Posted on 11.05.14
Fifth Circuit see-saw on contractual-liability exclusion
Source: http://www.lexology.com, November 2, 2014
By: Carl A. Salisbury, Kilpatrick Townsend & Stockton LLP
The United States Court of Appeals for the Fifth Circuit has gone back and forth, and back again, in deciding just what an exclusion in the standard Commercial General Liability policy means. Fortunately for construction contractors and policyholders, the Court got it right in the end.
Maybe this will be the last word on how to apply the “contractual-liability” exclusion to insurance coverage claims of faulty workmanship. And maybe it won’t. But it is gratifying that, after struggling to figure out the scope of the exclusion, the United States Court of Appeals for the Fifth Circuit (the federal court that hears appeals from U.S. District Courts in Texas, Louisiana, and Mississippi) eventually got it right.
Twice before, the Fifth Circuit has taken up the question whether a construction contractor can recover insurance for claims of faulty workmanship despite an exclusion in the standard-form CGL policy that precludes coverage for “liabilities assumed under contract.” (See the two previous blog posts about these decisions here.) Most construction projects, of course, are built pursuant to contracts — sometimes very complex contracts — that usually make representations and warranties that the project will be built in a “workmanlike manner,” or words to that effect, and that any defects will be corrected at the expense of the contractor.
When things go awry, the building owner invariably sues the contractor under both the contract and the common law to fix the problem. Whether the contractual-liability exclusion precludes coverage to the contractor for such claims is an issue that has vexed the Fifth Circuit, at least until now.
The first time around, the Court initially got it wrong, and affirmed on an appeal the decision of a District Court that had granted summary judgment to the insurer on the basis of the exclusion. On a rehearing in that case, the Fifth Circuit certified the question to the Texas Supreme Court — that is, it asked the Texas court to clarify and decide Texas law on whether the contractual liability exclusion precludes coverage for liabilities arising from alleged construction defects. In a decision that was, at the time, long-awaited, the Texas Supreme Court sided with the policyholder and held that the exclusion did not preclude coverage for faulty workmanship, even though the policyholder had agreed in a contract to perform the construction in a “workmanlike manner.” That case was Ewing Constr. Co. v. Amerisure Ins. Co., No. 12-0661 (Jan. 17, 2014). (Get a copy here.)
The contractual-liability exclusion contains an exception that says the exclusion will not apply to any claims for liability “That the insured would have in the absence of the contract or agreement.” The Texas Supreme court held that the contractual obligation to perform in a workmanlike manner did not enlarge the contractor’s obligations under the common law. Therefore, the contractor would have had liability to the project owner even in the absence of the contract. The exception to the exclusion applied and the provision did not exclude the claims for faulty workmanship. That was the holding in Ewing.
Whether the contractual-liability exclusion precludes coverage to the contractor for such claims is an issue that has vexed the Fifth Circuit, at least until now.
So far, so good. Then, in June 2014, the Fifth Circuit decided the case Crownover v. Mid-Continent Cas. Co., No. 11-10166 (5th Cir. June 27, 2014). The scenario in Crownover was a familiar one in construction-defect coverage cases. The contractor built a home and delivered it to the homeowners. Shortly thereafter, cracks began to appear in the foundation. In addition, there were undetected leaks in the HVAC system that overburdened and eventually destroyed the mechanical HVAC units, which then had to be replaced. The Crownovers (the homeowners) took the contractor to arbitration and won on the basis of the contractor’s contractual warranty to repair defects. The contractor went bankrupt shortly after the arbitration and the Crownovers obtained approval from the bankruptcy court to seek relief under the contractor’s general liability insurance policy.
The carrier, Mid-Continent, denied coverage on the basis of the contractual-liability exclusion. The Crownovers sued and the United States District Court for the Northern District of Texas granted summary judgment to the carrier, finding that, since the arbitrator’s award to the Crownovers only referenced the contractual obligation to repair, the liability was therefore based solely on the contract and the exception to the contractual-liability exclusion did not apply.
The Crownovers appealed to the Fifth Circuit. In its initial run at the question on appeal, the Fifth Circuit affirmed the District Court’s decision and held that the arbitrator’s award, which was based solely on the language of the construction contract, required finding that the contractual-liability exclusion applied to preclude coverage. For a full discussion and critique of that decision, see the blog post here.
In a display of admirable tenacity in the face of these losses, the Crownovers filed a motion for reconsideration. Such motions are typically a terrible long shot for the moving party. Judges always try hard to get their decision right the first time around and, the fact of the matter is, they do get it right more often than not. Accordingly, they’re usually pretty unreceptive to an argument that they should revisit an issue they have spent a lot of time deciding already. In the case of a motion for reconsideration to the Fifth Circuit, the odds of winning are even longer than they might otherwise be because each case before a U.S. Court of Appeals is decided by a panel of three judges, all of whom have carefully considered the decision the first time around and who now need to be convinced on the motion for reconsideration that all three of them were mistaken.
The Fifth Circuit kept at it and, despite see-sawing on the issue for a time, finally came to rest on the correct application of the contractual-liability exclusion.
In the Crownover case, however, the Fifth Circuit’s display of open-minded fairness was at least equal to the policyholder’s tenacity. The Court took another long and careful look at the Texas Supreme Court’s decision in Ewing and decided, correctly, that the arbitrator’s decision in favor of the Crownovers did not, in fact, enlarge the liabilities or legal obligations that the contractor would have had even in the absence of the contractual obligation to repair. In other words, the legal obligation to repair construction defects applies whether or not the contractor has agreed to do so in a contract. Since the contractor would have had a duty to repair the defects to the Crownovers’ home even in the absence of the contract, then the exception to the contractual-liability exclusion applied and, in accord with the Ewing decision, the Court granted summary judgment to the Crownovers under the Mid-Continent policy.
The Crownover decision also addressed several other exclusions, commonly lumped together and called the “business risk” exclusions, in favor of the Crownovers’ claim for coverage. (For a discussion of why the phrase “business risk” exclusions is a harmful misnomer, see the post here. It would eliminate confusion about the intent of CGL coverage and would, accordingly, tend to improve the quality of judicial decisions if we stopped referring to this group of exclusions collectively and simply called them by their individual names, as in: the “Damage to Your Work” exclusion; the “Damage to Your Product” exclusion; the “Damage to Property” exclusion; and the “Impaired Property” exclusion.) The Fifth Circuit’s analysis of each of those exclusions was careful and correctly confined them to the rather narrow set of circumstances to which they belong. That part of the opinion could be the subject of a separate blog post (and is consistent with the ruminations that appear in this post).
The real news, though, is that the Fifth Circuit kept at it and, despite see-sawing on the issue for a time, finally came to rest on the correct application of the contractual-liability exclusion. The hard work and analysis the Court has devoted to the issue should make the Crownoverdecision persuasive.
Other courts take notice: the Fifth Circuit has now done the heavy lifting for anyone who has to interpret this nettlesome exclusion in the standard CGL policy.
Maybe this will be the last word on how to apply the “contractual-liability” exclusion to insurance coverage claims of faulty workmanship. And maybe it won’t. But it is gratifying that, after struggling to figure out the scope of the exclusion, the United States Court of Appeals for the Fifth Circuit (the federal court that hears appeals from U.S. District Courts in Texas, Louisiana, and Mississippi) eventually got it right.
Twice before, the Fifth Circuit has taken up the question whether a construction contractor can recover insurance for claims of faulty workmanship despite an exclusion in the standard-form CGL policy that precludes coverage for “liabilities assumed under contract.” (See the two previous blog posts about these decisions here.) Most construction projects, of course, are built pursuant to contracts — sometimes very complex contracts — that usually make representations and warranties that the project will be built in a “workmanlike manner,” or words to that effect, and that any defects will be corrected at the expense of the contractor.
When things go awry, the building owner invariably sues the contractor under both the contract and the common law to fix the problem. Whether the contractual-liability exclusion precludes coverage to the contractor for such claims is an issue that has vexed the Fifth Circuit, at least until now.
The first time around, the Court initially got it wrong, and affirmed on an appeal the decision of a District Court that had granted summary judgment to the insurer on the basis of the exclusion. On a rehearing in that case, the Fifth Circuit certified the question to the Texas Supreme Court — that is, it asked the Texas court to clarify and decide Texas law on whether the contractual liability exclusion precludes coverage for liabilities arising from alleged construction defects. In a decision that was, at the time, long-awaited, the Texas Supreme Court sided with the policyholder and held that the exclusion did not preclude coverage for faulty workmanship, even though the policyholder had agreed in a contract to perform the construction in a “workmanlike manner.” That case was Ewing Constr. Co. v. Amerisure Ins. Co., No. 12-0661 (Jan. 17, 2014). (Get a copy here.)
The contractual-liability exclusion contains an exception that says the exclusion will not apply to any claims for liability “That the insured would have in the absence of the contract or agreement.” The Texas Supreme court held that the contractual obligation to perform in a workmanlike manner did not enlarge the contractor’s obligations under the common law. Therefore, the contractor would have had liability to the project owner even in the absence of the contract. The exception to the exclusion applied and the provision did not exclude the claims for faulty workmanship. That was the holding in Ewing.
Whether the contractual-liability exclusion precludes coverage to the contractor for such claims is an issue that has vexed the Fifth Circuit, at least until now.
So far, so good. Then, in June 2014, the Fifth Circuit decided the case Crownover v. Mid-Continent Cas. Co., No. 11-10166 (5th Cir. June 27, 2014). The scenario in Crownover was a familiar one in construction-defect coverage cases. The contractor built a home and delivered it to the homeowners. Shortly thereafter, cracks began to appear in the foundation. In addition, there were undetected leaks in the HVAC system that overburdened and eventually destroyed the mechanical HVAC units, which then had to be replaced. The Crownovers (the homeowners) took the contractor to arbitration and won on the basis of the contractor’s contractual warranty to repair defects. The contractor went bankrupt shortly after the arbitration and the Crownovers obtained approval from the bankruptcy court to seek relief under the contractor’s general liability insurance policy.
The carrier, Mid-Continent, denied coverage on the basis of the contractual-liability exclusion. The Crownovers sued and the United States District Court for the Northern District of Texas granted summary judgment to the carrier, finding that, since the arbitrator’s award to the Crownovers only referenced the contractual obligation to repair, the liability was therefore based solely on the contract and the exception to the contractual-liability exclusion did not apply.
The Crownovers appealed to the Fifth Circuit. In its initial run at the question on appeal, the Fifth Circuit affirmed the District Court’s decision and held that the arbitrator’s award, which was based solely on the language of the construction contract, required finding that the contractual-liability exclusion applied to preclude coverage. For a full discussion and critique of that decision, see the blog post here.
In a display of admirable tenacity in the face of these losses, the Crownovers filed a motion for reconsideration. Such motions are typically a terrible long shot for the moving party. Judges always try hard to get their decision right the first time around and, the fact of the matter is, they do get it right more often than not. Accordingly, they’re usually pretty unreceptive to an argument that they should revisit an issue they have spent a lot of time deciding already. In the case of a motion for reconsideration to the Fifth Circuit, the odds of winning are even longer than they might otherwise be because each case before a U.S. Court of Appeals is decided by a panel of three judges, all of whom have carefully considered the decision the first time around and who now need to be convinced on the motion for reconsideration that all three of them were mistaken.
The Fifth Circuit kept at it and, despite see-sawing on the issue for a time, finally came to rest on the correct application of the contractual-liability exclusion.
In the Crownover case, however, the Fifth Circuit’s display of open-minded fairness was at least equal to the policyholder’s tenacity. The Court took another long and careful look at the Texas Supreme Court’s decision in Ewing and decided, correctly, that the arbitrator’s decision in favor of the Crownovers did not, in fact, enlarge the liabilities or legal obligations that the contractor would have had even in the absence of the contractual obligation to repair. In other words, the legal obligation to repair construction defects applies whether or not the contractor has agreed to do so in a contract. Since the contractor would have had a duty to repair the defects to the Crownovers’ home even in the absence of the contract, then the exception to the contractual-liability exclusion applied and, in accord with the Ewing decision, the Court granted summary judgment to the Crownovers under the Mid-Continent policy.
The Crownover decision also addressed several other exclusions, commonly lumped together and called the “business risk” exclusions, in favor of the Crownovers’ claim for coverage. (For a discussion of why the phrase “business risk” exclusions is a harmful misnomer, see the post here. It would eliminate confusion about the intent of CGL coverage and would, accordingly, tend to improve the quality of judicial decisions if we stopped referring to this group of exclusions collectively and simply called them by their individual names, as in: the “Damage to Your Work” exclusion; the “Damage to Your Product” exclusion; the “Damage to Property” exclusion; and the “Impaired Property” exclusion.) The Fifth Circuit’s analysis of each of those exclusions was careful and correctly confined them to the rather narrow set of circumstances to which they belong. That part of the opinion could be the subject of a separate blog post (and is consistent with the ruminations that appear in this post).
The real news, though, is that the Fifth Circuit kept at it and, despite see-sawing on the issue for a time, finally came to rest on the correct application of the contractual-liability exclusion. The hard work and analysis the Court has devoted to the issue should make the Crownoverdecision persuasive.
Other courts take notice: the Fifth Circuit has now done the heavy lifting for anyone who has to interpret this nettlesome exclusion in the standard CGL policy.
