Deconstructing Texas Insurance Law: Ewing Confirms Court’s Shift

On Jan. 17, 2014, the Texas Supreme Court in Ewing Construction Company v. Amerisure Insurance Co. issued another surprising and controversial decision in a construction defect coverage case.

For many years the Texas Supreme Courts had largely been a model of restrained and plain-meaning interpreter of insurance policies. While there were anomalies, such as the broadly criticized Mid-Continent v. Liberty Mutual, where the longstanding practices of carrier contribution were undermined, the Court still steered a generally reasonable course in protecting the rights of policyholders and carriers.

The Court’s recent decisions in important construction defect cases, however, show a palpable new tilt to the policyholder side.

The long-time balance shifted significantly in the landmark ruling of Lennar Corp. v. Markel American Ins. Co. in August 2013. In Lennar, the Court took a hard turn to broadening policyholder’s rights by limiting the application of voluntary payments provisions by appending a prejudice requirement, holding that property damage need not take place entirely within the policy period and even held carriers responsible for repairs to non-damaged property in at least some circumstances. The Court has now confirmed that Lennar was not simply an aberration.

The recent opinion in Ewing holds that the contractual liability exclusion did not apply to defective construction when a general contractor merely promised to perform work in a good and workmanlike manner in a construction contract.

In this case, Ewing Construction Co. Inc. entered into a contract with Tuluso-Midway Independent School District to serve as a general contractor to renovate and build additions to a school, including construction of a pavilion consisting of multiple tennis courts.

Shortly after construction of the tennis courts was complete, the school district complained that the tennis courts had begun to flake, crumble and crack, rendering them unusable for playing tennis. The school district then filed suit against Ewing for breach of contract and negligence, specifically claiming that Ewing breached its contractual commitments by failing to perform its work in a good and workmanlike manner, failing to complete construction in accordance with the contract plans and specifications, and failing to properly retain and supervise its subcontractors. Further, Ewing allegedly was negligent in failing to properly prepare for the construction, failing to properly retain and oversee subcontractors, failing to properly carry out the construction according with the plans, and breaching its duty to use ordinary care.

Ewing tendered defense of the lawsuit to its CGL carrier, who ultimately denied coverage. Ewing filed suit against the carrier in federal court. The insurer asserted that its policy exclusions, including the contractual liability exclusion, precluded coverage and negated its duties to defend and indemnify. The federal district court granted the insurer’s motion for summary judgment, and a three-judge panel of the U.S. Fifth Circuit Court of Appeals initially affirmed the district court on a 2 – 1 vote.

So far a federal court, and a panel of the federal appeals court, agreed with the carrier. But, of course, the matter was not done.

The appeals court vacated its ruling and certified the coverage questions concerning the application of the contractual liability exclusion to the Texas Supreme Court. This process is employed when the federal appeals court wants guidance on an unsettled state law issue.

The contractual liability exclusion in the policy at issue excluded claims for damages based on an insured’s contractual assumption of liability, subject to two exceptions: (1) where the insured’s liability for damages would exist absent the contract, and (2) where the contract is an “insured contract” as defined by the policy.

The carrier reasonably argued that the contractual liability exclusion applied because Ewing contractually undertook the obligation to construct the tennis courts in a good and workmanlike manner, and thereby assumed liability for damages for its failure to do so.

However, the Texas Supreme Court agreed with Ewing’s argument that its agreement to construct the tennis courts in a good and workmanlike manner did not enlarge its obligations beyond any general common-law duty it might have. Therefore, its agreement to perform the contract in a good and workmanlike manner was not an “assumption of liability” within the meaning of the contractual liability exclusion in the policy.

The Court further held that the school district’s claims that Ewing failed to perform in a good and workmanlike manner were substantively the same as its allegations that Ewing negligently performed under the contract because they contain the same factual allegations and alleged misconduct.

The Court concluded that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not “assume liability” for damages arising out of its defective work so as to trigger the contractual liability exclusion.

The Court also disputed the carrier’s contention, richly deserved, that the Court’s decisions have had the effect of turning CGL policies into performance bonds. In fact, that is precisely what appears to be happening.

As a result of Ewing, the Texas Supreme Court’s prior decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (2010) on the application of the contractual liability exclusion will now be largely limited to its facts.

It will be the rare circumstance where a contractor or subcontractor will be held to have agreed to assume liability for damages arising out of circumstances beyond its obligation to perform in a good and workmanlike manner. It will be rarer still that a third-party claimant will include such a factual allegation in its pleading, since it wants to initiate an insurer’s duty to defend, and potentially indemnify, the insured contractor.

Ewing appears to confirm that the Court will twist itself like a contortionist to justify extending the scope of general liability policies, particularly in construction defect matters. It may be hoped that this shift will be limited to the construction defect area. If not, all carriers should beware.