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Fifth Circuit Examines Contractual Liability Exclusion in Light of Ewing v. Amerisure

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In a recently reported decision, the United States Court of Appeals for the Fifth Circuit held that an insurer had no duty to indemnify, based on the contractual liability exclusion. Crownover v. Mid-Continent Cas. Co., ___ F.3d ___ (5th Cir. June 27, 2014). As this blog has previously discussed, the state of the contractual liability exclusion has been in a great deal of flux lately, especially given the Fifth Circuit’s recent decision (and then subsequent vacatur of its own decision) in Ewing Construction Company v. Amerisure Insurance Company, 684 F.3d 512 (5th Cir. 2012).

In 2001, the plaintiffs contracted with Arrow to construct a new home. Their contract contained a “warranty to repair” clause, which obligated Arrow to correct any work that failed to conform to the contract documents. After the house began to experience foundation and ventilation problems, the plaintiffs filed for arbitration against Arrow. The arbitrator determined that Arrow had breached the warranty to repair clause, and awarded damages. Notably, the arbitrator’s decision did not rest on any other grounds. After Arrow’s insurer, Mid-Continent Casualty Company (“Mid-Continent”) declined to pay the arbitration award, plaintiffs filed a declaratory judgment action. Mid-Continent moved for summary judgment, arguing that the contractual liability exclusion applied to bar coverage.

Granting Mid-Continent’s motion for summary judgment, the District Court held that the contractual liability exclusion in Mid-Continent’s policy operated to exclude coverage. Under the District Court’s analysis, the fact that the arbitrator’s decision rested on a finding that Mid-Continent’s insured had become legally obligated to pay the arbitration award on the basis of the breach of the warranty to repair clause, as opposed to another ground, operated as a contractually-assumed liability sufficient to make the contractual liability exclusion applicable. The plaintiffs appealed, and the Fifth Circuit, citing the recent Texas Supreme Court decisions of Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.2d 30 (Tex. 2010) and Ewing Construction Co. v. Amerisure Insurance Co., 420 S.W.3d 30 (Tex. 2014), affirmed.

A bit of background on the recent cases of Gilbert and Ewing (both of which were instrumental to the Fifth Circuit’s reasoning) is necessary. In Gilbert, the Dallas Area Rapid Transit Authority (“DART”) contracted with Gilbert Construction Company to construct a light rail system. The construction contract required Gilbert to protect a third-party adjacent property owner from damages caused by Gilbert’s work, and to repair any damages to the adjacent property. After the adjacent property was damaged, the owner sued both DART and Gilbert. The Texas Supreme Court held that Gilbert’s obligation to repair the adjacent property was an assumption of liability, which triggered the contractual liability exclusion. As Gilbert enjoyed governmental immunity, there was no independent basis for liability against Gilbert in the absence of the DART/Gilbert contract, and thus Gilbert’s liability existed solely based on its contractual obligation to the third party. Accordingly, in Gilbert, the contractual liability exclusion operated to exclude coverage for the claims made by the adjacent property owner.

In Ewing (which was the subject of a post on this blog nearly two years ago), a contractor 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. Relying on the Texas Supreme Court’s decision in Gilbert, the Fifth Circuit affirmed the District Court’s grant of summary judgment on the grounds that the contractual liability exclusion operated to exclude coverage. Two months later, however, the Fifth Circuit vacated its own decision, and certified the following 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 the Fifth Circuit’s certified question in the negative, holding that the contractual liability exclusion would not bar coverage. In reaching its decision, the Texas Supreme Court distinguished Gilbert from the situation in Ewing. While in Gilbert the insured’s obligation to repair or pay for damage to a third-party adjacent property owner extended beyond its obligations under “general law principles,” in Ewing the insured’s agreement to perform its work in a good and workmanlike manner did not enlarge its obligations beyond any common-law duty it would otherwise have. As the Texas Supreme Court noted:

As we said in Gilbert, the exclusion means what it says: it excludes liability for damages the insured assumes by contract unless the exceptions bring the claim back into coverage. But we also determined in Gilbert that “assumption of liability” means that the insured has assumed a liability for damages that exceeds the liability it would have under general law. Otherwise, the words “assumption of liability” are meaningless and are surplusage . . .

Accordingly, we 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.

Back to Crownover: After analyzing Gilbert and Ewing, the Fifth Circuit analogized Mid-Continent’s insured’s contractual obligation as much closer to the obligation in Gilbert rather than in Ewing, and noted that the insured’s contractual obligation to repair extended beyond its “obligations under general law.” Thus, in affirming the District Court’s opinion, the Fifth Circuit noted that the underlying arbitration award was based not on the insured’s faulty workmanship, but its breach of a contractual obligation that extended its liability beyond its duties under “general law.” The Court rejected the plaintiffs’ arguments that Mid-Continent’s insured had also breached express warranties, noting that the underlying arbitration award was grounded solely in the insured’s breach of the warranty to repair clause.

Plaintiffs recently requested a rehearing of the Fifth Circuit’s decision.

For a copy of the decision in Crownover, click here. For more articles providing more detailed analyses of Gilbert and Ewing. click here and here