Last Friday, January 17, the Texas Supreme Court issued its long-awaited opinion in Ewing Construction v. Amerisure, regarding the scope of the typical contractual liability exclusion under Coverage A in commercial general liability policies, which excludes coverage for “bodily injury and property damage for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The bottom line is that Ewing Construction does not expand or narrow coverage for contractor insureds in the vast majority of construction defect cases in Texas. It essentially maintains the status quo.
Ewing Construction originated in the federal court system.
The federal court trial judge, Janice Jack in Corpus Christi, had interpreted the contractual liability exclusion and the supreme court’s holding regarding that exclusion in its 2010 opinion in Gilbert Texas Construction Co. v. Underwriters at Lloyds to mean that the exclusion would apply when the insured had liability because of or under a contract. Judge Jack reasoned that an insured assumes liability for his own performance of his contract, so that the exclusion would apply. Judge Jack’s interpretation of the exclusion was expansive. Had the Texas Supreme Court agreed with Judge Jack, coverage for contractors under general liability policies would have been severely restricted in many construction defect cases in Texas.
Ewing appealed and the Fifth Circuit issued, then withdrew an opinion and certified two questions regarding the application of the contractual liability exclusion to the Texas Supreme Court, which that court accepted.
In Gilbert, the supreme court had held that the exclusion’s applicability was not limited to indemnity agreements (as some other states’ courts have held) but would apply whenever the insured assumed liability under a contract or agreement. In Gilbert, the insured contractor had agreed to be liable for damages its construction for Dallas Area Rapid Transit caused to neighboring property, even though, in the absence of that contractual provision, it would not have been liable to the neighboring property owners under the doctrine of sovereign immunity. So, in Gilbert, the insured contractor has assumed liability that it otherwise would not have had under general law.
In Ewing Construction, the supreme court made it clear that the contractual liability exclusion will operate whenever the insured assumes liability (in a contract or agreement) that it otherwise would not have had under general law. However, the exclusion will not apply just because insured had a contract to perform the work out of which the damage arises. For the exclusion to apply, the insured must have assumed some liability under the contract that he would not have had under general law. Specifically in response to the certified question, the supreme court determined that the common-law obligation to perform a contract in a good and workmanlike manner is not the assumption of liability that the insured contractor would not otherwise have had. The court stated, “[W]e conclude 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.” Having answered the first certified question that way, it was not necessary for the supreme court to answer the second question.