Construction Alert: "Fifth Circuit Ruling on Commercial General Liability Policies Could Have a Significant Impact on the Texas Construction Industry"

Opinion purports to eliminate coverage under CGL polices for construction defect claims in Texas

On June 15, 2012, the U.S. Fifth Circuit Court of Appeals held that the district court correctly interpreted the contractual assumption of liability exclusion in a Commercial General Liability (CGL) policy and correctly applied that exclusion with respect to the insurer's duty to defend the construction company in Ewing Construction Company, Inc. v. Amerisure Ins. Co. (Cause No. 11-40512). The court held, however, that the district court was premature in applying the exclusion to the insurer's duty to indemnify because the duty to indemnify turns on the actual facts established at trial.

This case, originally filed in the Southern District of Texas, arose from a construction contract under which Ewing Construction Company, Inc. ("Ewing") agreed to construct tennis courts for the Tuloso-Midway Independent School District (“the School District”). After construction, the courts cracked and flaked, becoming unfit for playing tennis. The School District sued Ewing for breach of contract and negligence. The contractor tendered its defense to its insurer, which denied defense and indemnity on the ground that the policy’s “contractual assumption of liability” exclusion barred coverage.

The Fifth Circuit, relying on the Texas Supreme Court’s 2010 Gilbert decision (Gilbert Texas Construction, L.P. v. Underwriters at Lloyd's London), agreed, finding that because Ewing entered a contract to complete a project, it “assumed liability for defective construction” and therefore triggered the exclusion. The court rejected the insured’s argument that an exception to the exclusion, which restored coverage for liability the insured would have had in the absence of a contract, applied. In essence, the court treated the “contractual assumption of liability” exclusion as a “breach of contract” exclusion and rendered the “your work” exclusion in the CGL policy meaningless.

Prior to the Gilbert decision, CGL carriers regularly provided defense for claims involving construction defects. Although Gilbert was a departure from cases across the country which had analyzed the contractual assumption of liability exclusion, it involved only the issue of whether the insurer had to indemnify and not whether it had a duty to defend. In addition, Gilbert involved unique facts where the contractor had actually assumed responsibility to pay damages to third parties.

The Fifth Circuit’s expansion of Gilbert is a significant departure from previous law and practice and renders a major portion of CGL policies meaningless for the construction industry. This ruling could have a significant impact on the construction industry as it purports to eliminate coverage under CGL policies for construction defects claims in Texas.

We expect strong briefing urging the court to rehear the case. Until the Ewing decision is modified or the Texas Supreme Court clarifies the law in Texas on available coverage for construction defect claims, CGL coverage for construction defect claims in Texas is uncertain. Stay tuned.

For the full opinion, click here.

This information is made available for educational purposes only and does not offer specific legal advice or create an attorney-client relationship with Porter Hedges. Do not use this information as a substitute for specific legal advice. Attorney advertising.

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