerisure, relying heavily on the Texas Supreme Court’s decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd's, 327 S.W.3d 118 (Tex. 2010) (holding that the contractual liability exclusion applied when an insured entered into a contract and, by doing so, had assumed liability for its own performance under that contract). Although the Fifth Circuit initially affirmed the trial court’s opinion, it later withdrew its opinion (after receiving much backlash from the construction industry) and certified 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 this obligation, “assume liability” for damages arising out of the contractor’s defective work so as to trigger the Contractual Liability Exclusion?

The Texas Supreme Court answered, “No,” reasoning that the duty to perform a contract in a workmanlike manner is imposed by operation of law and is not an obligation “assumed” by the contractor in the sense required by the exclusion. Also using Gilbert (but arriving at a very different conclusion from the trial court), the Court illustrated what it means to “assume” liability, explaining that the contractor in Gilbert, in addition to his agreement to perform his work in a workmanlike manner, contractually agreed to be responsible for claims brought by third-party property owners against the rail authority – going beyond its ordinary common-law duty. Ewing, on the other hand, simply agreed to construct tennis courts and assumed no extraneous obligations beyond those already imposed by common law.

This decision clearly illustrates the power of the construction and related industries’ collective judicial lobbying efforts (in excess of 22 amicus curiae briefs were filed). CGL insurers are now precluded from denying coverage to contractors for claims of faulty workmanship based solely on the contractual liability exclusion when the obligation assumed is nothing more than a restatement of the standard of performance imposed by common law. Insurers must look to other policy exclusions and coverage limitations when claims involve faulty workmanship. Recognizing the continued viability of other exclusions arising from faulty workmanship, the Texas Supreme Court assured that its decision does not convert CGL policies into performance bonds.

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