Ewing Construction Co., Inc. v. Amerisure Insuranc , 684 F.3d 512 ( 2012 )

Case: 11-40512 Document: 00511887665 Page: 1 Date Filed: 06/15/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
June 15, 2012
No. 11-40512 Lyle W. Cayce
Clerk
EWING CONSTRUCTION COMPANY, INCORPORATED,
Plaintiff - Appellant
v.
AMERISURE INSURANCE COMPANY,
Defendant - Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before JOLLY, DAVIS, and BARKSDALE, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
This appeal calls upon us to interpret, under Texas law, a Commercial
General Liability (CGL) insurance policy. Although CGL policies are standard-
form documents, their terms are not interpreted uniformly nationwide. In many
jurisdictions, the term that is the subject of this appeal—the contractual liability
exclusion—is given a highly-technical, less-than-obvious meaning. In Texas, the
same term is given its plain meaning, and functions so as to exclude insurance
coverage for liabilities that the insured assumes by contract.
The district court held that a CGL policy’s contractual liability exclusion
applied in this case, and that no exception restored coverage. The insured
construction company faces liability, if at all, because it contracted to construct
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usable tennis courts for a school district, and it has allegedly failed to perform.
We hold that the district court correctly interpreted the contractual liability
exclusion, and correctly applied that exclusion with respect to the insurer’s duty
to defend the construction company. We also hold, however, that the district
court was premature in applying the exclusion to the insurer’s duty to
indemnify. We AFFIRM in part, VACATE in part, and REMAND.
I.
In June 2008, Ewing Construction Company, Inc. (“Ewing”) entered a
contract with Tuloso-Midway Independent School District (“the School District”),
in which Ewing agreed to construct tennis courts at a school in Corpus Christi,
Texas. Soon after Ewing completed the tennis courts, the School District
complained that the courts were cracking and flaking, rendering them unfit for
playing tennis. On February 25, 2010, the School District filed a petition (“the
underlying lawsuit”) in Texas state court, seeking damages for defective
construction, and naming Ewing as a defendant. Ewing tendered defense of the
underlying lawsuit to Amerisure Insurance Company (“Amerisure”), its insurer
under a CGL policy. Amerisure denied coverage.
On July 29, 2010, Ewing filed the instant action against Amerisure in the
District Court for the Southern District of Texas, contending that Amerisure was
obligated to defend it in the underlying lawsuit. Ewing’s complaint seeks
declaratory relief, contract damages, relief under the Texas Prompt Payment of
Claims Statute, and attorney’s fees.
After Amerisure answered and counterclaimed, the parties filed cross-
motions for summary judgment and a joint stipulation of facts to aid the court
in its consideration of these motions.
On April 28, 2011, the district court denied Ewing’s motion, granted
Amerisure’s motion, and entered a final judgment dismissing the case. The
court held that Amerisure owed no duty to defend or indemnify Ewing in the
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underlying lawsuit because the CGL policy’s contractual liability exclusion
excluded coverage, and no exception to that exclusion applied. For the same
reasons, the court held that Amerisure had not violated the Texas Prompt
Payment of Claims Statute. Ewing appeals.
II.
We review the district court’s grant of summary judgment de novo,
applying the same standards as the district court. Int’l Fid. Ins. Co. v. Sweet
Little Mexico Corp., 665 F.3d 671, 679 (5th Cir. 2011). Summary judgment is
appropriate if “there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
This case is a diversity action, so we apply the substantive law of Texas,
as interpreted by Texas courts. Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d
589, 593 (5th Cir. 2011). We must predict how the Texas Supreme Court would
resolve the controversy, using existing Texas Supreme Court precedent as
guidance. Id. at 593-94.
We note at the outset that an insurer in a CGL policy assumes two duties:
(1) to defend the insured against covered lawsuits and (2) to indemnify the
insured against all covered claims and judgments. D.R. Horton–Tex., Ltd. v.
Markel Int’l Ins. Co., Ltd., 300 S.W.3d 740, 743 (Tex. 2009). These duties are
distinct, and one may exist without the other. Id. We will consider them
separately.
A.
We first consider whether the Texas Supreme Court would, under the facts
of this appeal, determine that Amerisure owes a duty to defend Ewing in the
underlying lawsuit. An insurer’s duty to defend is determined by the eight-
corners rule, that is, by looking to the plaintiff’s pleading in the underlying
lawsuit and then to the insurance policy. King v. Dallas Fire Ins. Co., 85 S.W.3d
185, 187 (Tex. 2002). If the plaintiff’s pleading in the underlying lawsuit alleges
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facts that might fall within the scope of the policy, then that pleading triggers
the insurer’s duty to defend. Id.Our application of the eight-corners rule begins with the School District’s
petition1 in the underlying lawsuit, which alleges the following:
On March 20, 2008 Plaintiff entered into a contract with
Ewing in the amount of $2,168,000 for construction of tennis
courts for the Tuloso-Midway ISD High School and Middle
School, the work to commence on March 30, 2008 and
substantial completion of the entire work to be not later than
November 24, 2008. In fact, the notice of substantial
completion came on or about April 20, 2009 and change orders
increased the overall contract amount significantly. . . .
The petition goes on to allege the following failures:
Serious tennis court cracking and flaking problems began
shortly after completion of the work and have continued since.
Chunks of the court surfaces are coming loose. Flaking,
crumbling, and cracking make the courts unusable for their
intended purpose, competitive tennis events. . . .
It then alleges that Ewing breached its contract and performed negligently:
Defendant Ewing Construction has breached its contractual
commitments, proximately causing damages to Plaintiff. On
information and belief, Plaintiff says that Defendant Ewing
and/or its subcontractors breached its contract in the
following respects:
a) Failing to complete construction in accordance with
the contract plans and specifications;
b) Failing to exercise ordinary care in the preparation,
management and execution of construction;
c) Failing to perform in a good and workmanlike
manner; and
d) Failing to properly retain and supervise
subcontractors.
1
We draw from the “Plaintiff’s Second Amended Original Petition for Damages,” which
the parties’ joint stipulation of facts indicates is the live pleading in the underlying lawsuit.
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Furthermore, Defendant Ewing Construction and/or its
subcontractors was/were guilty of negligence proximately
causing damage to Plaintiff in the following respects:
a) Failing to properly prepare for and manage the
construction;
b) Failing to properly retain and oversee subcontractors;
c) Failing to perform in a good and workmanlike
manner; and
d) Failing to properly carry out the construction so that
it was in [sic] completed in accordance with the plans
and specifications.
The petition also states that Ewing “breached [its] duty to Plaintiff to use
ordinary care in the performance of [its] contract[], proximately causing damages
to Plaintiff.”
In addition to this language from the School District’s pleading, we must
consider the terms of the CGL policy between Ewing and Amerisure. The CGL
policy states that Amerisure must defend Ewing against any suit seeking
“damages because of ‘bodily injury’ or ‘property damage’” if the “‘bodily injury’
or ‘property damage’ is caused by an ‘occurrence’ that takes place in the
‘coverage territory.’” The CGL policy then provides the following:
2. Exclusions
This insurance does not apply to:
...
b. Contractual Liability
‘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 . . . .
Here, the parties agree that the alleged physical defects in the tennis
courts constitute property damage caused by an occurrence that took place in the
coverage territory. The parties dispute whether coverage is excluded by the
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contractual liability exclusion and whether the liability alleged in the underlying
lawsuit is of the sort that Ewing would have in the absence of a contract.
1.
The district court, relying on the Texas Supreme Court’s decision in
Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d
118 (Tex. 2010), held that the CGL policy’s contractual liability exclusion applied
in this case.
In Gilbert, the Dallas Area Rapid Transit Authority (DART) contracted
with a construction company (Gilbert) to construct a light rail system. Id. at
121-22. The contract required the company to protect the area surrounding its
work site, and the company contractually agreed with DART to repair damages
to the property of third parties caused by its construction. Id. at 122. During
construction, heavy rains caused flooding in a building near the work site, and
the third party building owner sued the construction company under several
theories. Id. The construction company’s primary insurer assumed its defense,
but its excess coverage insurer maintained that it had no duty to defend the
company and might ultimately have no duty to indemnify either. Id. at 122-23.
Only one legal theory, breach of contract based on the building owner’s third-
party beneficiary status, survived summary judgment, and the construction
company settled that claim. Id. at 123. The construction company then sought
indemnity from its excess coverage insurer, and sued when the excess insurer
denied coverage. Id. The Texas Supreme Court held that the excess insurer
owed no duty to its insured construction company because the CGL policy’s
contractual liability exclusion applied. Id. The court reasoned that in its
construction contract with DART, the construction company had undertaken
legal accountability to the third-party building owner by contract, and therefore
the contractual liability exclusion applied by its plain meaning. Id. at 126-27.
The court expressly rejected a technical meaning given to the exclusion in other
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jurisdictions—that “assumption of liability” means only the assumption of
liability of another, as in a hold-harmless agreement—insisting that in Texas the
exclusion “means what it says.” Id. at 131-32.
Applying Gilbert’s plain meaning approach, the district court here found
that the School District’s complaint in the underlying lawsuit alleges contractual
liability, and thus triggers the contractual liability exclusion in the CGL policy
between Ewing and Amerisure. Ewing, however, argues that the district court’s
reliance on Gilbert was misplaced because entering a construction contract is not
the same as assuming liability for faulty workmanship performed under the
contract. In Ewing’s view, the construction company’s promise to repair third
party property in Gilbert was an assumption of liability, but the relevant
promise here—an implied promise to the School Board to perform the contract
with ordinary care—is not. Id. at 127. Ewing argues that the contractual
liability exclusion of the CGL policy cannot possibly be triggered by implied
promises, which are contained in every contract, because the Gilbert court stated
in dicta that the contractual liability exclusion does not “preclude[] liability for
all breach of contract claims.”2 Id. at 128. The defect in Ewing’s argument is
that it elevates ambiguous dicta from Gilbert while minimizing that opinion’s
clear holding.
Gilbert, principally, stands for the proposition that a CGL policy’s
contractual liability exclusion excludes coverage for property damage when “the
insured assumes liability for . . . property damage by means of contract . . . .” Id.
at 132. The School District’s complaint in the underlying lawsuit reflects that
2
Ewing reads a bit too much into the Gilbert court’s dicta. Although the contractual
liability exclusion does not operate to exclude coverage for all breach of contract claims, it
operates to exclude many. Compare Gilbert, 327 S.W.3d at 128 (“We do not hold that the
exclusion in Coverage A precludes liability for all breach of contract claims.”) with id. at 131
(approving of the principle that “breach of contract claims generally are not covered absent tort
liability.”).
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the insured, Ewing, assumed liability for defective construction by agreeing in
a contract to complete a construction project, specifically to build tennis courts.
Whether the breached promise was implied or express, the promise was of a
contractual nature, all the same. We therefore hold that the CGL policy’s
contractual liability exclusion excludes coverage in the instant case.
We acknowledge that Gilbert contains some rather opaque language, and
that its particular facts make for imperfect comparisons to the instant case.
Nonetheless, Gilbert furnishes the Texas Supreme Court’s approach to the
contractual liability exclusion, and that approach is straightforward: Apply the
plain language of the exclusion, rather than grafting additional language to it.
Id. at 131-32. Ewing’s position, that the phrase, “assumption of liability in a
contract” means “assumption of a duty to repair third party property, but not
assumption of implied contractual duties,” is contrary to that approach.
Applying this plain meaning approach preserves the longstanding
principle that a CGL policy is not protection for the insured’s poor performance
of a contract. See Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1,
10 (Tex. 2007). Although other jurisdictions adopt this principle by holding that
poor contractual performance is not, under a CGL policy, an occurrence causing
property damage, Texas chooses to arrive at this holding through its
interpretation of coverage exclusions. See id. at 5 n.3, 10 (“More often, however,
faulty workmanship will be excluded from coverage by specific exclusions
because that is the CGL’s structure.”). Our holding today respects this choice.
2.
Having determined that the contractual liability exclusion applies, we now
ask whether any exception to that exclusion restores coverage. The district court
found inapplicable the exception that Ewing asserts, that is, the exception to the
contractual liability exclusion that allows coverage for liability that “the insured
would have in the absence of the contract or agreement.” Ewing contends that
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the district court erred because the petition in the underlying lawsuit uses the
term “negligence,” and liability for negligence is liability that exists irrespective
of a contract.
The School District’s use of the term “negligence,” however, is not
dispositive. See Century Sur. Co. v. Hardscape Constr. Specialties, Inc., 578 F.3d
262, 267-70 (5th Cir. 2009). We must assess the substance of the School
District’s petition and determine whether it alleges an action in contract, tort,
or both. Id. at 267 (citing Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617,
617-18 (Tex.1986)). To do this, we look to the “source of liability and the nature
of the plaintiff’s loss . . . . When the only loss or damage is to the subject matter
of the contract, the plaintiff’s action is ordinarily on the contract.” Id. (quoting
Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494-95 & n. 2 (Tex.1991)).
Ewing’s contract with the School District is the source of its potential
liability because Ewing’s duty to construct usable tennis courts arose out of
contractual undertakings. Further, the damage alleged in the School District’s
complaint is damage to the subject matter of the contract, the tennis courts, not
to any other property. The school district’s claim therefore sounds in contract,
regardless of the other labels that may be attached to it.3 Id. at 269-70. Because
the liability Ewing faces is contractual, it is not liability that would arise in the
absence of a contract. The exception, therefore, does not apply and coverage
remains excluded. We hold that Amerisure owes no duty to defend Ewing in the
underlying lawsuit.
3.
Before resolving the remaining issues on appeal, we pause to acknowledge
a somewhat troubling concern. If the contractual liability exclusion means what
3
Ewing argues that we may not make this assessment at this stage of litigation, when
the question is the duty to defend rather than the duty to indemnify. We note that the stage
of litigation was not a barrier in Century, a duty to defend case. See 578 F.3d at 265.
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it says, then it will often exclude coverage under the same circumstances as
another CGL exclusion: the “your work” exclusion. The “your work” exclusion
excludes coverage for “property damage to [the insured’s] work arising out of it
or any part of it.” Because an insured ordinarily undertakes work through a
contract, the contractual liability exclusion will ordinarily accomplish the same
purpose, that is, exclude coverage for property damage to the insured’s work.
Troubled by this predicament, the dissent is persuaded by Ewing’s position
that “assumption of liability in a contract” encompasses promises to repair third
party property, but not other contractual promises. In essence, the dissent
narrows the influence of the contractual liability exclusion to preserve the
influence of the “your work” exclusion. Although we also would prefer to avoid
the confusion of overlapping exclusions, we cannot accept the dissent’s solution.
The solution is premised on the least clear passage of Gilbert: a
comparison of liability incurred under “general law principles” and liability
incurred when promising to repair third party property. See Gilbert, 327 S.W.3d
at 127. We view this passage as merely explaining why an obligation relating
to third party property—which ordinarily would arise in tort—arose in contract
under the unusual facts of the case. Whatever the passage means, it cannot call
for a hyper-technical interpretation of the contractual liability exclusion, like the
interpretation the dissent favors, without contradicting the rest of the Gilbert
opinion. The opinion’s bottom line is that “assumption of liability in a contract”
means to have “undertake[n]” the “quality or state of being legally obligated or
accountable” in a contract. Id. There is no question but that Ewing has
assumed liability in that sense, and we will not contradict what is clear by
seizing on what is not.4 In fact, the dissent’s interpretation—that only a promise
4
The secondary sources referenced by the dissent do not influence our position. The
dissent writes that no third party commentators “have interpreted [Gilbert] as the majority
does.” In fact, none of the sources referenced by the dissent interpret Gilbert at all; the
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to repair the property of another is an assumption of liability—looks strikingly
like the interpretation that Gilbert expressly rejected, i.e., that only an
assumption of the liability of another is an assumption of liability. Id. at 126-27.
No matter how appropriate it may be to resolve cases like the instant case
under the “your work” exclusion, that judgment is not ours to make. If, under
Texas law, the contractual liability exclusion applies on the facts of this case,
then we are bound to apply it, regardless of our misgivings. We think that it
does.
B.
Still, there is the question whether the Texas Supreme Court would
determine that Amerisure owes a duty to indemnify Ewing in the underlying
lawsuit. Unlike the duty to defend, which is determined by the eight corners
rule, the duty to indemnify is determined by the facts actually established in the
underlying lawsuit. D.R. Horton, 300 S.W.3d at 744. Accordingly, the duty to
indemnify is ordinarily not justiciable until after the underlying lawsuit is
resolved because coverage may turn on facts that are proven, even if those facts
were not pled. Id. at 745.
The district court concluded that Amerisure owed no duty to indemnify
Ewing. Although the court acknowledged that the underlying lawsuit was
unresolved at the time, it concluded that “the same reasons that negate the duty
to defend likewise negate any possibility the insurer will ever have a duty to
indemnify.” Farmers Tex. Cnty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex.
1997).
This determination, we think, was premature. The Texas Supreme Court’s
holding in Griffin, on which the district court relied, is “fact-specific” and,
importantly, “not based on a rationale that if a duty to defend does not arise
sources are case summaries that describe Gilbert. Descriptions of the case and the promise
involved do not provide limitations on the case’s importance or scope.
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from the pleadings, no duty to indemnify could arise from proof of the
allegations.” D.R. Horton, 300 S.W.3d at 744, 745. If some fact outside of the
pleadings may arise in the course of the underlying lawsuit that would trigger
the duty to indemnify, then the duty to indemnify cannot be determined by the
pleadings and insurance policy alone. Id. Other than quoting from Griffin, the
district court did not specify why it considered the duty to indemnify justiciable
at this point in the proceedings; and of course, the mere absence of the duty to
defend, which has been described as the broader of the two duties, does not mean
that there ultimately could be no duty to indemnify. Colony Ins. Co. v. Peachtree
Const., Ltd., 647 F.3d 248, 253-54 (5th Cir. 2011).
Here, the School District might prove in the underlying lawsuit that
Ewing’s performance damaged property other than the tennis courts, thus
triggering tort liability and the exception to the contractual liability exclusion.
Coverage, to some extent at least, could be restored. Because we cannot rule out
this possibility, we cannot say whether Amerisure will have to indemnify Ewing.
See id. at 254-55. We therefore VACATE the district court’s judgment with
respect to the duty to indemnify and REMAND for consideration of whether the
duty to indemnify is ripe for adjudication at this time, based on the current
status of the underlying lawsuit.
C.
Finally, the district court also held that because Amerisure owed no duty
to defend or indemnify Ewing, it had not violated Texas’s Prompt Payment of
Claims Statute.5 That conclusion flows from the sensible rule that there can be
no liability for an insurer failing to pay a claim that is not covered by an
5
The Texas Prompt Payment of Claims Statute provides for civil liability when insurers
do not follow certain mandated procedures for investigating and paying insurance claims. Tex.
Ins. Code § 542.060.
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insurance policy. Progressive Cnty. Mut. Ins. Co. v. Boyd, 177 S.W.3d 919, 922
(Tex. 2005).
With respect to the duty to defend, we find no error in the district court’s
holding. Amerisure may properly refuse to defend Ewing because it is under no
legal obligation to do otherwise. With respect to the duty to indemnify, however,
we must vacate in the light of our holding that the duty to indemnify was not
justiciable at the time of the district court’s judgment.
III.
We thus conclude: Based on the petition in the underlying lawsuit and the
terms of the CGL policy, Amerisure owes no duty to defend its insured, Ewing.
The School District alleges that Ewing breached its construction contract by
building deficient tennis courts. Deficient performance that constitutes a mere
breach of contract is not covered by the CGL policy because liability for deficient
performance is contractual liability excluded under the contractual liability
exclusion.
We cannot say whether Amerisure owes a duty to indemnify Ewing
because facts that would trigger a duty to indemnify might still be proven in the
underlying lawsuit, the status of which is uncertain on the record before us.
The district court’s judgment is AFFIRMED in part, VACATED in part,
and REMANDED with instructions to consider whether Amerisure’s duty to
indemnify Ewing and liability under the Prompt Payment of Claims Statute for
refusing to indemnify Ewing are now ripe for adjudication.
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W. EUGENE DAVIS, Circuit Judge, dissenting:
I respectfully disagree with my colleagues’ interpretation of the Texas
Supreme Court case of Gilbert Texas Construction, L.P. v. Underwriters at
Lloyd’s London, 327 S.W.3d 118 (Tex. 2010). They read that decision to say that
a contract to construct tennis courts carrying with it implied contractual
warranties amounts to an “assumption of liability” that is excluded under the
contractual liability exclusion of the contractor’s comprehensive general liability
(CGL) policy. Because the entire weight of the majority’s decision depends on
this interpretation of Gilbert, that decision requires a closer look.
In Gilbert, a building located adjacent to the construction site where the
Dallas Area Rapid Transit System (DART) was constructing a rail line was
damaged by flooding during an unusually heavy rain. The third party owner of
the building, RTR, sued Gilbert, DART’s general contractor, in tort, and for
breach of contract as a third party beneficiary to the contract between Gilbert
and DART. The tort claim was dismissed on immunity grounds leaving only
RTR’s breach of contract claim pending against Gilbert. Gilbert settled with
RTR and sought indemnity from its CGL carriers, one of which denied coverage.
In the instant case, the contractor, Ewing, undertook to build tennis courts
for a school district, and this work allegedly had defects rendering them unfit for
playing tennis.
There is a critical difference between the construction contract executed
by Gilbert and the contract executed by Ewing – Gilbert’s contract included the
following language that is absent in Ewing’s contract. Paragraph 10(b) of the
DART/Gilbert contract provided:
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b. The Contractor shall protect from damage all existing
improvements and utilities (1) at or near the work site and (2) on
adjacent property of a third party . . . [and] repair any damage to
those facilities, including those that are the property of a third
party, resulting from failure to comply with the requirements of this
contract or failure to exercise reasonable care in performing the
work. If the Contractor fails or refuses to repair the damage
promptly, [DART] may have the necessary work performed and
charge the cost to the Contractor.
Gilbert, 327 S.W.3d at 122.
The entire focus of the Gilbert court was on whether the obligation
assumed by Gilbert in paragraph 10(b) of the DART/Gilbert contract quoted
above was excluded under the contractual liability exclusion found at section
2(b) of the policy. This provision excluded property damage “for which the
insured is obligated to pay damages by reason of the assumption of liability in
a contract or agreement.” Id. at 124. In other words, the sole question
considered by the Gilbert court was whether the obligation undertaken by
Gilbert in paragraph 10(b) of the contract fell within this exclusion, i.e., whether
it was “an assumption of liability in a contract or agreement.” Id.
The insured argued that paragraph 10(b) did not fall within the exclusion
for one reason: the exclusion only applied in the “limited situation in which the
insured has assumed the liability of another such as in a hold harmless or
indemnity agreement.” Id. at 125 (emphasis in original). This was a substantial
argument based on authorities from Texas courts as well as courts from around
the country. However, the Gilbert court disagreed with this argument and
accepted the underwriter’s argument that if the policy was designed to only
exclude assumption of liability of third persons, it should have said so. The court
therefore declined to read the exclusion as only excluding assumptions of
liability “of another.” The court concluded that the obligation undertaken by
Gilbert to protect from damage improvements on adjacent property, to repair
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any such damage including that of a third party, and authorizing DART to have
the necessary work performed and charge the cost to the contractor if it refused
to repair the damage amounted to “an assumption of liability in a contract.”
The court then explained that the obligation Gilbert undertook in
paragraph 10(b) was independent of its general contractual obligation so as to
qualify as an “assumption of liability”:
The obligation to repair or pay for damage to RTR’s property
“resulting from a failure to comply with the requirements of this
contract” extends beyond Gilbert’s obligations under general law
and incorporates contractual standards to which Gilbert obligated
itself. . . . Thus RTR’s breach of contract claim was founded on an
obligation or liability contractually assumed by Gilbert within the
meaning of the policy exclusion.
Gilbert., 327 S.W.3d at 127.1 In its explanation, the Texas Supreme Court
plainly distinguished between two types of liability Gilbert could have under the
construction contract – (i) the liability “it had under general law principles,” and
1
The Texas Supreme Court’s full explanation is as follows:
Independent of its contractual obligations, Gilbert owed RTR the duty to comply
with law and to conduct its operations with ordinary care so as not to damage
RTR's property, and absent its immunity it could be liable for damages it caused
by breaching its duty. In its contract with DART, however, Gilbert undertook
a legal obligation to protect improvements and utilities on property adjacent to
the construction site, and to repair or pay for damage to any such property
"resulting from a failure to comply with the requirements of this contract or
failure to exercise reasonable care in performing the work." (emphasis added).
The latter obligation-to exercise reasonable care in performing its work-mirrors
Gilbert's duty to RTR under general law principles. The obligation to repair or
pay for damage to RTR's property "resulting from a failure to comply with the
requirements of this contract" extends beyond Gilbert's obligations under
general law and incorporates contractual standards to which Gilbert obligated
itself. The trial court granted summary judgment on all RTR's theories of
liability other than breach of contract, so Gilbert's only potential liability
remaining in the lawsuit was liability in excess of what it had under general
law principles. Thus, RTR's breach of contract claim was founded on an
obligation or liability contractually assumed by Gilbert within the meaning of
the policy exclusion.
Gilbert, 327 S.W.3d at 127.
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(ii) “liability in excess of what it had under general law principles.” Id.
According to the court, only the latter category – “liability in excess of what [a
contractor] ha[s] under general law principles” – is contractually “assumed”
within the meaning of the contractual liability exclusion. The court further
explained that the ordinary contractual obligation “to exercise reasonable care
in performing” work under a construction contract is equivalent to the
contractor’s duty “under general law principles.” Id. Therefore, according to
Gilbert, liability arising out of a violation of that duty, though sounding in
contract, is not liability “assumed” by contract for purposes of the exclusion.
Thus, all Gilbert held was that when the insured affirmatively agreed in
paragraph 10(b) to be liable for damages in excess of what it would have been
liable for in tort or in contract “under general law” principles, then that liability
was “assumed” and excluded. Id.; see also Gilbert, 327 S.W.3d at 134 ("‘[W]here
the express contract actually adds nothing to the insured's liability, the
contractual liability exclusion clause is not applicable, but where [the] insured's
liability would not exist except for the express contract, the contractual liability
clause relieves the insurer of liability.'") (quoting Cagle v. Commercial Standard
Ins. Co., 427 S.W.2d 939, 943–44 (Tex.Civ.App.-Austin 1968, no writ)) (emphasis
added). The majority’s leap from this modest holding to say that any contractual
undertaking to perform a construction contract represents an “assumption of
liability” for all breaches of that contract cannot be squared with the court’s
careful language discussed above.
My conclusion is supported by the interpretation of the decision by third-
party commentators. Gilbert was immediately recognized to be a significant
decision, and after it was handed down a number of secondary sources –
including reporters, treatises, and a law review – discussed its holding on the
contractual liability issue. None have interpreted it as the majority does here,
to hold that a contractor’s agreement to perform a construction contract amounts
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to an “assumption of liability” for its faulty performance of that contract. All
read the case as I do: (1) to reject the insured’s argument that the contractual
liability exclusion was limited to the assumption of a third party’s liability, and
(2) to find that the liability in Gilbert was “assumed” under that exclusion
because, in addition to agreeing to perform its work under the contract, the
insured contractor also explicitly agreed to be responsible for the damage to
neighboring properties.2
Some of these sources expressly reference the court’s reasoning quoted
above concerning “obligations under ‘general law principles.’” They interpret it
as I do, to explain that the liability in Gilbert was found to be “assumed” because
Gilbert undertook an additional liability to pay for damages to a third party’s
structures resulting from its malperformance of the contract, in addition to the
duties it already owed in contract and tort under “general law principles.”3
2
E.g., C.T. Drechsler, American Law Reports, 63 A.L.R.2d 1122, §2[c] (updated weekly)
(“Contractual liability exclusion [in Gilbert] . . . barred coverage when contractor assumed
liability for damages in a contract, not just when contractor assumed the liability of a third
party through a contract, and thus the exclusion applied to breach of contract claim brought
by owner of damaged building adjacent to the construction site, which claim was based on
provision of construction contract in which contractor agreed to protect from damage all
improvements and utilities on adjacent property.”); Scott C. Turner, Insurance Coverage of
Construction Disputes § 10:8 (2011) (“Besides agreeing to perform the construction work, the
insured agreed to repair any damage done to adjacent properties of third parties.”); Hon. Craig
Enoch, Digest Texas Supreme Court Cases 2009-2010 Term, 54 The Advoc. (Texas) 1, XVII.A.1.
(2011) (“The primary issue in [Gilbert] was whether the contractual liability exclusion in a
Commercial General Liability policy excludes coverage for property damage when the only
basis for liability is that the insured contractually agreed to be responsible for the damage. .
. . The Court refused to interpret the provision to apply only where the insured assumed
another's liability in a contract, as argued by Gilbert.”); Craig B. Glidden, Business Litigation,
4 West's Tex. Forms, Business Litigation Ch. 13 Introduction (2011) (“In [Gilbert], the Texas
Supreme Court held that the contractual liability exclusion in a CGL policy excluded coverage
for property damage when the only basis for liability was that the insured contractually agreed
to be responsible for the damage.”)
3
E.g., J. Price Collins, et al, Insurance Law, 64 SMU L. Rev. 341, 354-356 (2011)
(“Discounting the proposition that ‘assumption' referred only to the assumption of another's
liability, the supreme court held that the exclusion applies in those situations in which the
insured is obligated to pay damages by reason of the contractual assumption of liability beyond
its obligations under general law. Because Gilbert already owed a duty to RTR under general
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Again, no one interpreted this case as the majority does here, to hold that an
“assumption of liability” is inherent in every agreement to perform a
construction contract.
Finally, the majority’s expansion of the contractual liability exclusion is
apparently animated by the belief that unless coverage is excluded in this case
as a contractually assumed liability, the CGL policy will act as a performance
bond to cover all instances of the contractor’s faulty workmanship. This concern
that a CGL policy should not operate as a performance bond for the contractor
has also been expressed by the Texas Supreme Court. See Lamar Homes, Inc.
v. Mid-Continent Cas. Co., 242 S.W.3d 1, 10 (Tex. 2007) (“More often, however,
faulty workmanship will be excluded from coverage by specific exclusions
because that is the CGL's structure.”). Although this concern does not justify the
majority’s unduly expansive reading of Gilbert, I understand and share their
concern. However, this concern is adequately addressed by other policy
provisions that make the majority’s troublesome expansion of the contractual
liability exclusion unnecessary.
As noted above, other “business risk exclusions” will usually exclude
coverage in cases such as this one. This principle is illustrated by a recent
decision of this court, another post-Gilbert faulty workmanship case from Texas.
In VRV Development L.P. v. Mid-Continent Casualty Co., 630 F.3d 451 (5th Cir.
2011), a contractor was sued by a property developer for its faulty workmanship.
The contractor sought defense and indemnity coverage from its CGL insurer.
law principles to exercise reasonable care in performing its work, the supreme court concluded
that the obligation to pay for damages ‘resulting from a failure to comply with the
requirements of this contract' represented an additional liability Gilbert assumed by
contract.”); Mark M. Schneier, 31 No. 9 Construction Litigation Reporter 9 (2010), and 32 No.
2 Construction Litigation Reporter 8 (2011) (“Independent of the prime contract, Gilbert owed
RTR the duty to conduct its operations with ordinary care so as not to damage RTR's property
and, absent immunity, Gilbert may have been liable to RTR for breaching its duty. In the
prime contract, however, Gilbert undertook a legal obligation to protect properties adjacent
to the work site, and to repair or pay for damage to any such property . . .”).
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The insurer denied coverage under the “your work”4 and contractual liability
exclusions,5 and a suit followed. The district court upheld the denial on
unrelated grounds.
On appeal, we found, consistent with Lamar Homes, 242 S.W.3d, at 4, that
the faulty workmanship was an occurrence giving rise to coverage under the
CGL policy. We found, however, that coverage was excluded under exclusion (l),
the “your work” exclusion for “property damage to your work arising out of it.”
We also found that the subcontractor exception to that exclusion did not revive
coverage, because the parties had included an endorsement in the policy
removing the exception.
This ruling was consistent with the guidance of the Texas Supreme Court
in two recent faulty workmanship cases, Lamar Homes, 242 S.W.3d at 12, and
Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 653-55
(Tex. 2009). There, the Court found that coverage for a contractor's faulty
workmanship under the CGL depends on (i) whether the underlying petition
alleges faulty workmanship by the contractor or the subcontractor, and (ii) for
work performed by the subcontractor, whether the parties included the
endorsement eliminating the "subcontractor exception" to the "your work"
exclusion in the policy. In Lamar Homes and Pine Oak Builders the parties had
not included the endorsement, so coverage was excluded for the claims alleging
faulty workmanship by the contractor, but not for the claims arising out of the
subcontractor’s work. In VRV Development the parties had included the
4
A standard exclusion in CGL policies excludes coverage for “‘[p]roperty damage’ to
‘your work’ arising out of it or any part of it.” “Your work” means, inter alia, “[w]ork or
operations performed by you or on your behalf.” See VRV Development, 630 F.3d, at 455.
5
These were the bases for denying coverage for the claims that faulty workmanship
resulted in damage to the subject of the contract, as is the issue here. The contractor also
sought coverage for claims of damage to other property. This coverage was denied because the
damage occurred outside the effective period of the policy, a denial which we upheld on appeal.
See VRV Development, 630 F.3d at 458-59.
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endorsement, so coverage was excluded even though the damage was allegedly
caused by the subcontractor’s work. In this case, the underlying petition alleges
faulty workmanship by the subcontractors and the contractor, and the policy
does not include the endorsement eliminating the subcontractor exception.
Thus, the well known endorsement discussed in the above cases was
available in this case to exclude coverage for defects caused by the
subcontractor’s work had the parties bargained to include it in the policy. They
did not do so. We should respect that bargain. More to the point, I read the
Texas cases (as did our panel in VRV Development) as having chosen to rely on
this “business risk” exclusion, in the form bargained for by the parties, to
prevent the contractor’s CGL policy from becoming a performance bond, without
the majority’s unnecessary and troublesome expansion of the contractual
liability exclusion.6
III
Conclusion
For all of these reasons, I would reverse the district court’s conclusion that
the Ewing contract amounted to an assumption of liability that excluded
Amerisure’s coverage.
6
The majority acknowledges this issue but endorses the contractual liability exclusion
as merely another way to resolve these types of cases. This position would be acceptable if
application of the contractual liability exclusion and the “your work” exclusion led to the same
result. However, the “your work” exclusion contains the “subcontractor exception,” for which
the contractual liability exclusion contains no equivalent. The majority thus reads this
exception out of existence. In my view, this renders a significant change in Texas insurance
law, upsetting parties’ settled expectations and dictating that these cases will henceforth be
decided differently in federal court than they have been decided in Texas.
Like the majority, despite this result, I would still interpret the contractual liability
exclusion to exclude coverage here if I thought that was the holding of Gilbert. I do not, for
the reasons explained above. My observation that this interpretation yields a more coherent
role for the contractual liability exclusion in the CGL policy merely reinforces this view. See
Gilbert, 327 S.W.3d at 126 (“We examine the entire agreement and seek to harmonize and give
effect to all provisions so that none will be meaningless.”).
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Alternatively, because this decision expands the holding in Gilbert,
renders a major portion of the CGL superfluous, and is inconsistent with the way
Texas courts have decided this type of case in the past, I would certify the
question to the Texas Supreme Court.
Therefore, I respectfully dissent.
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