Construction Contracts
AIA Contract Promises No More Than to Perform Work in a Good and Workmanlike Manner
Barry Zalma
January 21, 2014
The United States Court of Appeals for the Fifth Circuit sent the following certified questions to the Supreme Court of Texas. The certified questions are:
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 Constr. Co. v. Amerisure Ins. Co., 690 F.3d 628, 633 (5th Cir. 2012).]
The Supreme Court of Texas resolved the issue in Ewing Construction Co., Inc. v. Amerisure Insurance Co., 12-0661 (Tex. 01/17/2014) and gave all contractors across the county time to issue a sigh of relief.
BACKGROUND
In 2008, Ewing Construction Company, Inc. (Ewing) entered into a standard American Institute of Architects contract with Tuluso-Midway Independent School District (TMISD) to serve as general contractor to renovate and build additions to a school in Corpus Christi, including constructing tennis courts. Shortly after construction of the tennis courts was completed, TMISD complained that the courts started flaking, crumbling, and cracking, rendering them unusable for their intended purpose of hosting competitive tennis events. TMISD filed suit in Texas state court against Ewing and others (the underlying suit). Its damage claims against Ewing were based on faulty construction of the courts and its theories of liability were breach of contract and negligence.
Ewing tendered defense of the underlying suit to Amerisure Insurance Company, its insurer under a commercial package policy that included CGL coverage. Amerisure denied coverage, prompting Ewing to file suit in the U.S. District Court for the Southern District of Texas. There, Ewing sought a declaration that Amerisure had, and breached, duties to defend Ewing and indemnify it for any damages awarded to TMISD in the underlying suit.
Amerisure did not deny that Ewing established coverage under the policy’s insuring agreements; rather, it urged that policy exclusions, including the contractual liability exclusion, precluded coverage and negated its duties to defend and indemnify. On cross motions for summary judgment, the district court denied Ewing’s motion, granted Amerisure’s motion based on the contractual liability exclusion, and entered a final judgment dismissing the entire case.
On appeal, the Fifth Circuit, in a 2-1 opinion, initially affirmed the district court’s judgment on the duty to defend but vacated and remanded with respect to the duty to indemnify and the related Prompt Payment of Claims Act issue to await the results of the underlying suit. Ewing petitioned for rehearing, and the Fifth Circuit withdrew its opinion and certified the above questions to the Texas Supreme Court.
DUTY TO DEFEND
Texas courts follow the eight corners rule in determining an insurer’s duty to defend. Under that rule, courts look to the facts alleged within the four corners of the pleadings, measure them against the language within the four corners of the insurance policy, and determine if the facts alleged present a matter that could potentially be covered by the insurance policy. The factual allegations are considered without regard to their truth or falsity and all doubts regarding the duty to defend are resolved in the insured’s favor.
The insured has the initial burden to establish coverage under the policy. If it does so, then to avoid liability the insurer must prove one of the policy’s exclusions applies. If the insurer proves that an exclusion applies, the burden shifts back to the insured to establish that an exception to the exclusion restores coverage.
THE UNDERLYING SUIT AND THE EXCLUSION
Amerisure’s policy provides that the insurance applies to “bodily injury” and “property damage” only if: (1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”; and (2) The “bodily injury” or “property damage” occurs during the policy period.
It also provides that “This insurance does not apply to: ‘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’ . . . .”
Amerisure does not dispute that the alleged defects in the tennis courts occurred during the policy period and constitute “property damage” caused by an “occurrence” within the scope of the policy’s insuring agreement.
CONTRACTUAL LIABILITY EXCLUSION
Amerisure contends that the contractual liability exclusion means what it says: it excludes claims when the insured assumes liability for damages in a contract or agreement, except when the contract is an insured contract or when the insured would be liable absent the contract or agreement. Amerisure argues that the exclusion applies because Ewing contractually undertook the obligation to construct tennis courts in a good and workmanlike manner and thereby assumed liability for damages if the construction did not meet that standard.
Ewing proposes that its agreement to construct the courts in a good and workmanlike manner did not add anything to the obligation it has under general law to comply with the contract’s terms and to exercise ordinary care. That being so, Ewing argues, its express agreement to perform the construction in a good and workmanlike manner did not enlarge its obligations and was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion. The Supreme Court agreed with Ewing.
The exclusion means what it says: it excludes liability for damages the insured assumes by contract. Assumption of liability means that the insured has assumed a liability for damages that exceeds the liability it would have under general law. Otherwise, the words “assumption of liability” are meaningless and are surplusage. The term “assumption” must be interpreted to add something to the phrase “assumption of liability in a contract or agreement.” Reading the phrase to apply to all liabilities sounding in contract renders the term “assumption” superfluous. Interpretations of contracts as a whole are favored so that none of the language in them is rendered surplusage.
Negligence means the failure to use ordinary care, that is, failing to do that which a reasonable person or provider of the defendant’s type would have done under the same or similar circumstances. As Ewing points out, it had a common law duty to perform its contract with skill and care. The common law duty to perform with care and skill accompanies every contract. Accordingly, a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not “assume liability” for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion. We answer the first question “no” and, therefore, need not answer the second question.
More often, however, faulty workmanship will be excluded from coverage by specific exclusions because that is the CGL’s structure. Because the policy contains exclusions that may apply to exclude coverage in a case for breach of contract due to faulty workmanship, our answer to the first certified question is not inconsistent with the view that CGL policies are not performance bonds.
The Fifth Circuit answered the first certified question “no” and had no reason to answer the second.
ZALMA OPINION
The court’s decision was one of the most anticipated insurance cases in the country. If the Texas Supreme Court had ruled in favor of the insurance company, coverage of construction mistakes in Texas would have virtually disappeared.
Although most general liability policies have a clause that allows the insurance company to exclude liability claims when a contractor assumes liability “in a contract or agreement” that contract or agreement must be an assumption greater than the obligation to perform the work in a good and workmanlike manner. Insurance companies will, if the insured takes on greater risks, require it to pay more for the extra coverage. Here the insured did not take on a greater risk than that contemplated and did not assume any greater obligations, like a promise to indemnify a third person not doing the work.
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