The Michigan Court of Appeals rejected the insurer's argument that coverage was barred for the insured's contractual assumption of liability of another. Travelers Prop. Cas. Co. of Am v. Peaker Serv., Inc., 2014 WL 3605680 (Mich. Ct. App. July 22, 2014).
The contractor was hired to install an "electronic over-speed system" at the University of Michigan. The hope was that the new system would prevent the steam turbines at the central power plant from turning too quickly. The parties' contract provided,
Section 15.18. Supplier Damage to University Property. Without regard to any other section of the Agreement, Supplier shall be responsible for the costs to return to "as was" condition from any damage caused to the building, grounds, or other equipment and furnishings caused in whole or part by Supplier Personnel while performing activities arising under this Agreement.
The contractor improperly calibrated the system, causing one of the university's turbines to operate at twice the safe operational speed, causing significant damage to the generator equipment. The university sued the contractor for more than $3 million in damages. Travelers defended, but filed a declaratory judgment action, contending that coverage did not exist because the "contractual liability" exclusion applied. Section 15.18 of the contract purportedly constituted an "assumption" of the insured's own liability, and was therefore not covered under the CGL policy.
The policy excluded coverage for "'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." But the exclusion did not apply to liability for damages that the insured would have in the absence of the contract.
Travelers argued that "assumption" encompassed all contracts where the insured assumed any liability, including its own liability. The contractor, in response, argued that the term "assumption of liability" is generally understood to mean situations where an insured assumed the liability of a third party, such as indemnity or hold harmless agreements. Therefore, "assuming liability" was wholly distinct from assuming a duty to perform a contract in a certain manner.
The court agreed with the contractor. The plain meaning of the phrase "assumption of liability" meant the act of taking on the legal obligations or responsibilities of another. "Assumption of liability" in a CGL policy's contractually assumed liability exclusion referred to those contracts or agreements where the insured assumed the liability of another.
Travelers relied on Gilbert Texas Constr., LP v. Underwriters at Lloyd's London, 327 S.W. 3d 118 (Tex. 2010) and argued the case applied a plain meaning approach to the contract interpretation. Further, Gilbert held that the exclusion barred breach of contract claims arising from contracts where the insured assumed its own liability. The Michigan court, however, found that Gilbert stood for the proposition that where an insured would be liable at general law for damages arising from its breach of contract, the contractually-assumed liability exclusion would not preclude coverage. But where an insured took on additional legal obligations and liabilities beyond those imposed at general law, coverage was barred by the contractual liability exclusion.
Here, the contractor's warranting that its goods and services were "free from defects in material and workmanship," and agreeing to return the university's property to "as was" condition in the event that it damaged property during completion of the contract, did not enlarge the contractor's duty to exercise ordinary care in fulfilling its contract.
Finally, merely because the university brought a breach of contract action as opposed to a tort action was not dispositive as to whether coverage existed. Rather, the policy's initial grant of coverage turned on whether the property damage arose from an "occurrence."
