Insurance Law Blog

July 29, 2014
Dear Colleague,

We previously wrote regarding the U.S. Fifth Circuit Court of Appeals’ recent decision in Crownover v. Mid-Continent Casualty Co. in which the court—perhaps inadvertently—returned Texas’s insurance coverage jurisprudence back to the pre­-Ewing days a mere six months after the Supreme Court of Texas decided Ewing Construction Co. v. Amerisure Insurance Co., 420 S.W.3d 30 (Tex. 2014). This blog serves as an update on recent developments involving the Crownover decision. In particular, the Crownovers filed a Petition for Rehearing with the Fifth Circuit on July 11, 2014, pointing out the court’s misreading of the holding in Ewing. On behalf of Texas Association of Builders, National Association of Home Builders and Leading Builders of America, we filed an amici curiae brief further highlighting the misapplication of Ewing, as well as the impact of the ruling in light of the holdings in several other important construction defect insurance coverage cases that have been issued by Texas courts over the last several years, including Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007), Lennar Corp. v. Markel American Insurance Co., 413 S.W.3d 750 (Tex. 2013), Mid-Continent Casualty Co. v. Castagna, 410 S.W.3d 445 (Tex. App.—Dallas 2013, pet. denied), and, of course, Ewing itself. That brief was filed on July 18, 2014. The AGC-Texas Branch likewise filed an amici curiae brief in support of rehearing.

Subsequently, on July 22, 2014, the Michigan Court of Appeals addressed a similar coverage dispute involving the applicability of the “contractual liability” exclusion, finding it did not apply to negate coverage for an insured that had performed work for the University of Michigan. See Travelers Prop. Cas. Co. of Am. v. Peaker Servs., Inc., 2014 WL 3605680 (Mich. Ct. App. July 22, 2014). Because, like in the Crownover matter, the insured’s contract included a “duty to repair” provision, the Michigan Court of Appeals’ decision addressed the very issues currently before the Fifth Circuit on rehearing. And, as such, we filed a supplemental letter brief with the Fifth Circuit highlighting this new decision.

The insured in Peaker Services had agreed to install an “over-speed” system at the University’s central power plant in order to prevent the steam turbines at the plant from turning too quickly. Notably, the parties’ contract included the following provision:

15.18 Supplier Damage to University Property. Without regard to any other section of the Agreement, Supplier shall be responsible for the costs to return to “as was” condition from any damage caused to the building, grounds, or other equipment and furnishings caused in whole or part by Supplier Personnel while performing activities arising under this Agreement. Supplier shall immediately report in writing the occurrence of any damage to the Building/Project Manager.

Id. The insured apparently improperly calibrated the system, causing one of the university’s turbines to operate at twice the safe operational speed and resulting in significant damage to the generator equipment. Id. As a result, the University sued the insured for more than $3 million in damages. While Travelers defended its insured, it ultimately filed a declaratory judgment action, contending that coverage did not exist because the “contractual liability” exclusion applied, as Section 15.18 of the contract purportedly constituted an “assumption” of the insured’s own liability and, therefore, was not covered under a standard-form CGL policy. Id.

Although the court held that the “contractual liability” exclusion only applies to assumptions of liability of third parties by the insured—a holding the Supreme Court of Texas specifically rejected in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010)—the court specifically addressed the insurer’s argument that coverage should not exist as was found in the Gilbert case. The Michigan Court of Appeals, in response, undertook an in-depth analysis of the interplay between Gilbert and Ewing.  In doing so, the court disagreed with the insurer, finding that Gilbert held “that the exclusion barred claims arising under a contract wherein the insured assumed greater liability than that which the insured would have incurred under general law.” Peaker Servs., 2014 WL 3605680 (emphasis in original). Put differently, the court said:

In short, Gilbert stands for the proposition that, in instances where an insured would be liable at general law for damages arising from its breach of contract, the contractually-assumed liability exclusion does not preclude coverage. However, in situations where an insured takes on additional legal obligations and liabilities beyond those imposed at general law, coverage is barred by the contractual liability exclusion.

Id. The court also noted that its reading of Gilbert was aligned with the Supreme Court of Texas’s more recent decision in Ewing, where the Supreme Court concluded that “a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, thus it does not ‘assume liability’ for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.” Id. (quoting Ewing, 420 S.W.3d at 38)) (emphasis in original).

Applying the rationale of Gilbert and Ewing to the facts at hand, the Michigan Court of Appeals correctly found that the exclusion did not apply to negate coverage merely because the insured’s contract with the University included a “duty to repair” provision. The court explained:

By warranting that its goods and services were “free from defects in material and workmanship,” and by agreeing to return the university’s property to “as was” condition in the event that it damaged property during completion of the contract, defendant did not “enlarge its duty to exercise ordinary care in fulfilling its contract.” Ewing, 420 S.W.3d at 38. General principles of law required defendant to perform the contract with good and ordinary care and that defendant’s goods were fit and merchantable for their intended use so as not to cause damages to the university’s property. [citations omitted]. Here, like the general contractor in Ewing, by agreeing to return the university’s property to “as was” condition, defendant agreed to no more than what was imposed upon it under general law. As such, like in Ewing, defendant did not “‘assume liability’ for damages arising out of its defective work so as to trigger the Contractual Liability Exclusion.” Ewing, 420 S.W.2d at 38.

Id. (emphasis added). Simply put, the Michigan court’s holding correctly interprets the findings of the Supreme Court of Texas in both Gilbert and Ewing, and is squarely on point to the issue raised in the Crownover rehearing.

Although rehearings are seldom granted, we are cautiously optimistic that the panel will recognize the error of its initial conclusion in Crownover regarding the “contractual liability” exclusion and follow the “spot on” reasoning adopted by the Michigan Court of Appeals in Peaker Services. Stay tuned -- We've Got You Covered.


Lee Shidlofsky
Founding Member of Shidlofsky Law Firm

Douglas P. Skelley
Member of Shidlofsky Law Firm