This past Friday, the Texas Supreme Court gave general liability insurers pointed guidance about what constitutes an “assumption of liability” for purposes of a contractual liability exclusion. Declaring that a contractor that agrees to construct a project in a good and workmanlike manner does not add anything to its common-law obligations to comply with the contract’s terms and exercise ordinary care in doing so, the Texas court rejected the argument that the contractor thereby makes an “assumption of liability” within the meaning of the policy’s contractual liability exclusion. The decision in Ewing Construction Company, Inc. v. Amerisure Insurance Company, No. 12-0661, is available here.
In 2008, the Tuluso-Midway Independent School District hired Ewing Construction Company to act as the general contractor on a project to renovate and build additions to a school in Corpus Cristi. Part of the project involved the construction of new tennis courts, on which the school district planned to host competitive events. Shortly after construction was completed, the courts started flaking, crumbling, and cracking. The school district sued Ewing on theories that Ewing had been negligent and had also breached its construction contract. Amerisure declined to accept Ewing’s tender of defense for a variety of reasons, including the Ewing policy’s contractual liability exclusion.
Ewing brought a coverage action against Amerisure in the federal district court for the Southern District of Texas. Amerisure did not deny that Ewing’s tender fell within the insuring agreement; rather, Amerisure contended that policy exclusions, including the contractual liability exclusion, precluded coverage and altogether negated Amerisure’s duties to defend and to indemnify. The district court granted Amerisure’s motion for summary judgment, holding that the Texas Supreme Court’s prior ruling in Gilbert Texas Contructions, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), stood for the proposition that “the contractual liability exclusion applies when an insured has entered into a contract and, by so doing, has assumed liability for its own performance under that contract.” The Fifth Circuit initially affirmed the district court. Following Ewing’s petition for rehearing, however, the Fifth Circuit withdrew its opinion and certified the case to the Texas Supreme Court.
The Amerisure policy’s contractual liability exclusion read as follows:
This insurance does not apply to:
b. Contractual Liability
“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; or
(2) Assumed in a contract or agreement that is an “insured contract” . . . .
Answering the Fifth Circuit’s questions, the Texas Supreme Court distinguished its holding in Gilbert by noting that the construction contract there in issue required Gilbert to assume certain liabilities beyond those set forth in its contract. Here, the court wrote, Ewing was obligated only to comply with the contract’s terms and to exercise ordinary care in doing so. The court held that this contract language did not enlarge Ewing’s obligations under the common law and, therefore, that Ewing had not assumed any liability within the meaning of the policy’s exclusion.
The Texas court took pains to note that its decision was not to be construed as judicially converting general liability insurance policies into performance bonds. The court emphasized that various business risk exclusions in the Amerisure policy might still apply, but that the questions certified by the Fifth Circuit did not require the Texas court to reach them. Carriers, therefore, should carefully consider the entirety of their policies. If they intend to decline coverage for a particular claim, at least in Texas, they would be well-served to assert all possible grounds for their decision.