In Century Surety Co. v. Hardscape Construction Specialties Inc., No. 06-10930 (5th Cir. Aug. 7, 2009) [here], the court considered whether the exclusion for assumed liability under a contract was applicable.
Hardscape contracted to construct a swimming pool facility for Hillwood Residential Services, L.P. Hardscape agreed to indemnify and hold Hillwood harmless from any liability arising out of the construction. Hardscape contracted with its sub-contract, Elite Concepts, to construct the swimming facility pools. The Hardscape-Elite contract provided Elite would be bound to the Contractor (Hardscape) according to the same terms and conditions as the Contractor was bound to the Owner under the construction contract.
Elite had a CGL policy with Century Surety Company. The policy excluded "'property damages' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." Excepted from the exclusion were contractual obligations to pay for another party's tort liability or an insured contract.
After completion of the swimming pool, Hillwood sued Hardscape and Elite, alleging that faulty design and construction caused physical and aesthetic damage to the pool. Hardscape demanded that Elite defend and indemnify. Elite forwarded the demand to Century, who failed to respond. When Century sued Hardscape and Elite, the district concluded there was no coverage.
The Fifth Circuit affirmed. Initially, the Court agreed that under Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W. 3d 1 (Tex. 2007), allegations of unintended construction defects may constitute an "accident" or "occurrence" under a CGL policy. Therefore, the Century policy's "occurrence" terms covered the underlying suit.
In determining whether Elite's assumed liability was an insured contract, the Court noted the exclusion's exemption only applied if the underlying complaint alleged a tort cause of action against Hardscape. To fall within the exclusion's exception, the underlying suit had to make specific factual contentions that could constitute "a liability that would be imposed by law in the absence of any contract or agreement." Therefore, the Court had to focus on the difference between common law tort and contract causes of action.
The Court determined that the allegations were easily classified as giving rise to contract claims. The damages occurred only to the subject matter of the Hillwood-Hardscape contract and no liability arose independently of the contract. Hillwood made contract claims when it alleged that Elite's failure to properly design and construct the pools caused cracks in the walls and floor of the pool, aesthetic damage, pool structural damage, etc. Similarly, the need to identify, diagnose, and correct the design and construction defects gave rise only to contract claims.
