Outliers often make headlines; however, more often than not common sense prevails. Such was the case in mid-January as the Texas Supreme Court issued its opinion in Ewing Construction Company, Inc. v. Amerisure Ins. Co. Ewing Construction Company had been sued for negligence and breach of contract after a project it had completed was unusable for its intended purposes due to certain construction defects. Ewing tendered the defense of that suit to its insurer, Amerisure, who denied coverage based, in part, upon the contractual liability exclusion in its CGL policy. In denying coverage on this basis Amerisure asserted that Ewing, by virtue of having entered into the contract with its customer, had assumed liability for its own performance under that contract – thereby triggering the contractual liability exclusion of the policy. Ewing then sued Amerisure in federal court and the insurer prevailed at the trial level. On appeal the United State Court of Appeals for the Fifth Circuit initially affirmed the district court’s ruling, but later withdrew its opinion and sought direction from the Texas Supreme Court. In seeking clarification as to the reach of this exclusion the Fifth Circuit 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.” The Texas Supreme Court answered the first question “no” and did not answer the second. The Ewing court concluded that the contractual liability exclusion means exactly what it says: the exclusion is only triggered when the policyholder has “assumed” by contract some additional obligations that it would not customarily have. Ewing argued that its agreement in the contract to perform its work in a good and workmanlike manner, without more, did not enlarge those obligations generally imposed upon a contracting party and, therefore, was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion. The Texas Supreme Court agreed. Rationality and reason carried the day.