On January 17, 2014, the Texas Supreme Court ruled that a Contractual Liability Exclusion contained in a general liability insurance policy did not preclude coverage of a general contractor for a claim arising out of its defective work merely because the contractor agreed to perform its work in a “good and workmanlike manner.”
In Ewing Construction Co., Inc. v. Amerisure Insurance Co., Ewing entered into a standard-form AIA contract with Tuluso-Midway Independent School District to serve as general contractor to renovate a school. 2014 WL 185035 (Tex. Jan. 17, 2014). Pursuant to the contract, Ewing agreed to perform its work in a “good and workmanlike manner.”
The contract included the construction of tennis courts. Shortly after completion, the School District complained that the tennis courts were defectively constructed, and filed suit against Ewing and others for breach of contract and negligence. Ewing tendered defense of the underlying suit to its insurer (Amerisure), which denied coverage. Amerisure took the position that the Contractual Liability Exclusion, which applies where the insured assumes liability for the damages by the contract, precluded coverage.
Ewing filed suit in the U.S. District Court for the Southern District of Texas for a declaratory judgment finding Amerisure had a duty to defend Ewing and indemnify it for any damages awarded to the School District in the underlying suit. The District Court agreed with Amerisure, finding that the Contractual Liability Exclusion applied because Ewing had entered into a contract that assumed liability for its own performance under the contract by agreed to perform its work in a “good and workmanlike manner.” Relying primarily on Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), the district court held that Ewing had assumed liability for its own construction work.
On appeal, the Fifth Circuit initially affirmed, in part, but later withdrew its opinion and certified the following questions to the Texas Supreme Court:
1. 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?
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 Texas Supreme Court answered the first question in the negative. It began by distinguishing Gilbert, stating that Gilbert had promised to repair or pay for damage to an adjacent property resulting from its failure to comply with the requirements of the contract. In so doing, the Court held that Gilbert assumed an obligation that extended beyond Gilbert’s common-law duty to avoid negligence. The Court reaffirmed the general rule that the Contractual Liability Exclusion applies where an insured has “assumed a liability” for damages that exceeded the liability it would have under common law.
In the instant case, the Court held that Ewing had not assumed liability in excess of its common-law duty to exercise ordinary care by agreeing to perform its work in a good and workmanlike manner. The Court considered the School District’s claim for failure to perform in a “good and workmanlike manner” to be substantially the same as a claim for negligence under common law. Thus, 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.”
Because the answer to the first question was “no,” the Court did not answer the second question.
Comment: The Court’s decision is a victory for general contractors and builders. Contractual Liability Exclusions are commonplace in general liability insurance policies, and many construction agreements require contractors to perform in a good and workmanlike manner. Although the Texas Supreme Court’s interpretation of the exclusion is not controlling precedent in Washington courts, the Court’s analysis is persuasive and can be used to combat an insurer’s attempt to exclude coverage based upon similar exclusions. Furthermore, this decision puts added pressure on insurance companies to provide coverage. If an insurer incorrectly denies the tender of defense in bad faith, the insurer may be estopped from denying coverage, even when coverage is later determined to be unavailable.