Nathan Lander | Risk and Recovery: Legal Insights for the Insured | November 4, 2014
On October 29, the Fifth Circuit reversed itself for the second time this year in a case involving the interpretation of a contractual liability exclusion in a CGL policy. This recent decision by the Fifth Circuit in Crownover v. Mid-Continent Casualty Co., coupled with decisions from the Texas Supreme Court and Fifth Circuit earlier this year in Ewing Constr. Co. v. Amerisure Ins. Co., is of major significance to the construction industry in Texas. These decisions ensure that the valuable protection that contractors, builders, and their customers depend on from CGL policies is not swallowed up by an overly broad interpretation of a standard exclusion.
Many CGL policies exclude damages “for which the insured is obligated to pay by reason of the assumption of liability in a contract or agreement.” This standard exclusion has a carve-out, however, for liability “[t]hat the insured would have in the absence of the contract or agreement.”
In most jurisdictions, courts have construed this exclusion as limiting coverage only when the insured has agreed to assume the liability of a third party. This is also how the average policyholder would generally understand the exclusion.
Earlier this year, however, a pair of Texas federal courts interpreted the exclusion in a much different and broader manner. In both Ewing and Crownover, the district court held that the exclusion applies anytime “an insured has entered into a contract and, by doing so, has assumed liability for its own performance under the contract.” So if the contract promises that the contractor will perform work in a certain manner, and the contractor is sued for breaching that warranty, the claim is excluded. The Fifth Circuit initially affirmed each of these decisions before agreeing in Ewing to certify the proper interpretation of the exclusion to the Texas Supreme Court.
If allowed to stand, these decisions would have been devastating to the construction industry in Texas. In virtually all construction contracts, the builder or contractor agrees to perform its work in a good and workmanlike manner (or other similar promise). Interpreting the contractual liability exclusion as barring coverage whenever such a promise is made would have left Texas builders and contractors with little coverage at all.
And the harm from the decisions would not have ended there. Many contractors do not have the financial resources to pay for damages caused by construction mistakes. They, and in turn the businesses and homeowners who utilize their services, rely on the availability of insurance to cover mistakes that are made.
Fortunately, the Texas Supreme Court said “not so fast” to the strained and commercially unreasonable interpretation of the exclusion reached by the federal courts. It held that the exclusion can apply only when a policyholder assumes a liability “that exceeds the liability it would have under general law.”
Contractors are under a common law duty to perform their contracts with skill and care. Thus, the Texas Supreme Court concluded, “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.”
After the Texas Supreme Court issued its decision in Ewing, the Fifth Circuit reversed its earlier decision in that case and held that the policyholder’s claim was not barred by the contractual liability exclusion.
Now, the Fifth Circuit has done the same in Crownover. Reversing its earlier decision, the Court began by explaining that in Texas, as elsewhere, exclusions must be narrowly construed against the insurer. The saying “everything is bigger in Texas” does not apply to exclusions.
Applying this well-settled rule for interpreting exclusions, and the Texas Supreme Court’s guidance in Ewing, the Fifth Circuit found the exclusion did not apply to claims against the insured in Crownover for breaching a “duty to repair” warranty in a construction contract. Under the general law, the policyholder already had a duty to repair work that was not performed in a good and workmanlike manner. Promising to do so in the contract, thus, did not in any way enlarge the insured’s liability.
Insurers that issue CGL policies to contractors promise to cover them for losses caused by mistakes made in the construction process. These contractors depend on this liability protection, as do consumers who enlist their services in construction projects. The fact that a contractor promises when hired to do a good job should not provide a get out of jail free card to its insurer if a construction mistake is later made. Now that the Crownhover decision has been reversed, along with the Ewing decision, “Texas justice” has been restored on this issue.