Construction Defect:  5th Cir. Refuses To Apply Contractual Liability Exclusion To Alleged Failure To Do Work In “Good And Workmanlike Manner.”

The Fifth Circuit Court of Appeals, applying Texas law, held that a contractual-liability exclusion did not apply to limit the insurer’s coverage obligations to homeowners because the contractually-assumed duty in question did not expand liability.

The homeowners contracted with Arrow Development, Inc. (“Arrow”) to construct a house.  Arrow performed defective work and then failed to promptly correct the work. An arbitrator found Arrow liable to the homeowners for breaching its express warranty to repair non-conforming work and awarded damages. Because Arrow filed for bankruptcy, the Homeowners sued Arrow’s insurer, Mid-Continent Casualty Co. (“Mid-Continent”), for the damages owed.

The contractual-liability exclusion at issue provided: “[t]his insurance does not apply to[] ‘property damage’ for which the insured is obligated to pay damages by reason of assumption of liability in a contract or agreement.” The district court held that based upon the arbitrator’s ruling that Arrow’s liabilities were solely based in contract, the contractual-liability exclusion applied, and therefore Mid-Continent was not obligated to indemnify Arrow.

The question before the Fifth Circuit was whether the contractual provision in the construction contract was an “assumption of liability” that exceeded Arrow’s liability under general Texas law, thereby triggering the contractual-liability exclusion in the Mid-Continent insurance policy.  The court reversed and held that the contractual obligation did not create additional liability and therefore the contractual-liability exclusion did not apply. The Fifth Circuit followed the controlling law of Gilbert Texas Constr., L.P. V. Underwriters at Lloyd’s London and Ewing Constr. Co. v. American Ins. Co. In Ewing, the court held that the contractual liability exclusion does not bar coverage for claims that a builder violated a contractual obligation to carry out construction in a “good and workmanlike manner” because the contractual duty did not represent an expansion of liability. Additionally, the Texas Supreme Court stated that a general contractor who enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner and assume liability for damages arising out of the contractor’s defective work does not trigger a contractual-liability exclusion. The Fifth Circuit reasoned that like in Ewing, Arrow’s adjudicated liability was no greater than that called for by general law and therefore the exclusion did not apply. Crownover v. Mid-Continent Cas. Co., No. 11-1-166 (5th Cir. Oct. 29, 2014).