Texas Supreme Court Holds Contractual Liability Exclusion of CGL Policy Not Triggered in Construction Defects Suit

In the recent opinion of Ewing Construction Company, Inc. v. Amerisure Insurance Co., the Texas Supreme Court construed a commercial general liability (CGL) insurance policy in favor of the insured. In Ewing, a school district hired a construction company to build tennis courts. The school district sued for construction defects based upon breach of contract and negligence.   The construction company made a claim to its insurance company to defend the lawsuit on its behalf under its CGL policy. The insurance company denied coverage based upon the contractual liability exclusion in the policy. The construction company then sued the insurance company in federal court. The federal district court ruled in favor of the insurance company and an appeal followed. The Fifth Circuit Court of Appeals referred questions of Texas law to the Texas Supreme Court.


The Texas Supreme Court noted that an insurer’s duty to defend is based upon the eight corners rule. Under the rule, the court looks to the four corners of the language of the insurance policy, and the four corners of the allegations in the lawsuit. The Court noted that the allegations in the underlying lawsuit for construction defects included negligence and breach of contract theories.   The court also noted that the construction contract expressly stated that the company would perform construction “in a good and workmanlike manner.” The insurance policy exclusion stated that the insured’s contractual assumption of liability was excluded from coverage unless one of two exceptions existed: (1) . . . “the insured’s liability for damages would exist absent the contract, and (2) where the contract is an insured contract.”


The Court interpreted the first exception to the contractual liability exclusion in the CGL policy as follows: a claim would be excluded only if the insured had signed a contract that assumed liability for damages that exceeded its liability under the law if the contract did not exist. The Court held that agreeing in a contract to perform construction work in a good and workmanlike manner, “without more, does not enlarge its duty to exercise ordinary care . . .” Therefore, the insured did not assume liability beyond its obligations under general law, and the exclusion did not apply. Accordingly, the insurance company was obligated under the CGL policy to defend the lawsuit on behalf of the insured. The link to the opinion is found here: http://www.supreme.courts.state.tx.us/historical/2014/jan/120661.pdf

Breach of Restrictive Covenant Claim Did Not Trigger CGL Duty to Defend

In a recent opinion, the Dallas Court of Appeals held that a breach of restrictive covenant claim against a condominium owner did not trigger a duty to defend under the condominium association’s commercial general liability policy.  Brown v. American Western Home Ins. Co., 2013 WL 873824 (Tex. App.—Dallas 2013).  In the Brown case, husband and wife condominium owners sued their association for failure to maintain the property.  The association counterclaimed for breach of restrictive covenant due to the owners’ failure to obtain written consent from the association prior to making structural improvements.  The owners then added individual board members from the association board of directors and the association’s insurance company as defendants in the lawsuit.


The insurance company obtained a summary judgment in its favor from the trial court arguing that the owners were not a named insured under the policy and the association’s counterclaim against the insured did not constitute an “occurrence” under the policy triggering the duty to defend.  Without deciding whether the owners were a named insured under the policy, the Dallas Court of Appeals upheld the summary judgment in favor of the insurance company.  The Court based its ruling on the conclusion that the breach of restrictive covenant counterclaim against the owners was not an “occurrence” under the policy.


The Court applied the 8 corners rule and examined the 4 corners of the insurance policy, and the 4 corners of the pleading containing the allegations that could potentially trigger a duty to defend.  The pleading allegations in the counterclaim were that the owners had violated restrictive covenants by making improvements without prior consent.  The insurance policy language provided coverage for an “occurrence,” which was defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  Coverage did not apply to injury or damage “expected or intended from the standpoint of the insured.”  The Court noted that an accident is generally understood to be unexpected and unintended.  The counterclaim was based upon the intentional violation of the owners in making alterations without prior consent.  The Court ruled in favor of the insurance company because the violation was intentional and not an accident.