Insurance coverage for construction industry policyholders has been thrown into a state of upheaval due to a recent decision by the Fifth Circuit Court of Appeals misinterpreting and misapplying Texas precedent and standard form general liability insurance policies. On June 15, 2012, the Fifth Circuit issued its decision in Ewing Construction Company, Inc. v. Amerisure Insurance Co.,[1] and affirmed the district court’s expansive interpretation of the contractual liability exclusion. The court held that the exclusion, which eliminates coverage for damages arising from the “assumption of liability in a contract,” operates as a bar to coverage whenever a breach of contract is alleged. The court held that the defendant insurer was therefore under no obligation to defend its policyholder, a contractor, from a lawsuit alleging property damage caused by an occurrence, simply because the project owner alleged causes of action based on the existence of a contract.
Aside from missing the mark on the interpretation of the contractual liability exclusion, the original opinion issued in Ewing represented a wholly unnecessary extension of the Texas Supreme Court’s ruling in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London.[2] The contractual undertaking at issue in Gilbert approximated the kind of indemnity/hold-harmless agreement that the insurance industry generally understands as being encompassed by the exclusion, whereas Ewing dealt with a direct contractual relationship between a project owner and contractor. The Ewing court could have easily distinguished Gilbert on that basis alone. Moreover, Ewing inappropriately extended Gilbert—a duty-to-indemnify case—to the defense context.
The court of appeals recently withdrew its opinion and certified the issues to the Texas Supreme Court.[3] In its opinion issued upon reconsideration, the Ewing Court noted that it was unclear about the application of Gilbert to the facts before it. Its acknowledgement that the issues in Ewing were subject to “no controlling Texas Supreme Court precedent”[4] leaves open, for the time being, the proper interpretation of the standard CGL policy’s contractual liability exclusion—a critical exclusion to insureds in the construction industry.