While addressing the impact of a contractual liability exclusion, the Fifth Circuit recently held that the duty to indemnify could potentially exist despite the absence of a duty to defend. Applying Texas law, the Fifth Circuit in Ewing Construction Co., Inc. v. Amerisure Ins. Co., No. 11-40512, 2012 WL 2161134 (5th Cir. June 15, 2012), affirmed the decision by the District Court for the Southern District of Texas granting summary regarding the insurer’s duty to defend, but remanded for additional fact finding regarding a potential duty to indemnify.
The policyholder, a general contractor, undertook to construct tennis courts for a school district. The courts proved unfit for play. The school district sued the contractor, alleging defective construction. Its complaint included contract and negligence causes of action, but did not allege damage to property other than the athletic facility itself. The contractor tendered its defense to its CGL insurer. The insurer denied a defense, citing the “contractual liability” exclusion, and the contractor filed suit. The district court entered summary judgment for the insurer. The court held that all potential damages fell within the “contractual liability” exclusion, which precluded any duty to defend or indemnify.
On appeal, the Fifth Circuit affirmed the decision, but modified it. The Court of Appeals agreed that the gravamen of the underlying complaint was the contractor’s purportedly deficient performance of the contract. The court explained that states generally interpret general liability policies as precluding coverage for deficient contractual performance on the basis that subpar performance does not constitute an “occurrence.” Texas arrives at the same conclusion, but through a different route: its interpretation of coverage exclusions. In this case, despite the school district’s utilization of the term “negligence” in its underlying complaint, the policyholder’s potential liability stemmed from contractual obligations. As such, notwithstanding the terminology utilized, the school district’s claim arose in contract. Therefore, potential coverage was barred by the contractual liability exception, no exception to the exclusion applied, and the insurer was entitled to summary judgment regarding the duty to defend.
The court held that the district court’s ruling on the duty to indemnify was premature, however. It explained that “the duty to indemnify is determined by the facts actually established in the underlying lawsuit.” Since the underlying lawsuit had not been resolved, it was conceivable that the ultimate resolution could rest on circumstances giving rise to coverage notwithstanding the contractual liability exclusion. The court suggested the possibility of an award for damaged property other than the athletic facility, “thus triggering tort liability and the exception to the contractual liability exclusion.” Therefore, the court remanded for further factual inquiry to ascertain if the determination that the insurer owed no duty to indemnify was warranted at this stage. Insurers relying on coverage exclusion terms in briefing dispositive motions will thus want to tailor their arguments carefully to foreclose the possibility that the court will identify any potential basis for a lingering duty to indemnify.