May 28, 2014

Contractual Liability Exclusion Trivialized by Texas Court

In a recent ruling, the Supreme Court of Texas provided guidance for contractors, restricting insurers’ attempts to narrow coverage in general liability policies. Prior to the court’s ruling, a contractor’s general liability policy would commonly contain a contractual liability exclusion, which would eliminate coverage for defects caused by a contractor’s own work where the contractor breached a specific covenant in the contract. A typical clause would exclude the following from coverage: “bodily injury” or “property damage” for which the insured is obligated to pay damages due to the assumption of liability in a contract or agreement.

In essence, the contractor/insured would assume any liability for damages caused by defects found in work that it contractually warranted. However, the Supreme Court of Texas in Ewing Construction v. Amerisure Insurance Co., 2014 Tex. LEXIS 39 (Tex. 2014) found that the contractual liability exclusion would not apply where the contractor/insured’s liability for damages would exist absent the existence of a written contract. The court held that where a contractor enters into a contract requiring the contractor to perform work in a “good and workmanlike manner,” an assumption of liability within the meaning of the contractual liability exclusion is not created because the contractor impliedly warrants the work in a good and workmanlike manner anyway. Texas, like Pennsylvania, recognizes the common law duty to perform work with care and skill as an implied term in every construction contract. The Ewingcourt found Ewing’s agreement to perform the construction in a good and workmanlike manner did not enlarge the obligations it had under general law to comply with the contract terms and exercise ordinary care in so doing. Therefore, this agreement did not create an assumption of liability within the meaning of the policy’s contractual liability exclusion.

There is extensive Pennsylvania case law establishing that a commercial general liability policy usually does not apply to breach of contract claims; however, these cases are based primarily upon the premise that faulty workmanship is not an “occurrence” or an “accident” under a general liability policy. See Ryan Homes, Inc. v. The Home Indemnity Co., 647 A.2d 939 (Pa.Super. 1994); Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Company, 825 A.2d 641 (Pa. 2006). These courts note that any other interpretation would be converting the general liability policies into a performance bond guaranteeing the contractor’s workmanship.

What It Means to You

Contractors should review their general liability policies closely to determine if the policy contains contractual liability exclusions and, if so, what specifically is excluded. But if the exclusion cannot be removed from the policy and a claim is made against the contractor for defective construction based upon the breach of an express covenant to perform in a good and workmanlike manner, the claims may still be covered. A Pennsylvania judge may consider the Ewing logic persuasive and hold that if the deficient work breaches an express term that is identical to the implied warranty of good and workmanlike construction, then the contractual exclusion would not apply.