United States: Texas Supreme Court Limits Liability Exclusion In Ewing

On January 17, 2014, the Texas Supreme Court issued a key ruling clarifying the scope of contractual liability exclusions in insurance policies. In Ewing Const. Co., Inc. v. Amerisure Ins. Co., 2014 WL 185035 (Tex. Jan. 17, 2014), the court held contractual liability exclusions in a commercial general liability (CGL) insurance contract do not preclude coverage when a contractor agrees to perform its work in a good and workmanlike manner, without assumption of additional liability.

The coverage issue arose out of the United States District Court for the Southern District of Texas' holding that Amerisure Insurance Company ("Amerisure") had no duty to defend or indemnify Ewing Construction Company ("Ewing") in a lawsuit brought by Tuloso-Midway School District alleging defective work in the construction of tennis courts. The court held Ewing's agreement in the contract to perform all work in a "good and workmanlike manner" constituted the "assumption of liability in a contract" and therefore triggered the contractual liability exclusion in the Amerisure policy. The court relied heavily upon Gilbert Texas Construction LP v. Underwriters at Lloyd's London, 327 S.W.3d 118 (Tex. 2010) in reaching its decision that no coverage existed for the claims against Ewing. The decision was appealed to the Fifth Circuit, which initially issued an opinion affirming the district court's decision on the duty to defend, but vacating and remanding with respect to the duty to indemnify to await results of the underlying suit in order to determine whether one of the exceptions to the exclusion brought the claim within coverage. Both Ewing and Amerisure took issue with the panel's interpretation of Texas precedent and asked that the case be sent to the Texas Supreme Court for clarification. The Fifth Circuit agreed, withdrew its opinion, and presented the Texas Supreme Court with two certified questions:

  1. Does a 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 the 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 the common law duty to perform the contract in a careful, workmanlike, and a non- negligent manner fall within the exception to the contractual liability exclusion for "liability that would exist in the absence of the contract."

Ewing, 2014 WL 185035 at 1.

The Texas Supreme Court found a contractor's promise to perform work in a "good and workmanlike manner" did not assume liability for its defective work and trigger the contractual liability exclusion. Rather, the court held a contractor must undertake additional obligations in order to trigger the exclusions. In its decision, the Texas Supreme Court distinguished Ewing from Gilbert, which involved a contractor building a light rail system through Dallas undertaking both an express contractual obligation to protect surrounding property belonging to third parties and a contractual agreement to perform its work in a good and workmanlike fashion. In Gilbert, the court held that the contractor was not entitled to coverage under its CGL policy because the contractor assumed liability beyond general common law duties by including in its contract an agreement to repair or replace third-party property affected by its work. Conversely, in Ewing, the court found the contractor's agreement to perform in a "good and workmanlike manner" was not an "assumption of liability beyond common law duties" and did not trigger the contractual liability exclusion.

Although the court noted it was not necessary to its answer, it addressed Amerisure's allegation that allowing coverage for defects to the policyholders' work transforms CGL policies into performance bonds, and specifically rejected the argument. The court referenced its Lamar Homes, Inc. v. Mid-Continent Casualty Co. 242 S.W.3d 1, 16 (Tex. 2007) opinion in which it held a claim for an insured's faulty workmanship can be an "occurrence" or can constitute "property damage" triggering coverage under a CGL policy. Once an occurrence or property damage triggers coverage, the issue becomes whether an exclusion contained in the policy precludes coverage. The court pointed out the CGL policy at issue in Ewing contains exclusions other than the contractual liability exclusion that may result in damage to a policyholder's work falling outside of coverage. In rejecting Amerisure's argument, the court pointed out that the ability to exclude coverage for some claims for faulty workmanship or damage to a policyholder's work through policy exclusions distinguishes a CGL policy from a surety bond.

Because the court answered the Fifth Circuit's first question in the negative, it did not reach the second certified question.

The court's decision in Ewing is a victory for general contractors and builders who can now have increased confidence in the general liability coverage they carry. While the Ewing decision interprets liability exclusions with respect to construction contracts, such clauses are found in many general liability policies, and many master service agreements require contractors to perform in a good and workmanlike manner. Consequently, the Texas Supreme Court's interpretation of contractual liability exclusions provides important clarification to all policyholders.

Reed Smith's construction and engineering lawyers have in-depth knowledge of the industry, garnered through decades of experience working in and on behalf of the construction and engineering industry. Our lawyers are involved at each stage of a project's life-cycle, often as part of a client's delivery team, whether at the inception (procurement and risk management stage), implementation (project counsel) or completion/post-completion of a project (including any litigation and dispute resolution). Our construction and engineering team works closely with our insurance recovery lawyers, who represent policyholders in all manner of insurance issues, to provide a full range of integrated services to our clients. Reed Smith is among the few law firms to offer a fully integrated global practice, with an international network of highly experienced lawyers who can advise on all aspects of construction and engineering projects around the world, including providing advice to Texas policyholders on the possible impacts of this proceeding, and taking steps to protect their interests.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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