Insurance Law

Ten Most Significant Insurance Coverage Decisions Of 2014 – What Could Have Been For The Contractual Liability Exclusion

Ewing Construction Company v. Amerisure Insurance Company, 420 S.W.3d 30 (Tex. 2014), [enhanced version available to lexis.com subscribers], is a funny case. Not funny ha ha. Funny strange.

The Texas Supreme Court’s decision was a very easy choice as one of the year’s ten most significant. And an argument could be made that it was the most significant. Yet, despite that, one way to characterize the decision is that it essentially didn’t do anything.

At issue were certified questions from the Fifth Circuit concerning, under what circumstances, the contractual liability exclusion, contained in a commercial general liability policy, serves to preclude coverage for a contractor for claims for property damage allegedly caused by its construction defects. More specifically, does the contractual liability exclusion apply broadly – to liability assumed by an insured arising from its express and implied promises to complete a contract in a good and workmanlike manner? In other words, the typical promises that contractors make in construction contracts. Or, does the contractual liability exclusion apply narrowly -- as most courts nationally that have addressed the issue have concluded – being solely to an insured’s assumption of liability of another, such as, one example, a hold harmless or indemnity agreement? The issue could be described in more technical terms, but that’ll suffice for the purposes here.

If the Ewing court adopted the broader interpretation – applying the contractual liability exclusion to preclude coverage for a pedestrian construction defect claim – there was a real possibility that other courts may have followed suit. Consider that many courts have not addressed the issue and the Texas Supreme Court is an important, and influential, one when it comes to insurance coverage (most important, I have argued). At a minimum, if the Ewing court adopted the contractual liability exclusion broadly, more insurers no doubt would have looked at the exclusion and considered raising it – something that few do.

And it was not without risk for policyholders that the Texas Supreme Court could have interpreted the contractual liability exclusion to preclude coverage for the most typical of construction defect claims. After all, the District Court, and then the Fifth Circuit in the case, had done just that. Ewing successfully petitioned the Fifth Circuit for re-hearing. The court withdrew its opinion and certified the issue to the Texas Supreme Court.

That Ewing presented a serious concern for policyholders is evidenced by the number of amicus briefs filed in the Texas Supreme Court on behalf of Ewing – three, representing a staggering twenty contractor and other policyholder parties. As evidence that insurers were not convinced by Amerisure’s position, it had no amicus support. That’s unusual for a Texas Supreme Court case involving liability coverage.

Following this long and winding road the Texas Supreme Court interpreted the contractual liability exclusion narrowly – limiting it to an insured’s assumption of liability – being one that exceeds the liability the insured would have under general law. In other words, after all this, Ewing interpreted the contractual liability exclusion as most insurers already saw it – not applicable to an insured’s breach of its promise to complete a contract in a good and workmanlike manner. But it cannot be overstated that, if the Ewing court had adopted the contractual liability exclusion, to preclude coverage for an insured’s breach of such promise, more insurers would have looked at the exclusion and considered raising it, even if they hadn’t in the past. Ewing could have put in play the contractual liability exclusion much more so than it had ever been in the context of construction defect claims. So while it could be said that Ewing essentially didn’t do anything, not doing anything was in fact doing something, and very significant at that – preventing a change on the construction defect landscape.

While I’ve described Ewing here in general terms, here is a brief summary of the case itself – borrowing heavily directly from the court’s opinion for convenience sake. [People familiar with the case know that the decision and its rationale is more complex than this. But the nuts and bolts, to make the case for Ewing’s significance, are as follows.]

“Ewing Construction Company, Inc. entered into a standard American Institute of Architects contract with Tuluso–Midway Independent School District (TMISD) to serve as general contractor to renovate and build additions to a school in Corpus Christi, including constructing tennis courts. Shortly after construction of the tennis courts was completed, TMISD complained that the courts started flaking, crumbling, and cracking, rendering them unusable for their intended purpose of hosting competitive tennis events. TMISD filed suit in Texas state court against Ewing and others. Its damage claims against Ewing were based on faulty construction of the courts and its theories of liability were breach of contract and negligence.”

Ewing sought coverage from Amerisure under a commercial general liability policy. Amerisure denied coverage and Ewing instituted litigation. Amerisure did not dispute that the alleged defects in the tennis courts occurred during the policy period and constituted “property damage” caused by an “occurrence.”

At issue before the Texas Supreme Court was the potential applicability of the contractual liability exclusion, which precludes coverage for damages based on an insured’s contractual assumption of liability except (1) where the insured’s liability for damages would exist absent the contract, and (2) where the contract is an insured contract.

Amerisure argued “that the exclusion applies because Ewing contractually undertook the obligation to construct tennis courts in a good and workmanlike manner and thereby assumed liability for damages if the construction did not meet that standard.” Ewing countered that its “agreement to construct the courts in a good and workmanlike manner does not enlarge its obligations beyond any general common—law duty it might have. That is, Ewing posits, its agreement to construct the courts in a good and workmanlike manner did not add anything to the obligation it has under general law to comply with the contract’s terms and to exercise ordinary care in doing so. That being so, Ewing argues, its express agreement to perform the construction in a good and workmanlike manner did not enlarge its obligations and was not an ‘assumption of liability’ within the meaning of the policy’s contractual liability exclusion.”

The court ruled in favor of Ewing: “[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.” To put it another way, the court held that “‘assumption of liability’ means that the insured has assumed a liability for damages that exceeds the liability it would have under general law.”

Epilogue: Just when you thought that the Ewing issue was laid to rest, it had a brief resuscitation – six months later the Fifth Circuit applied the contractual liability exclusion to a construction defect claim in Crownover v. Mid-Continent Casualty Company, 757 F.3d 200 (5th Cir. 2014) (Crownover I), [enhanced version available to lexis.com subscribers]. It resembled a scene right out of a horror movie, where the killer dies, and as the camera is panning over his lifeless body, he quickly jerks up, causing screams in the theater. But, just as in the movie, where the Freddy Kruger-like character then falls back down, this time really dead, the Fifth Circuit kept Crownover from bringing Ewing back to life. The court granted rehearing, withdrew Crownover I, and in late October issued Crownover II, [enhanced version available to lexis.com subscribers], holding “that for a contractual-liability exclusion to apply, the insurer must prove that a contractually-assumed duty effected an expansion of liability beyond that supplied by general law.”

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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