The U.S. Fifth Circuit Court of Appeals affirmed a district court’s grant of summary judgment in favor of an insurer on a contractual liability exclusion, finding that it applied and that the exception to the exclusion for liability that would otherwise exist at common law does not apply. Crownover v. Mid-Continent Casualty Co., 2014 WL 2921649 (5th Cir. June 27, 2014).

Homeowners brought claims for construction defects against their builder and eventually went to arbitration that concluded with a finding that the builder had breached its express warranty to make repairs.  The builder filed for bankruptcy protection, and the homeowners filed suit against the builder’s insurer to collect the award.  The parties filed cross-motions for summary judgment.  The insurer relied upon a standard contractual liability exclusion and argued that coverage was excluded because the claims were contractual and a duty to make repairs was not a duty the builder would have otherwise had in the absence of the contract. The homeowners argued that the court could have still found that there was also a breach of an implied warranty of construction in a good and workmanlike manner.  The trial court granted the insurer’s motion.

The Fifth Circuit relied upon the Texas Supreme Court’s rulings in Gilbert Texas Construction, L.P. v. Underwriters at Lloyds London, 327 S.W.3d 118 (Tex. 2010), and most recently, Ewing Construction Co. v. Amerisure Insurance Co., 420 S.W.3d 30 (Tex. 2014) to hold that the district court was limited to the findings of the arbitration, which did not include a finding on an implied warranty of construction, and that Texas law provides that an express warranty precludes an implied warranty for the same activity in any event.

The contract included express warranties to make prompt repairs, which are greater than the duty it would have at common law, and the insurer argued that the exception for liability that could exist absent the contract did not apply.  The Fifth Circuit rejected the argument that the contractual liability exclusion was being interpreted so broadly as to make coverage in other parts of the contract (such as completed operations done by an subcontractor) illusory, emphasizing that the arbitration award made no findings on the quality of the initial construction, only the failure to make the repairs, and so that section was unaffected.