On January 17, 2014, the Supreme Court of Texas rejected a commercial general liability (“CGL”) insurer’s attempt to invoke the “contractual liability” exclusion to deny coverage under a standard CGL policy regarding a construction defect breach of contract claim. The insurer denied coverage to the general contractor, arguing that the contractor had assumed liability in its contract to perform its work in a “good and workmanlike manner”, and that a breach of contract claim based on construction defects, arising out of the failure to perform the contract in a good and workmanlike manner, was not covered under the CGL policy due to the standard “contractual liability” exclusion. The Supreme Court held that the general contractor did not contractually assume any liability beyond its common law duty to perform its contract with due skill and care, and thus the policy exclusion did not apply. The case is Ewing Construction Company, Inc. v. Amerisure Insurance Company.1
Generally speaking, insurance coverage for construction defects works as follows: the plaintiff alleges the existence of defective construction that is a breach of a construction contract and/or breach of a duty (i.e., negligence) causing “personal injury” or “property damage.” These allegations within the four corners of the complaint trigger the insurer’s duty to indemnify the insured pursuant to the four corners of the insurance policy if the allegations constitute an “occurrence.” In many states, such allegations can lead to a finding of an “occurrence” under the reasoning that contractors do not intend to perform defective work and the defects are thus “accidental” (this issue has been the subject of several recent high-profile court decisions and a majority of jurisdictions now follow this logic).2 This scenario further triggers the insurer’s duty to defend the insured in the lawsuit (this process is frequently referred to as the “eight corners” rule).3 The insurer, however, has multiple “business risk” exclusions in its standard insurance policy that may further erode its indemnity obligations, including the “your work” exclusion that limits coverage for a general contractor’s own work (but is usually subject to a notable exception for the work of subcontractors) and the “damage to impaired property” exclusion. Another important exclusion is the “contractual liability” exclusion, which is the subject of the Ewing case.
The typical contractual liability exclusion purports to remove coverage for damages for “‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or...
