The Summer of Dissents - Ewing Construction v. Amerisure Eviscerates Completed Operations Coverage
The Fifth Circuit panel that decided Ewing Construction Co. v. Amerisure Insurance Company did not get the same press that Justice Roberts and the SCOTUS opinion on Obamacare did this Summer, but it was just as wrong. Ewing v. Amerisure should be a wake-up call to contractors and subcontractors (especially those with coverage by Amerisure) that their completed operations coverage is not safe.
What happened? Ewing contracted with the Tuloso-Midway ISD in Corpus Christi to build tennis courts at a school. Soon after completion, the courts began cracking and flaking, rendering them unfit for playing tennis. Predictably, the school district filed suit against Ewing alleging breach of contract and negligence for the defective construction. Ewing tendered its claim to its insurer, Amerisure. Surprisingly, Amerisure denied coverage. We say "surprisingly" because this is not an unusual claim against a contractor, and one that any carrier in the business of insuring construction contractors would normally defend, absent a clear exclusion.
Not so in this case. Here, Amerisure contended that the "contractual liability exclusion" applied to exclude defense and indemnity for the claim brought by Ewing Construction. The district court accepted this argument and granted summary judgment in favor of Amerisure. The Fifth Circuit panel affirmed the district court's holding by a 2 to 1 margin.
Both the district court and the Fifth Circuit judges declared that they were simply applying Texas law under the Texas Supreme Court's decision in Gilbert Texas Construction v. Underwriters at Lloyd's of London. But, the facts of Gilbert are somewhat unique.
Gilbert had contracted with the Dallas Area Rapid Transit System to construct a light rail project. In the contract, Gilbert agreed to protect all surrounding property, and it agreed to repair any damages to the property of third parties caused by its construction. Heavy rains caused flooding to a building near the work site. The building owner filed suit alleging several different theories including negligence and contractual. All allegations except the breach of contract were dismissed and Gilbert settled the breach of contract issue and sought reimbursement from Lloyds. The Texas Supreme Court ruled that the promise to repair any damaged property was a contractual obligation. It also went on to rule that the exception to the exclusion for liability that you would have in the absence of any contract did not apply in this case since all negligence allegations had been dismissed. In other words, but for the contract, Gilbert would have no liability. The Texas Supreme Court once again interpreted the meaning of the policy based on the plain meaning of the language and arrived at a very logical conclusion based on the unique characteristics of this case.
Ignoring those unique characteristics (i.e., the agreement to repair any damages to the property of third party), the majority of the Fifth Circuit panel applied the contractual liability exclusion to Ewing's claim using the holding of Gilbert as cover.
At this point you might be saying one of two things, "I didn't know my CGL policy excluded contractual liability?" or "What does this have to do with completed operations?" Let's digress a bit to explain the first question. If you have the second question, just hang on a little longer.
The contractual liability exclusion is a standard part of your CGL policy. It excludes bodily injury and property damage "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." Don't panic! There are exceptions for liability "the insured would have in the absence of the contract or agreement" and liability assumed under an "insured contract" (where you get coverage for your indemnity agreement).
Here is where the Fifth Circuit panel really ran off the rails. Ewing was sued for breach of contract AND negligence. Clearly, that negligence claim is something they would be liable for in the absence of the contract or agreement. So, there is coverage, right? Let's go to the transcript:
The School District's use of the term "negligence," however is not dispositive . . . . When the only loss or damage is to the subject matter of the contract, the plaintiff's action is ordinarily on the contract. 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. . . . 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.
So much for the "eight-corners rule" determining the duty to defend and so much for completed operations coverage, too! How so? Here is a quick example from John Prince:
You contract to build a school. Skylights are installed as a part of the contract. The skylights are installed incorrectly allowing water to pour inside the building during a heavy rain. The only damage is to the building. None of the school’s contents are damaged. According to the Fifth Circuit, “the damage alleged in the school district’s complaint is damage to the subject matter of the contract… not to any other property. The school district’s claim therefore sounds in contract..”. In other words, the contractual exclusion applies, and you have no insurance coverage!
John's example is spot on. The defective work must damage something outside the subject matter of the contract to create coverage. This effectively eviscerates a contractor's completed operations coverage for work put in place. The implications of this decision are probably more ominous for general contractors than specialty or subcontractors performing their own work, but that will depend on the circumstances of each contractor.
How far will this case go? Is this the new law of the land? It is important to note that the Fifth Circuit is a federal court, not a state court. While its ruling on a matter of federal law would be binding precedent on Texas courts, this is not a ruling on a matter of federal law. This is a matter of Texas law. Thus, it is persuasive authority, but not binding precedent on the Texas Supreme Court or any other state court. It is binding on federal district courts in the state of Texas and any federal district courts in the Fifth Circuit. Here is the rub: almost no insurance carriers are domiciled in the state of Texas. This means they will almost certainly be able to remove any suit brought in state court to federal court.
Groups representing the Texas construction industry have urged a rehearing of the Ewing v. Amerisure decision. If that rehearing is granted, the Fifth Circuit might overturn this panel decision. If it is denied, the only relief will come from the Supreme Court of the United States or perhaps by a new decision from the Texas Supreme Court.
Authored by Andy Adams and John Prince
BREAKING NEWS - August, 9, 2012 - We had hoped to influence the debate with our blog post, but this is ridiculous! Yesterday, mere hours after our post, the Fifth Circuit released a new opinion vacating the 2-1 decision in Ewing v. Amerisure and certfying the questions to the Supreme Court of Texas. Go here to find out what happened. Now, if we could just get Justice Roberts to do the same thing with his opinion . . .