Contractors: Can your insurer deny coverage on defective work claims because your contract requires you to perform in a good and workmanlike manner?

Friday
24
Jan
2014

In a decision on January 17, 2014, the Supreme Court of Texas answered “no.”

The facts were as follows: A construction company entered into a standard AIA contract with a school district to serve as general contractor on a renovation and building project job.  The school district then sued the contractor for faulty construction based on breach of contract and negligence.  The contractor submitted the claim to its insurer under its commercial policy which included commercial general liability coverage.  The insurer denied coverage.  The contractor then filed suit in federal district court asking the Court to declare that the insurer breached its duty to defend, and that the insurer must indemnify the contractor for damages in the underlying suit.  The federal court ruled in favor of the insurer, and stated that the policy’s contractual liability exclusion applied here because the contractor assumed liability for its own construction work pursuant to its contract with the school district, and that the contractor was therefore liable for damages due to its defective work.

No Assumption of Liability

The federal court presented this Certified Question to the Supreme Court of Texas, which held that that the contractual provision in the construction contract which required the contractor to perform in a good and workmanlike manner did not permit the insurer to exclude defective work claims against the contractor.  The contractor did not assume any liability for  its defective work such that the insurer could deny coverage.

Exclusion Did Not Apply

The Court stated that the exclusion meant what it said: it excludes liability for damages the insured assumes by contract unless the exceptions bring the claim back into coverage.  However, assumption of liability means that the insured has assumed liability for damages in excess of liability under general law.  Therefore, 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.  The contractor thus does not “assume liability” for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.

Ewing Construction Co., Inc. v. Amerisure Insurance Co., The Supreme Court of Texas, No. 12-0661; 690 F.3d 628, 633 (5th Cir. 2012).

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