J. Richard Harmon

J. Richard Harmon

Partner, Insurance Litigation & Coverage Chair

Fifth Circuit Holds Coverage for Faulty Workmanship Barred by the Contractual Liability Exclusion

June 18, 2012 E-Alerts

Ewing Constr. Co. v. Amerisure Ins. Co., No. 11-40512 (5th Cir. June 15, 2012)

The Fifth Circuit Court of Appeals, interpreting Texas law, handed down its decision in Ewing addressing the applicability of the breach of contract exclusion in a construction defect case. The court held (2-1) in favor of Amerisure that the exclusion barred coverage for faulty workmanship. The contract at issue involved the construction of tennis courts, and, notably, the damage was confined to the tennis courts. According to the court, “the implied promise to the School Board to perform the contract with ordinary care,” when the damage was to the property that was the subject of the contract, constituted the assumption of liability in the contract. The court held that deciding whether Amerisure owed indemnity was premature because evidence could be presented in the underlying case that Ewing caused damage to property other than the tennis courts, potentially establishing tort liability outside the contract. As the case was pleaded, however, Amerisure had no duty to defend.

The opinion is very insurer friendly—going so far as to say that while other states have found faulty workmanship is not an occurrence to avoid turning the GL policy into a performance bond, Texas gets to the same result through the breach of contract exclusion. According to the court, the pleaded claim for negligence did not change the result because the duties between the school district and Ewing were premised on their contractual relationship.

The dissent agreed with Ewing, finding that the implied contractual warranties assumed by Ewing were distinguishable from the express contractual liability the insured assumed inGilbert Texas Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010), where the assumption of liability concerned liability to repair property damage of third parties. The dissent also noted that the majority’s holding essentially abrogated the “business risk” exclusions, which would result in a general contractor receiving no coverage for the faulty workmanship of a subcontractor.

Ewing will likely file a motion for rehearing en banc. Given that there was a dissenting opinion, a greater chance exists that the motion for rehearing will be granted. Additionally, while the original panel chose not to certify the coverage questions to the Texas Supreme Court, it is possible that the en banc panel will reconsider and certify those questions.