If you are a subrogation professional who handles construction defect claims in Texas, you may have heard references to the case of Ewing Construction Company v. Amerisure Insurance Company, 684 F.3d 512 (5th Cir. 2012). In Ewing, the Fifth Circuit Court of Appeals held thatan insurer had no duty to defend its insured subcontractor since the insuring policy excluded coverage for property damage the subcontractor was obligated to pay by reason of the assumption of liability in a contract or agreement. However, shortly after issuing its opinion, the Fifth Circuit withdrew the opinion and certified two questions to the Texas Supreme Court:
1. 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.
2. If the answer to question one is “Yes” and the contractual liability exclusion is triggered, do the allegations in the underlying lawsuit alleging that the contractor violated its common law duty to perform the contract in a careful, workmanlike, and non-negligent manner fall within the exception to the contractual liability exclusion for “liability that would exist in the absence of contract.”
Ewing Construction Company (”Ewing”) contracted with a school district in Corpus Christi to build tennis courts. Unfortunately, the workmanship was defective and the tennis courts were unfit for their intended use. The school district filed a construction defect action against Ewing. Ewing’s insurer Amerisure Insurance Company (“Amerisure”) denied coverage arguing under the policy’s contractual liability exclusion that there would be no coverage for “property damage” for which Ewing was obligated to pay damages by reason of its assumption of liability in a contract or agreement. Ewing later filed a declaratory judgment action in United State District Court. The District Court ultimately held that Amerisure owed no duty to defend Ewing because the contractual liability exclusion excluded coverage. The Fifth Circuit affirmed the District Court’s ruling but then quickly withdrew its opinion and certified the above-referenced questions to the Texas Supreme Court.
The Texas Supreme Court heard oral argument in Ewing on February 27, 2013. We are currently awaiting the Texas Supreme Court’s decision. The outcome of Ewing is of particular importance to subrogation professionals since the Court’s ultimate decision could have far-reaching implications for available coverage in construction defect claims. Theoretically, if the Texas Supreme Court were to answer the first question in the affirmative, commercial general liability insurers could seek to exclude coverage for construction defect claims asserted by subrogating carriers in any instance where its insured signed a construction contract and breach of contract claims were asserted. On the other hand, if the Texas Supreme Court answers the question in the negative and finds that a contractor’s contractual agreement to essentially perform its work in a good and workmanlike manner, without more, does not trigger the contractual liability exclusion, coverage for most typical construction defect claims likely would not be affected.
In the interim, subrogation professionals who handle construction defect claims need to be mindful of this very important case, as some liability carriers may attempt to use the uncertainty of how the Texas Supreme Court might rule as leverage in pending cases. A typical scenario would be one where a liability carrier asserts that because its insured contractor executed a contract for the underlying project, the contractor might not be covered for damages because of the contractual liability exclusion. While no one really knows how the Texas Supreme Court will ultimately rule on this issue, many commentators tend to believe that the Texas Supreme Court will answer the first question in the negative which would negate this rather novel interpretation of the contractual liability exclusion. The attorneys involved in the case expect a decision in late-August or early-September.