Canterbury, Gooch, Surratt, Shapiro, Stein, Gaswirth & Jones

Great News for Insured Contractors: Texas Supreme Court limits CGL insurance exclusions

Recently, the Texas Supreme Court, in an unanimous opinion, held that the exclusion in a commercial general liability policy for property damage resulting from “the assumption of liability in a contract or agreement,” also known as the “contractual liability exclusion” did not bar coverage for the contractor’s alleged failure to construct its work in a good and workmanlike manner.

In this case, a contractor was sued by a school district for breach of contract and negligence after a tennis court that the contractor had constructed showed multiple defects. The school district alleged that the contractor breached its contract and committed negligence by failing to perform its work in a good and workmanlike manner. The contractor sought defense and indemnification from its insurer, the insurer denied coverage, and the contractor filed suit against its insurer, seeking both defense and indemnification.

The commercial general liability insurance policy at issue contained the following contractual liability exclusion and exceptions to the exclusion:
This insurance does not apply to…property damage for which the insured is obligated to pay damages by reason of assumption of liability in contract or agreement. This exclusion does not apply to liability for damages: (1) that the insured would have in the absence of the contract or agreement; or (2) assumed in contract or agreement that is an “insured contract….”

The construction contract for the tennis courts between the contractor and the school district obligated the contractor to perform its work under the contract in a good and workmanlike manner.

The insurer argued that the contractual liability exclusion applied to preclude coverage because the contractor assumed the liability for its failure to perform in a good and workmanlike manner by contractually agreeing to perform the contract in a good and workmanlike manner.

The federal district court granted the insured’s motion for summary judgment, ruling that due to the policy contractual liability exclusion, the insured had no duty to defend or indemnify the contractor. On appeal, the U.S. Fifth Circuit Court of Appeals presented the Texas Supreme Court with the following certified questions:

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.

2. If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.

The Court answered the first question in the negative, explaining that the issue of coverage in light of the contractual liability exclusion is whether the construction contract adds duties that do not ordinarily exist. The Court reasoned that regardless of a contractual provision requiring workmanlike performance, a contractor already has an implied duty to perform its obligations under the contract in a workmanlike manner. Therefore, the contractual obligation at issue “to construct the [tennis] courts in a good and workmanlike manner did not add anything to the obligations [the contractor] has under general law to comply with the contract’s terms and to exercise ordinary care in doing so.” In other words, the construction contract did not expand the contractor’s duty of ordinary care that is already implied in every contract, and therefore, the exception to the exclusion applied.

The Ewing decision should bring comfort to insured contractors involved in disputes regarding allegations of defective construction or faulty workmanship as the original interpretation of the exclusion by the Federal district court would have eliminated most property damage claims. Other exclusions, however, may still apply to preclude coverage for property damage to some portions of the contractor’s work. For example, another exclusion exists for property damage to the work of the general contractor which first occurs following the completion of the project; however an exception exists for work which arises out of the work of a subcontractor employed by the general contractor. An exclusion also exists for property damage which first occurs during construction but the exclusion only applies to the particular part of the defective work of the contractor and not to damage to other work caused by the defective work.