TEXAS SUPREME COURT NARROWLY CONSTRUES CONTRACTUAL LIABILITY EXCLUSION

In a significant decision addressing certified questions from the Fifth Circuit, last Friday the Texas Supreme Court narrowly construed the contractual liability exclusion in a commercial general liability policy and 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.”

In Ewing Construction Company, Inc. v. Amerisure Ins. Co., No. 12-0661, 2014 WL 185035 (Tex. January 17, 2014), Ewing Construction contracted with a school district to serve as a general contractor on some renovations and additions to a school.  Shortly after the work was completed, the district complained that the tennis courts started cracking and flaking rendering them unusable.  Suit was filed and Ewing tendered the defense to Amerisure.  Amerisure denied coverage based in part on the contractual liability exclusion which, in turn prompted Ewing to file a declaratory judgment action in federal court seeking coverage.  The district court held that the contractual liability exclusion precluded coverage, the insured appealed and the Fifth Circuit certified questions involving the contractual liability exclusion to the Texas Supreme Court.

The Texas Supreme Court observed that the contractual liability exclusion precludes coverage when the insured contractually assumes liability, except when: (1) the insured’s liability for damages would exist absent the contract, and (2) where the contract is an insured contract. In this case, the insurer argued that the contractual liability exclusion “means what it says” and the exclusion applies here because the insured contractually agreed to construct the tennis courts in a good and workmanlike manner, and therefore assumed liability for damages.  The insured, on the other hand, argued that this case is distinguishable from the Court’s decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), and that the insured’s agreement to perform in a good and workmanlike matter did not enlarge any duties it has at common law, and therefore, was not an “assumption of liability” within the meaning of the contractual liability exclusion. 

In responding to the first certified question:

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.

The Texas Supreme Court answered “no.  And, as a result, the court did not answer the second question of whether an exception to the exclusion applied.

Editor’s Note: The opinion makes it clear that the court does not disavow earlier decisions addressing related issues, and that the Gilbert decision was not overturned, but simply distinguished on its facts.  And, lastly the court observes that other exclusions being asserted were not addressed by the court’s opinion.