OBLIGATIONS UNDER CONSTRUCTION CONTRACT MUST EXPAND INSURED’S DUTIES BEYOND THOSE ALREADY OWED, FOR CONTRACTUAL-LIABILITY EXCLUSION TO APPLY

Recently, in Crownover v. Mid-Continent Cas. Co., No. 11-10166, 2014 WL 5473084, at *1 (5th Cir. Oct. 29, 2014) the Fifth Circuit reversed its previous June 2014 decision and then reversed the trial court’s order granting summary judgment in favor of Mid-Continent Casualty Co. on the basis that the order conflicted with two Texas Supreme Court decisions regarding the contractual-liability exclusion.

Plaintiffs contracted with Arrow Development to construct a house for them.  Arrow performed defective work, and then failed to promptly correct the work.  The parties went to arbitration and the arbitrator found that Arrow was liable to Plaintiffs for breach its expressed warranty to repair non-conforming work and awarded them damages.  However, because Arrow filed for bankruptcy, Plaintiffs were limited to what they could recover from Arrow’s insurance policies. 

Therefore, Plaintiffs sued Mid-Continent, Arrow’s insurer, for the damages owed to them from Arrow’s defective work.  Both sides moved for summary judgment, and the district court determined that the contractual-liability exclusion in Arrow’s policy with Mid-Continent prevented indemnity and granted summary judgment in Mid-Continent’s favor.  In June, the Fifth Circuit affirmed the trial court’s decision.  Plaintiffs; however, asked the Fifth Circuit to reconsider its ruling based on the order conflicting with the Texas Supreme Court decisions in Ewing v. American Insurance Co., 420 S.W.3d 30 (Tex. 2014) and Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010).

Specifically, the Plaintiffs argued that the Fifth Circuit should reconsider its previous order where it found that Arrow’s liability to perform its work in a workmanlike manner was solely derived from the requirements under the construction contract with Plaintiffs.

In Gilbert and Ewing, the Supreme Court of Texas determined that the contractual-liability exclusion does not bar coverage for claims that a builder violated a contractual obligation to perform construction in a “good and workmanlike manner” because the obligation existed independently of the contract.  More specifically, the court noted that it is not the presence of the language in the contract, but whether the contractual language expands an insurer’s obligations to provide coverage beyond the insured’s common law obligation to perform its work in a good and workman like manner that triggers the policy exception.  In sum, the Texas Supreme court maintains that for a contractual liability exclusion to apply, the insurer must prove the contractually-assumed duty expanded liability beyond what is already owed under common law.

The Court noted that the Arbitrator in this case determined that Arrow violated an express duty to repair work that did not conform to the requirements of its construction contract with Plaintiffs.  Further, because Mid-Continent did not offer evidence that the arbitration award was based on liability greater than that dictated by general law, the contractual-liability exclusion from coverage did not apply. 

The Court acknowledged that there were three elements in the construction contract that could have potentially triggered the contractual-liability exclusion under the Policy (1) it constituted an express rather than implied warranty; (2) it was a duty to repair rather than construct; (3) it referred to performance in conformity with the contract documents rather than simple competent performance.  However, the Court noted that none of these factors were dispositive, and not one of them extended Arrow’s liability beyond its liability under general law. 

Since there is a general law duty to perform the terms of a (construction) contract with reasonable care, the Court concluded that it is unclear how Arrow’s express duty to repair, without a showing that the “requirements of the Contract” exceeded its common law duties, could constitute an expansion of Arrow’s obligations beyond what it already owed under general law.  The Fifth Circuit further determined that none of the other policy exclusions alleged by Mid-Continent applied, and rendered summary judgment in favor of the Plaintiffs.