Houston – On June 15, 2012, the Fifth Circuit issued Ewing Construction Co., Inc. v. Amerisure Ins. Co., Case 11-40512, —F.3d—, (5th Cir. 2012). Ewing is the most recent in the contentious and confusing line of cases determining the extent of coverage and applicable exclusions in CGL policies, following Lamar Homes and Gilbert. The 5th Circuit Court of Appeals held that an obligation implied in contract is a sufficient assumption of liability to trigger the contractual liability exclusion in a CGL policy and indirectly held that the economic loss rule can extinguish the insurer’s duty to defend (despite the SCOT specifically prohibiting that exact analysis in Lamar Homes).
In this case Ewing Construction Company entered into a contract with a school district to construct tennis courts. When the courts began to flake and deteriorate shortly after completion, the district sued on the contract and in negligence, and Ewing tendered defense of the lawsuit to its insurer, Amerisure. Amerisure denied coverage, and Ewing filed suit in the District Court for the Southern District of Texas, contending Amerisure was obligated to defend it in the underlying suit. Ewing’s CGL policy contained the standard exclusion to coverage for any contractually assumed liability. The district court held that the exclusion applied to any liability arising under contract, meaning that Amerisure had no duty to defend or indemnify Ewing, because Ewing contracted to build the defective courts.
You may recall the Supreme Court of Texas dealing with the same exclusion in Gilbert, determining the relevant policy excluded damages in that case because the contractor expressly assumed liability for damage to property adjacent to the worksite. Gilbert, however, involved a set of “unusual circumstances” in that the contractor was protected by governmental immunity. Accordingly, Gilbert’s express assumption of liability in its contract was liability that would not otherwise exist.
The Ewing Court has interpreted Gilbert to apply to any contractual liability, not just that which the contractor expressly assumes. It held that the CGL contractual liability exclusion operated in this instance because Ewing’s contract contained an implied liability for defective construction, and that whether “the breached promise was implied or express, the promise was of a contractual nature, all the same.”
The Court then determined that the exception to the exclusion, that coverage continues for liability the insured would have in the absence of the contract (negligence), was inapplicable. The duty to defend is judicially determined using the eight corners rule: the court may only look to the pleadings and the policy. Without saying so, the Ewing Court applied the economic loss rule to its pleadings analysis. It determined that, despite the pleadings in this case alleging breach of contract and negligence, all alleged damages stemmed from Ewing’s contractual obligation and were to the subject matter of the contract, and so the exclusion applied. This is contrary to the SCOT’s stance in Lamar Homes, which held that the economic loss rule is not an adequate tool for assessing coverage. The Court also held that the exception for liability that would exist in the absence of the contract did not apply even though there were pending negligence allegations against Ewing.
The decision includes a fairly scathing dissent from Judge Davis that notes that Gilbert was limited to express assumptions of liability, quoting Gilbert, “[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.”
Ewing effectively renders a significant portion of contractor CGL policies meaningless in the Federal courts. As the dissent points out, under Ewing’s line of reasoning, an insurance carrier would now have its pick of the “your work” exclusion, or the contractual liability exclusion, which now performs the same function, but doesn’t contain the exception for subcontracted work. At the very least, inartfully drafted pleadings that don’t clearly allege damage beyond the subject of the contract risk losing coverage for their defense. For general contractors, this will often be easier said than done.
The district court opinion had not been widely followed by insurers. In fact, the lawyers at Andrews Myers have been involved in dozens of settlements where insurers—who were clearly aware of the opinion—completely ignored the holding of the district court and settled cases even though the damages were to the subject matter of the construction contract. They did so because the district court’s interpretation was contrary to how most insurers apply CGL coverage to general contractors. It will not be that simple now that the Fifth Circuit has affirmed the district court’s opinion because insurers may have reinsurance implications if they do not follow Fifth Circuit precedent. We expect that there will be a significant move to get the Fifth Circuit to rehear the case. We will keep you apprised of any developments. In the meantime, if you have any questions, please do not hesitate to contact one of our attorneys.