In a much anticipated decision, the Texas Supreme Court ruled that a general contractor who agrees to perform its work in a good and workmanlike manner does not "assume liability" for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion. Ewing Constr. Co., Inc. v. Amerisure Ins. Co., 2014 Tex. LEXIS 39 (Tex. Jan.17, 2014).
Ewing signed an agreement with the School District to serve as general contractor to renovate and build additions to a school, including tennis courts. After construction was completed, the tennis courts started flaking, crumbling, and cracking. The School District filed suit, alleging breach of contract and negligence.
Amerisure denied coverage under the CGL policy. Amerisure agreed there was property damage caused by an occurrence, but contended policy exclusions, including the contractual liability exclusion, applied.The policy excluded contractual liability as follows:
"Bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a 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 . . .
Ewing filed suit in federal court. The district court found the exclusion applied, relying primarily on the Texas Supreme Court's decision in Gilbert Texas Constr., L.P. v. Underwriters at Lloyd's London, 327 S.W. 3d 118 (Tex. 2010). There, the court determined the contractual liability exclusion applied when an insured entered a contract and, by doing so, assumed liability for its own performance under that contract.
On appeal, the Fifth Circuit certified the following question to the Texas Supreme Court:
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.
Amerisure argued the exclusion applied because Ewing contractually undertook the obligation to construct tennis courts in a good and workmanlike manner and thereby assumed liability for damages if the construction did not meet this standard. Ewing, on the other hand, argued its agreement to construct the courts in a good and workmanlike manner did not enlarge its obligations beyond any general common-law duty it might have.
The Texas Supreme Court agreed with Ewing. The School District's claims that Ewing failed to perform in a good and workmanlike manner and its claims that Ewing negligently performed under the contract were substantively the same. Therefore, agreeing to perform in a good and workmanlike manner, without more, did not enlarge Ewing's duty to exercise ordinary care in fulfilling its contract. Thus, the general contractor did not "assume liability" for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.
Amerisure also argued that if the exclusion did not apply, CGL policies would effectively be transformed into performance bonds. The court did not agree. Because the policy contained exclusions that could apply to exclude coverage in case of breach of contract due to faulty workmanship, finding the Contractual Liability Exclusion did not apply here was not inconsistent with the view that CGL polices were not performance bonds.