Construction Defect Coverage
5th Circuit Changes Mind in Construction Case
John Council | Texas Lawyer
November 5, 2014
In a decision that could have a big impact on construction defect coverage litigation, the U.S. Court of Appeals for the Fifth Circuit has ruled that homeowners can compel a builder's insurance company to pay for foundation and air-conditioning system repairs to their new house, erasing a previous finding that such claims constituted an exclusion of coverage under common Texas commercial liability policies.
The Oct. 29 decision in Crownover v. Mid-Continent Casualty. is a big victory for both consumers and home builders after the Fifth Circuit withdrew its July 27 opinion in the case. The court granted a rehearing of that decision, which found that an insurance company was not obligated to cover homeowners' losses after they sought reimbursement from the builder for hundreds of thousands of dollars they spent repairing faulty work on their home.
The background to the case, according to the court's recent decision in Crownover, is as follows.
Doug and Karen Crownover entered into a construction contract with Arrow Development Inc. to construct a new house in 2001. The work was completed in 2002 but by 2003, cracks began to appear in the foundation, and the problems with the air conditioning system caused it to run almost continually. The AC unit and foundation were repaired at the Crownovers' expense. The Crownovers later won an arbitration award against Arrow for the cost of the repairs.
After Arrow filed for bankruptcy in 2009, the Crownovers demanded that Arrow's insurer company, Mid-Continent Casualty Company, pay the arbitration award. Mid-Continent denied the demand, citing several insurance policy defenses and exclusions in the commercial liability policy it issued the builder. The Crownovers sued Mid-Continent for the damages owed to them by Arrow. Mid-Continent convinced the district court to dismiss the case on summary judgment.
The Crownovers appealed the decision to the Fifth Circuit, which it affirmed on July 27. But the Fifth Circuit later granted the Crownovers' motion to rehear that decision.
The principle question for the appellate court was whether a provision in the construction contract between the Crownovers and Arrow—which obligated the builder to repair its work that failed to comply with the requirements of the construction contract—was an "assumption of risk" that exceeded Arrow's liability under general Texas law, thereby triggering a "contractual liability exclusion" in Arrow's insurance policy with Mid-Continent.
To reach its decision favoring the homeowners, the Fifth Circuit examined recent Texas Supreme Court decisions on the subject, including 2010's Gilbert Texas Construction v. Underwriters at Lloyd's London and 2014's Ewing Construction v. Amerisure Insurance, and concluded that the contractual liability exclusion from coverage does not apply, and therefore Mid-Continent was not entitled to summary judgment.
"In sum, Gilbert and Ewing maintain that for a contractual liability exclusion to apply, the insurer must prove that a contractually assumed duty effected an expansion of liability beyond that supplied by general law. The arbitrator in this case determined that Arrow violated an express duty to repair work that did not conform to the requirements of its construction contract with the Crownovers. Mid-Continent has failed to proffer evidence creating a dispute of fact as to whether the arbitrator's award was based on liability greater than that dictated by general law," wrote Judge James Dennis.
"Therefore, the contractual liability exclusion from coverage does not apply," Dennis wrote in the decision, which reverses the grant of summary judgment for Mid-Continent, renders summary judgment for the Crownovers and remands the case back to the trial court for calculation of legal fees.
Greg Harwell, a partner in Dallas' Slates Harwell who represents the Crownovers, is happy with the decision, which he believes will prevent insurers from avoiding coverage in construction defect disputes between consumers and home builders.
"It helps confirm that insurance coverage for construction defects, when your work exclusion does not apply, should be available,'' Harwell said. "The Crownovers are pleased and looking forward to getting this wrapped up.''
Brent Cooper, a partner in Dallas' Cooper & Scully who represents Mid-Continent, did not return a call for comment.
Harwell noted that numerous home builder and contractor groups filed amicus briefs with the Fifth Circuit urging the court to change its mind about their previous decision in Crownover.
"Those amicus [briefs] were very helpful,'' he said.
Lee Shidlofsky, a partner in Austin's Shidlofsky Law Firm who wrote an amicus brief in the case on behalf of the National Association of Home Builders and Texas Association of Builders, said Crownover would have had drastic consequences for both consumers and home builders had the Fifth Circuit's previous decision in the case not been overturned.
"It would have left the consumer holding the bag. You'd enter into a contract to build a house in a good and workmanlike manner. But if you agree to repair it, you're out of coverage," Shidlofsky said of consumers.
"Unless you have the money to pay for it yourself, then the homeowner would be left chasing you for damages," Shidlofsky said of home builders. "It basically left CGL [commercial general liability] policies worthless for property damage.
"The courts listen to these amicus briefs. This was a case that really got it wrong. But I give credit to these judges that realized they made a mistake and corrected it," Shidlofsky said. "You don't see that every day.''
The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.
SOURCE: www.texaslawyer.com