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Fifth Circuit Affirms Denial of Coverage to Contractor Under Contractual Liability Exclusion

Blogs, Insurance Coverage

The Fifth Circuit Court of Appeals recently upheld a District Court’s decision that an insurer had no duty to defend its insured subcontractor, holding that the policy’s contractual liability exclusion operated to exclude coverage in a construction defect case. Ewing Construction Company v. Amerisure Insurance Company 684 F.3d 512 (5th Cor. 2012).

Ewing Construction Company contracted with a school district in Corpus Christi, Texas to construct tennis courts. After the tennis courts began cracking and flaking, the school district filed a construction defect action in Texas state court. Ewing tendered its defense to its CGL insurer, Amerisure Insurance Company, which denied coverage, relying on the policy’s contractual liability exclusion, which stated there would be no coverage for “‘property damage’ for which [Ewing] is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” (emphasis added). The policy further provided, however, that the contractual liability exclusion would not apply to liability for damages that Ewing would have in the absence
of the contract or agreement.”

Ewing subsequently filed a declaratory judgment action in federal court. Relying on the 2010 Texas Supreme Court decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), the District Court granted summary judgment in Amerisure’s favor, holding that Amerisure owed no duty to defend or indemnify Ewing because of the contractual liability exclusion in the policy, and Ewing appealed to the Fifth Circuit Court of Appeals. In a 2-1 decision, the Fifth Circuit partially affirmed, holding that that Amerisure had no duty to defend Ewing in the underlying construction litigation.

In Gilbert, a construction contract obligated a contractor to protect a third-party adjacent property owner from damages caused by the contractor’s work, and to repair any damages to the third-party’s property. The contract further provided that if the contractor failed to repair the damages to the third-party’s property in a prompt fashion, the owner would have the work performed at the contractor’s expense. The Texas Supreme Court held the contractor’s agreement to this provision to be an undertaking of legal accountability which would trigger the contractual liability exclusion.

The crux of the Fifth Circuit’s opinion in Ewing centered on whether Ewing’s obligation to perform its contract in a workmanlike manner constituted a similar “assumption of liability” which would trigger the contractual liability exclusion as it did in Gilbert. Ewing argued that merely entering into a construction contract – which the District Court held to be an assumption of liability sufficient to trigger the contractual liability exclusion – was not the same as actually assuming liability for faulty workmanship under the contract. The Fifth Circuit noted that in Gilbert, however, the Texas Supreme Court rejected what it called a “technical” meaning of the contractual liability exclusion – a meaning which is accepted in many other jurisdictions – that “assumption of liability” means the assumption of liability of another, as in a hold-harmless agreement. The Fifth Circuit noted:

Gilbert, principally, stands for the proposition that a CGL policy’s contractual liability exclusion excludes coverage for property damage when “the insured assumes liability for. . . property damage by means of contract. . . .” The School District’s complaint in the underlying lawsuit reflects that theinsured, Ewing, assumed liability for defective construction by agreeing in a contract to complete a construction project, specifically to build tennis courts. Whether the breached promise was implied or express, the promise was of a contractual nature, all the same. We therefore hold that the CGL policy’s contractual liability exclusion excludes coverage in the instant case.

The Fifth Circuit further noted:

Applying this plain meaning approach preserves the longstanding principle that a CGL policy is not protection for the insured’s poor performance of a contract . . . [a]lthough other jurisdictions adopt this principle by holding that poor contractual performance is not, under a CGL policy, an occurrence causing property damage, Texas chooses to arrive at this holding through its interpretation of coverage exclusions . . . Our holding today respects this choice.

A rather insightful dissent followed, which argued that the majority had misread Gilbert in holding that Ewing’s agreement to perform under the contract was sufficient to trigger the contractual liability exclusion. According to the dissent, Gilbert merely stood for the proposition that when an insured agreed to be liable for damages in excess of what it would have otherwise been, then such liability is excluded from coverage under the contractual liability exclusion. The dissent noted that the majority’s decision to interpret a standard construction contract as an assumption of liability which would, in nearly all cases, be excluded from coverage, constituted a gross misreading of Gilbert. The dissent also noted that in many similar circumstances, coverage would be excluded by other business risk exclusions common in CGL policies, such as those exclusions for the insured’s own work.