Insurance Law Update Construction Defect Coverage . Lee H. Shidlofsky Shidlofsky Law Firm PLLC 512.685.1400 firstname.lastname@example.org. We’ve Got You Covered. INSURANCE COMPANY RHETORIC . . . (A Bit of History). CGL policies are not Performance Bonds
Lee H. Shidlofsky
Shidlofsky Law Firm PLLC
We’ve Got You Covered
CGL policies are not Performance Bonds
Faulty workmanship is a “business risk” to be assumed by the insured
Damages flowing from faulty workmanship are economic losses and do not constitute “property damage”
Damages flowing from faulty workmanship are not an “occurrence” because they are not accidental
Suffice to say, that if a [CGL] policy taken out by a contractor is not generally intended to cover “construction,” it might surprise the Texas Supreme Court; it seems to treat this conclusion as axiom.
Essex v. Hines, 385 F. App’x 596 (5th Cir. 2010)
“Property damage” means:
a. Physical injury to tangible property, including the loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
PPI Tech. Services, LP v. Liberty Mut. Ins. Co., 2012 WL 130389 (S.D. Tex. Jan. 17, 2012)
Evanston Ins. Co. v. Legacy of Life, Inc., 370
S.W.3d 377, 385 (Tex. 2012)
The Debate Heads to the
Supreme Court of Texas
b. Contractual Liability
“[B]odily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumptionof liability in a contract or agreement.” This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or agreement; or
(2) Assumed in a contract or agreement that is an “insured contract” . . . .
Gilbert Tex. Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010)
The Court recognized that it was adopting the “minority” view.
“We disagree, by and large, with courts’ and treatises’ conclusions that the language of the contractual liability exclusion before us applies only to indemnity or hold-harmless agreements….”
Holding: Underwriters had no duty to indemnify and held exclusion applied (and exception did not) because Gilbert could not have been liable to RTR but for its specific assumption to “protect and repair.”
It is not at all clear exactly what the Court was saying in the opinion:
Is the contractual liability exclusion a pure breach of contract exclusion?
What does it mean to “assume” liability?
Has Lamar Homes been overruled?
Is the case limited to its unusual facts (e.g., contractual assumption mixed with governmental immunity)?
Did the Court provide a hint?
Hypothetical based on Lamar Homes:
What if the claimant waited three years after discovery of the damage to bring the lawsuit?
What if the insured in Lamar Homes moved for summary judgment on the economic loss rule and won?
“We understand Gilbert’s concerns, but speculation about coverage of insurance policies based on surmised factual scenarios is a risky business because small alterations in the facts can warrant completely different conclusions as to coverage. It is proper that we await a fully developed, actual case to decide an issue not presented here.”
Basic garden-variety commercial construction defect claim involving cracking and flaking of tennis courts.
Contractor (Ewing) entered into contract with school district for construction of tennis courts.
State court lawsuit against GC and design team with claims of negligence, breach of contract, and breach of warranty.
Amerisure denied a duty to defend based on the contractual liability exclusion.
Coverage lawsuit commenced during pendency of underlying construction defect lawsuit.
Duty to Defend Denied: Amerisure contended that the economic loss rule defeats the pending tort claims because the only real basis for Ewing’s liability is in contract or warranty and that is excluded by the contractual liability exclusion.
Say it isn’t So: Ewing contended that the construction contract contains no express assumption of liability for damages comparable to Gilbert and, in any case, the coverage court cannot issue an advisory opinion on the economic loss rule when the negligence claims remain pending in the underlying lawsuit.
Addressing the issue of “assumption of liability,” Judge Jack concluded that “Ewing assumed liability for its own construction work pursuant to the parties’ contract” because “Ewing is liable if the work it agreed to perform under the contract is defective.”
Turning to the exception for liability that would exist in the absence of contract or agreement, Judge Jack concluded that the coverage court could look to the merits of the pending state court claims and utilize the economic loss rule in doing so.
“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
We understand Gilbert’s concerns, but speculation about coverage of insurance policies based on surmised factual scenarios is a risky business because small alterations in the facts can warrant completely different conclusions as to coverage. It is proper that we await a fully developed, actual case to decide an issue not presented here.
Lets all Pray that they Do!!!
Shidlofsky Law Firm PLLC