The Fifth Circuit Court of Appeals has held that a contractor’s breach of an express warranty to repair does not constitute an “assumption of liability in a contract or agreement” for purposes of the “contractual liability” exclusion found in most general liability policies.
Once upon a time, insurers, insureds and courts understood that the “contractual liability” exclusion, which applies to damages the insured is obligated to pay by reason of the “assumption of liability in a contract or agreement,” is triggered only “when the insured assumes responsibility for the conduct of a third-party” in an indemnity or hold-harmless agreement.1 In Gilbert in 2010 and in Ewing in January of this year, the Texas Supreme Court adopted a new legal construct: “‘assumption of liability’ means that the insured has assumed a liability for damages that exceeds the liability it would have under general law.”2
Since this new standard has been articulated, policyholders and insurers have struggled to know what contractual obligations exceed the “general law.” As demonstrated in the Ewing and more recent Crownovercases, courts have also labored figuratively to put the genie back in the bottle and make the “general law” standard conform in practice to past interpretations limiting the “contractual liability” exclusion to a third-party assumption of liability. Although, given the expansive equitable subrogation rights granted parties under Texas law, even a third-party indemnitor may not “assume liability” that exceeds that party’s obligations under the “general law.”
In Ewing, the Court found that “a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not . . . ‘assume liability’ for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.” Now, in Crownover v. Mid-Continent Casualty Company, the Fifth Circuit has further confirmed that homeowners’ claims against a builder for breach of an express warranty to repair also do not trigger the “contractual liability” exclusion.
According to the three-judge panel in Crownover, the fact that the warranty was express rather than implied was not dispositive. “The issue is not whether the relevant duty is contractual; it is whether the contractual duty represents an expansion of liability.” (emphasis in original). To that point, the Court also confirmed that “there is no doubt that the general law provides a duty to repair.” Even though the contractor’s warranty required the repair to satisfy a contractual standard, as opposed to simple competency, that fact also did not establish an “assumption of liability” since “[t]he general law creates a duty to perform under the terms of a contract with reasonable care.” Mid-Continent did not meet its burden to show that the contractor’s duty to repair up to contractual standards exceeded its general law obligation to exercise reasonable care.
While the Court’s analysis and the result is undoubtedly correct, this decision was reached only after the district court granted summary judgment in favor of Mid-Continent on the “contractual liability” exclusion and after the Fifth Circuit itself affirmed the district court’s denial of coverage in a decision issued in June. Only after a motion for rehearing was the Court persuaded to reexamine its initial analysis and arrive at the result announced on October 30.
The procedural history of the Crownover case is evidence of the confusion that continues to exist with respect to the “contractual liability” exclusion and the “general law” standard adopted by the Texas Supreme Court. Consequently, policyholders should continue to be careful in framing the warranties that are offered and demanded in contracts with counterparties to ensure that those warranties do not impose obligations that exceed the “general law.” Parties in disputes should also circumscribe their claims and defenses within the “general law” to offer the best chance of securing coverage.
Alternatively, during the underwriting of new policies, insureds should request an endorsement confirming that the “contractual liability” exclusion applies to the assumption of “another’s” liability in a contract or agreement. Contractual insurance requirements should demand the same from counterparties. Doing so will maximize coverage and minimize costly disputes.