SUMMARY OF THE CASES
A construction
contractor or the injured third party (i.e., a homeowner) can recover insurance
for claims of faulty workmanship despite an exclusion in the standard-form CGL
policy that precludes coverage for “liabilities assumed under contract.
The contractor
built a home and delivered it to the homeowners. Shortly thereafter, cracks began to appear in
the foundation. In addition, there were undetected leaks in the HVAC
system that overburdened and eventually destroyed the mechanical HVAC units,
which then had to be replaced. The
Crownovers (the homeowners) took the contractor to arbitration and won on the
basis of the contractor’s contractual warranty to repair defects. The contractor went bankrupt shortly after
the arbitration and the Crownovers obtained approval from the bankruptcy court
to seek relief under the contractor’s general liability insurance policy.
The legal
obligation to repair construction defects applies whether or not the contractor
has agreed to do so in a contract. Since
the contractor would have had a duty to repair the defects to the Crownovers’
home even in the absence of the contract, then the exception to the
contractual-liability exclusion applied and, in accord with the Ewing decision, the Court
granted summary judgment to the Crownovers under the Mid-Continent policy.
Case: 11-10166 Document: 00512818708 Page: 1 Date Filed: 10/29/2014
IN
THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 11-10166
United States Court of Appeals
Fifth Circuit
FILED
October 29, 2014
Lyle W. Cayce
Clerk
DOUG CROWNOVER and KAREN CROWNOVER,
Plaintiffs - Appellants
v.
MID-CONTINENT CASUALTY COMPANY,
Defendant - Appellee
Appeals from the United States District
Court for the Northern District of Texas
ON PETITION FOR REHEARING
Before KING, BENAVIDES, and DENNIS, Circuit
Judges.
JAMES L. DENNIS, Circuit Judge:
The petition for panel rehearing is GRANTED.
The prior opinion, Crownover v. Mid-Continent Casualty Co., 757 F.3d 200
(5th Cir. 2014), is WITHDRAWN, and the following opinion is substituted:
Doug and Karen Crownover contracted with
Arrow Development, Inc. (“Arrow”) to construct a house for them. Arrow
performed defective work and then failed promptly to correct the work. The
Crownovers spent a significant amount of money paying to correct the work
themselves. An arbitrator found Arrow liable to the Crownovers for breaching
its express warranty to repair non-conforming work and awarded them damages.
Because Arrow filed for bankruptcy, however, the Crownovers were limited to recovering
what they could from Arrow’s insurance policies. They therefore sued
Mid-Continent Casualty Co. (“Mid-Continent”), Arrow’s insurer, in federal court
for the damages owed to them by Arrow, and both sides moved for summary
judgment. The principal question in this diversity case is whether a
contractual provision in the construction contract between the Crownovers and
Arrow, which obligated Arrow to repair its work where that work failed to
conform to the requirements of the construction contract, was an “assumption of
liability” that exceeded Arrow’s liability under general Texas law, thereby
triggering a “contractual-liability exclusion” in Arrow’s insurance contract
with Mid-Continent. If the contractual-liability exclusion does not apply, the
question becomes whether any other exclusion from coverage applies.
The district court held that the
contractual-liability exclusion in Arrow’s contract with Mid-Continent
prevented indemnity and granted summary judgment for Mid-Continent. We conclude
that, consistent with Texas law and considering the Texas Supreme Court’s
decisions in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s
London, 327 S.W.3d 118 (Tex. 2010), and Ewing Construction Co. v.
Amerisure Insurance Co., 420 S.W.3d 30 (Tex. 2014), the
contractual-liability exclusion from coverage does not apply and therefore
Mid-Continent was not entitled to summary judgment on that ground. We further
conclude that no other exclusion from coverage forecloses the Crownovers’
claim. Accordingly, we REVERSE summary judgment for Mid-Continent, RENDER
summary judgment for the Crownovers, and REMAND for calculation of legal fees.
BACKGROUND
I.
In October 2001, the Crownovers entered into
a construction contract with Arrow to construct a home on their land in
Sunnyvale, Texas. The contract also contained a warranty-to-repair clause,
which in paragraph 23.1 provided that Arrow would “promptly correct work . . .
failing to conform to the requirements of the Contract Documents.” The work was
completed in November 2002, but by early 2003, cracks began to appear in the
walls and foundation of the Crownovers’ home. Additional problems with the
heating, ventilation, and air conditioning (“HVAC”) system caused leaking in
exterior lines and air ducts inside the home. To compensate for defects in the
HVAC system, the system’s mechanical units ran almost continuously in order to
heat or cool the house. As a result of being overburdened, the mechanical units
ultimately had to be replaced. In all, the Crownovers paid several hundred
thousand dollars to fix the problems with the foundation and HVAC system.
II.
The Crownovers attempted to have Arrow
correct the problems and eventually sought legal relief. Their demand letters
were forwarded to Mid-Continent, but to no avail. The Crownovers then initiated
an arbitration proceeding against Arrow. The arbitrator found that the HVAC
system “was not installed properly, did not perform as required, and exhibited
numerous deficiencies as identified by the various consultants and contractors
who evaluated the system,” and determined that “Arrow is responsible for the
costs associated with replacement of the HVAC system, less betterment.” The arbitrator
also found that the foundation failed and that Arrow was responsible for the
costs of repairing the foundation. Accordingly, the arbitrator concluded that
the Crownovers had a meritorious claim for breach of the express warranty to
repair contained in paragraph 23.1 of their contract with Arrow, which was not
barred by the statute of limitations. Because the arbitrator awarded damages to
the Crownovers on that ground, she declined to decide whether the Crownovers’
other claims were barred by a statute of limitations.
Arrow later filed for bankruptcy. In June
2009, the bankruptcy court lifted the automatic stay but limited the
Crownovers’ recovery to any amount they could recover from an applicable
insurance policy. (To date, Arrow has not paid the Crownovers any money.) In
July 2009, the Crownovers sent a letter to Mid-Continent, demanding that the
insurance company pay the arbitration award. Mid-Continent denied their demand
in August 2009, citing several insurance policy defenses and exclusions.
The Crownovers then sued Mid-Continent for
breach of contract. Both sides moved for summary judgment. Ultimately, the
district court granted Mid-Continent’s motion and denied the Crownovers’
motion. In its opinion, the district court examined an “Insuring Agreement,” a
provision that appeared (in exactly the same form) in a series of comprehensive
general liability (“CGL”) policies, by which Mid-Continent insured Arrow, from
August 2001 through 2008. The district court concluded that the Insuring
Agreement covered Arrow while it constructed the Crownovers’ home. The Insuring
Agreement states that Mid-Continent “will pay those sums that [Arrow] becomes
legally obligated to pay as damages because of . . . ‘property damage’ to which
this insurance applies.”
Several exclusions apply to this general
coverage provision. The district court concluded that one of them, the
contractual-liability exclusion, applied in the instant case, such that
Mid-Continent was not obligated to indemnify Arrow for the damages it owed the
Crownovers. This exclusion states that “[t]his insurance does not apply to[]
‘property damage’ for which the insured is obligated to pay damages by reason
of the assumption of liability in a contract or agreement.” There is, however,
an exception to this exclusion for “liability . . . [t]hat the insured would
have in the absence of the contract or agreement.” The district court noted
that the arbitration award to the Crownovers was based only on Arrow’s breach
of the express warranty to repair contained in paragraph 23.1 (the arbitrator
explicitly declined to decide whether Arrow was liable to the Crownovers on any
other ground). Thus, the district court held that because Arrow “became legally
obligated to pay the arbitration damages on the basis of [its] contractually assumed
liability,” the contractual-liability exclusion applied with no applicable
exception to the exclusion. The district court did not rule on Mid-Continent’s
other alleged exclusions from coverage.
The Crownovers had argued that the district
court should consider whether Arrow would have been liable in the absence of
the express warranty to repair. Specifically, they had contended that the
“implied warranty of good workmanship” continued to apply to the contract they
had with Arrow because the contract contained no express disclaimer of such a
warranty. The district court declined to adopt this argument. First, it noted
that under Gilbert, 327 S.W.3d 118, it was confined to the actual facts
of the case and could not consider hypothetical scenarios. Second, the district
court reasoned that when a contract contains an express warranty of good
workmanship, that warranty supersedes any implied warranty of the same.
The Crownovers subsequently filed motions
for a new trial, to amend or modify the judgment, and for relief from the
judgment, arguing that the district court had erred in ruling on implied
warranties, a ground that had not been raised in Mid-Continent’s motion for
summary judgment. They further argued that no such waiver or disclaimer exists
under Texas law. The district court denied their motions, finding that the
Crownovers had raised the implied warranty issue in their briefing and that
Mid-Continent was thus allowed to respond to their argument in its sur-reply.
The district court also adhered to its earlier reasoning that the express
warranty of good workmanship superseded any implied warranty of the same. The
Crownovers timely appealed.
STANDARD OF REVIEW
“[We] appl[y] a de novo standard of
review when determining whether a district court erred in granting summary
judgment.” LaBarge Pipe & Steel Co. v. First Bank, 550 F.3d 442, 449
(5th Cir. 2008). Summary judgment should be granted “if the movant shows that
there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.” FED. R. CIV. P. 56(a). “A genuine issue of
material fact exists when the evidence is such that a reasonable jury could
return a verdict for the non-moving party.” Gates v. Tex. Dep’t of
Protective & Regulatory Servs., 537 F.3d 404, 417 (5th Cir. 2008).
“[S]ubstantive law will identify which facts are material.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). “When, as here, jurisdiction
is based on diversity, we apply the substantive law of the forum state.” Holt
v. State Farm Fire & Cas. Co., 627 F.3d 188, 191 (5th Cir. 2010). Thus,
in this case, Texas law determines which facts are material.
DISCUSSION
In light of the Texas Supreme Court’s
controlling analysis in Gilbert and Ewing, we conclude that the
contractual-liability exclusion to coverage does not apply to bar the
Crownovers’ suit. We also hold that the alternative exclusions from coverage
raised by Mid-Continent are inapplicable under the facts established here. We
therefore hold that the Crownovers, rather than Mid-Continent, are entitled to
summary judgment.
I.
Under Texas law, “the insured has the
[initial] burden of establishing coverage under the terms of the policy.” Gilbert,
327 S.W.3d at 124 (citing Ulico Cas. Co. v. Allied Pilots Ass’n, 262
S.W.3d 773, 782 (Tex. 2008)). “If the insured proves coverage, then to avoid
liability the insurer must prove the loss is within an exclusion.” Id. (citing
Ulico Cas. Co., 262 S.W.3d at 782). “If the insurer proves that an
exclusion applies, the burden shifts back to the insured to show that an
exception to the exclusion brings the claim back within coverage.” Id. (citing
Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d
181, 193 (Tex. Ct. App. 2003)).
“The principles [Texas] courts use when
interpreting an insurance policy are well established.” Id. at 126.
Those principles include construing the
policy according to general rules of contract construction to ascertain the
parties’ intent. First, we look at the language of the policy because we
presume parties intend what the words of their contract say. We examine the
entire agreement and seek to harmonize and give effect to all provisions so
that none will be meaningless. The policy’s terms are given their ordinary and
generally-accepted meaning unless the policy shows the words were meant in a
technical or different sense. Courts strive to honor the parties’ agreement and
not remake their contract by reading additional provisions into it.
Id. (citations omitted). We follow this framework in resolving the instant
dispute.
II.
A.
In Gilbert, the Texas Supreme Court
held that a contractual-liability exclusion applied to bar recovery where the
only viable claim was for breach of contract, since all other claims were
barred by governmental immunity. The insured party was Gilbert Texas
Construction (“Gilbert”), which contracted with the Dallas Area Rapid Transit
Authority (“DART”) to build a light rail system. Id. at 121-22. As part
of the contract, Gilbert agreed to “protect from damage . . . adjacent property
of a third party . . . [and] repair any damage to those facilities, including
those that are the property of a third party, resulting from failure to comply
with the requirements of this contract or failure to exercise reasonable care
in performing the work.” Id. at 122. “During construction, Dallas
suffered an unusually heavy rain, and a building adjacent to the construction
area flooded.” Id. The adjacent building’s owner (“RTR”) sued Gilbert,
among others, under various theories of liability, including tort and breach of
contract. Id. Based on defenses of governmental immunity, the trial
court granted motions for summary judgment on all claims except RTR’s breach of
contract claims against Gilbert. Id. at 123. Gilbert eventually settled
with RTR, but Gilbert’s insurer, Lloyd’s of London (“Lloyd’s”), refused to
indemnify Gilbert on the ground that the contractual-liability exclusion
applied. See id. at 122-23. Gilbert sued Lloyd’s, and the case
eventually reached the Texas Supreme Court. Id.
The Texas Supreme Court laid out the steps
for determining whether a contractual-liability exclusion applies:
[1] Initially, the insured has the burden of
establishing coverage under the terms of the policy. [2] If the insured proves
coverage, then to avoid liability the insurer must prove the loss is within an
exclusion. [3] If the insurer proves that an exclusion applies, the burden
shifts back to the insured to show that an exception to the exclusion brings
the claim back within coverage.
Id. at 124 (citations omitted). Applying this framework, the Gilbert court
first noted that Lloyd’s did not deny that RTR’s claim was within the general
terms of the policy. Id. at 125. The Texas Supreme Court next explained
that the contractual-liability exclusion “means what it says: it excludes
claims when the insured assumes liability for damages in a contract or
agreement, except . . . when the insured would be liable absent the contract or
agreement.” Id. at 128; see also Ewing, 402 S.W.3d at 37 (“[W]e .
. . determined in Gilbert that ‘assumption of liability’ means that the
insured has assumed a liability for damages that exceeds the liability it would
have under general law.” (citing 327 S.W.3d at 127)). The court concluded that
Gilbert had “assumed” liability by taking on liability in its contract that it
would not otherwise have had under the law:
Independent of its contractual obligations,
Gilbert owed RTR the duty to comply with law and to conduct its operations with
ordinary care so as not to damage RTR’s property[] . . . . In its contract with
DART, however, Gilbert undertook a legal obligation to protect improvements and
utilities on property adjacent to the construction site, and to repair or pay
for damage to any such property “resulting from a failure to comply with the
requirements of this contract or failure to exercise reasonable care in
performing the work.” (emphasis added). The latter obligation—to exercise
reasonable care in performing its work—mirrors Gilbert’s duty to RTR under
general law principles. The obligation to repair or pay for damage to RTR’s
property “resulting from a failure to comply with the requirements of this
contract” extends beyond Gilbert’s obligations under general law and
incorporates contractual standards to which Gilbert obligated itself.
Gilbert, 327 S.W.3d at 127.
Since governmental immunity foreclosed all
of RTR’s theories of liability apart from breach of contract, all that remained
was RTR’s claim that Gilbert had breached the contract by causing damage
“resulting from a failure to comply with the requirements of th[e] contract.” See
id. When Gilbert settled with RTR (a stranger to the contract), its “only
potential liability remaining in the lawsuit was liability in excess of what it
had under general law principles.” Id. Thus, the court concluded that
RTR’s breach-of-contract claim “was founded on an obligation or liability
contractually assumed by Gilbert within the meaning of the policy exclusion.” Id.;
see also Ewing, 420 S.W.3d at 36 (“In other words, Gilbert did not
contractually assume liability for damages within the meaning of the policy
exclusion unless the liability for damages it contractually assumed was greater
than the liability it would have had under general law—in Gilbert’s case,
negligence.”).
The Gilbert court then considered
whether the exception to the exclusion brought Gilbert’s liability to RTR back
into coverage. See 327 S.W.3d at 133-35. The relevant exception stated
that the exclusion “does not apply to liability for damages . . . [t]hat the
insured would have in the absence of the contract or agreement.” Id. at
133 (alterations in original). To determine whether the exception applied, the
court ruled that it had to “decide whether Gilbert proved it would have had
liability for RTR’s damages absent its contractual undertaking.” Id. at
134. The court pointed out, however, that “[b]ecause RTR’s tort claims were
properly dismissed, the only viable claim underlying Gilbert’s settlement was
for breach of contract.” Id. Thus, the court held “[t]he exception for
liability for damages Gilbert would have in the absence of the DART contract is
inapplicable where, as here, the insured has governmental immunity and
liability is based on its contract.” Id. at 135.
B.
Following oral argument in this case, a
panel of this court certified two questions to the Texas Supreme Court that are
germane to the Crownovers’ dispute with Mid-Continent. See Ewing Constr. Co.
v. Amerisure Ins. Co., 690 F.3d 628, 633 (5th Cir. 2012). Those questions
were:
1. Does a general contractor that enters
into a contract in which it agrees to perform its construction work in a good
and workmanlike manner, without more specific provisions enlarging this obligation,
“assume liability” for damages arising out of the contractor’s defective work
so as to trigger the Contractual Liability Exclusion.
2. If the answer to question one is “Yes”
and the contractual liability exclusion is triggered, do the allegations in the
underlying lawsuit alleging that the contractor violated its common law duty to
perform the contract in a careful, workmanlike, and non-negligent manner fall
within the exception to the contractual liability exclusion for “liability that
would exist in the absence of contract.”
Id. The Texas Supreme Court answered the first question “no” and did not
answer the second question, Ewing, 420 S.W.3d at 31.
Ewing had entered into a contract with the
Tuluso-Midway Independent School District (“TMISD”) “to serve as general
contractor to renovate and build additions to a school in Corpus Christi,
including constructing tennis courts.” Id. at 31. “Shortly after construction
of the tennis courts was completed,” however, “TMISD complained that the courts
started flaking, crumbling, and cracking, rendering them unusable for their
intended purpose of hosting competitive tennis events.” Id. TMISD then
brought suit against Ewing; “[i]ts damages claims against Ewing were based on
faulty construction of the courts and its theories of liability were breach of
contract and negligence.” Id. at 31-32.
Ewing tendered defense of the underlying
suit to its insurer, Amerisure Insurance Co. (“Amerisure”), under an insurance
policy that included CGL coverage. Id. at 32. Amerisure denied coverage,
and Ewing brought suit, seeking “a declaration that Amerisure had, and
breached, duties to defend Ewing and indemnify it for any damages awarded to
TMISD in the underlying suit.” Id. Amerisure “urged that policy
exclusions, including the contractual Id. tangible property. See
Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23-24 (Tex.
2008). The policy defines an “occurrence” as “an accident, including continuous
or repeated exposure to substantially the same general harmful conditions.” The
requirement that property damage be caused by an “occurrence” limits coverage
in at least two ways—the “accident” requirement excludes coverage for
intentional torts and the “continuous” element limits the number of occurrences
that can stem from a single accident. Id. at 24. Mid-Continent argues
that because an “occurrence” must be an “accident,” and since Texas has
expansive clay soils, foundation movement was to be expected and therefore some
amount of damage to the structural elements of the house was natural.
Mid-Continent claims that the Crownovers have not proved that an “occurrence”
caused “property damage” because they have not shown that the cracks in their
home were caused by excessive foundation movement.
The policy defines “property damage,” as
“[p]hysical injury to tangible property, including all resulting loss of use of
that property . . . [or][l]oss of use of tangible property that is not
physically injured.” Interpreting a nearly identical CGL, the Texas Supreme
Court has held that defective construction that caused a foundation to shift,
thereby resulting in cracks in the interior and exterior of a house, was
“property damage” caused by an “occurrence.” See Lamar Homes, Inc. v.
Mid-Continent Cas. Co., 242 S.W.3d 1, 16, 20 (Tex. 2007); see also
Wilshire Ins. Co. v. RJT Constr., LLC, 581 F.3d 222, 225 (5th Cir. 2009)
(interpreting a similar CGL policy under Texas law and stating that “cracks
themselves are physical damage allegedly caused by the faulty foundation. . . .
The cracks are not merely a warning of prior undiscovered damage; they are the
damage itself. . . . The complaint’s allegations trigger coverage unless an
The evidence indicates that neither Arrow
nor the Crownovers anticipated the cracks in the walls and foundation or the
failure of the HVAC system. See Lamar Homes, 242 S.W.3d at 9 (finding an
“occurrence” where “[n]o one allege[d] that [the contractor] intended or
expected its work or its subcontractors’ work to damage the DiMares’ home.”).
Mid-Continent’s claim, therefore, that some more excessive damage beyond cracks
in the walls and the foundation is required for “property damage” to be caused
by an “occurrence” is unavailing.
Mid-Continent alleges that the faulty
workmanship that led to the need to replace the HVAC units “merely diminishe[d]
the value of the home without causing property damage or loss of use.” In
support of this contention, Mid-Continent cites, Building Specialties, Inc.
v. Liberty Mutual Fire Insurance Co., 712 F. Supp. 2d 628, 646 (S.D. Tex.
2010), in which the Southern District of Texas held that the cost of repairing
defective but undamaged air ducts was not attributable to “property damage.”
There, defective installation caused an air conditioner to drip condensate, but
there was no allegation of actual property damage to the air conditioner itself
or to anything else. Id. at 645. Thus, the court concluded that the
plaintiff had failed to allege that the defective work caused physical damage
or loss of use. Id. Here, the defective installation of the HVAC system
caused the system to be deficient and eventually required the stressed
mechanical units to be replaced. There can be no doubt that the HVAC units were
themselves “tangible property,” and therefore the loss of their use amounted to
property damage. The HVAC units fall within the plain meaning of “tangible
property” and no case cited by Mid-Continent suggests otherwise. See Lamar
Homes, 242 S.W.3d at 8 (“Terms that are not defined in a policy are given
their generally accepted or commonly understood meaning.”); see also Lennar
Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750, 757 (Tex. 2013) (holding that
cost of removing exterior insulation to check for water damage and cost of
repairing such damage were both costs incurred “because of” property damage).
Therefore, Arrow’s defective work was an
“occurrence” that caused the HVAC system and the foundation to require repairs,
which amounted to “property damage.” The Crownovers thus met their initial
burden of establishing coverage under the insurance policy.
B.
Once coverage is established, the burden
shifts to Mid-Continent to show that the contractual-liability exclusion
applies. Gilbert, 327 S.W.3d at 124. “Exceptions or limitations on
liability are strictly construed against the insurer and in favor of the
insured.” Evanston Ins. Co. v. ATOFINA Petrochems., Inc., 256 S.W.3d
660, 668 (Tex. 2008) (internal quotation marks omitted). For the exclusion to
apply, Mid-Continent must show that Arrow is obligated to pay the Crownovers
“by reason of the assumption of liability in a contract or agreement,” as
stated in the Insuring Agreement. “‘[A]ssumption of liability’ means that the
insured has assumed a liability for damages that exceeds the liability it would
have under general law.” Ewing, 420 S.W.3d at 37 (citing Gilbert,
327 S.W.3d at 127). “Otherwise, the words ‘assumption of liability’ are
meaningless and are surplusage.” Ewing, 420 S.W.3d at 37. Thus, under
both Ewing and Gilbert, Mid-Continent must show that Arrow’s
express warranty to repair effected an assumption of liability that was not
already covered by general law. The key question, therefore, becomes whether
the source of adjudicated liability—the express duty to repair—expanded Arrow’s
obligations. We hold that it did not.
The arbitrator ruled in the Crownovers’
favor based solely on Arrow’s breach of its express warranty to repair in
paragraph 23.1, which required it to “promptly correct work . . . failing to
conform to the requirements of the Contract Documents.” Thus, there were three
elements of paragraph 23.1 that could potentially have triggered the contractual-liability
exclusion: (1) it constituted an express rather than implied warranty;
(2) it was a duty to repair rather than construct; (3) it referred to
performance in conformity with the contract documents rather than simple
competent performance. None of these factors is dispositive and we conclude
that not one of them (nor all of them together) extended Arrow’s liability
beyond its liability under general law.
First, Mid-Continent would have us hold that since the award was based on a
contractual duty, the contractual-liability exclusion applies. Ewing makes
clear that our task is not so simple. The question is not whether the
obligation was contained in an express contractual provision, but whether that
provision reflected an expansion of liability. See Ewing, 420 S.W.3d at
36 (“[A party does] not contractually assume liability for damages
within the meaning of the policy exclusion unless the liability for damages it
contractually assumed was greater than the liability it would have had under
general law.”).
In Ewing, the court held that an
express contractual duty “to construct the [tennis] courts in a good and
workmanlike manner did not add anything to the obligation it ha[d] under
general law to comply with the contract’s terms and to exercise ordinary care
in doing so.” Id. at 36. Therefore, the Texas high court held that the
“express agreement to perform the construction in a good and workmanlike manner
did not enlarge its obligations and was not an ‘assumption of liability’ within
the meaning of the policy’s contractual liability exclusion.” Id. The
issue is not whether the relevant duty is contractual; it is whether the
contractual duty represents an expansion of liability. Indeed, the Ewing
court stated that there is an “obligation . . . under general law to comply
with the contract’s terms.” Id. “TMISD’s allegations that Ewing failed
to perform in a good and workmanlike manner are substantively the same as its
claims that Ewing negligently performed under the contract because they contain
the same factual allegations and alleged misconduct.” Id. at 37. Thus,
the fact that the arbitrator’s award in this case was based on an express
contractual duty, rather than an implied general-law duty, is inconsequential.
Second, there is no doubt that the general law provides a duty to repair. Both
Gilbert, 327 S.W.3d at 127, and Ewing, 420 S.W.3d at 35, state
that the obligation to repair or pay for damage resulting from failure to
exercise reasonable care in performing work under a contract does not differ
from liability for damages under general law. Cf. Lennar Corp., 413
S.W.3d at 757 (holding costs associated with finding and repairing damage were
“because of” property damage). Since general law establishes a duty to repair
work that was not carried out in a good and workmanlike manner, it makes no
difference that paragraph 23.1 refers to a duty to repair rather than a duty to
perform the initial work with reasonable care. That is a distinction without a
difference. The remedy for failure to fulfill the duty to repair is the same as
for failure to perform work in a workmanlike manner; the remedy is the cost to
repair the defective work. Paragraph 23.1, therefore, did not expand Arrow’s
liability simply because it was framed in terms of a duty to repair, as opposed
to a duty to construct.
Third, paragraph 23.1’s reference to the requirements of the contract
documents did not increase Arrow’s liability in any relevant manner. The
contract between Arrow and the Crownovers, unlike in Ewing, does not
recite the general law duty to perform construction work in a good and workmanlike
fashion (or to repair damage resulting from a failure to perform in such a
fashion). Instead, it states that there is a duty to correct work failing to
conform to the requirements of the contract documents. While this
complicates our analysis, it does not alter it fundamentally. It merely means
that we need to look one step further. In Ewing, the Texas Supreme Court
made clear that the contractual-liability exclusion does not apply merely
because the relevant obligation was an express contractual duty; a court must
determine whether that contractual duty actually represented an expansion of
liability beyond that established by general law. See Ewing, 420 S.W.3d
at 36 (“Gilbert did not contractually assume liability for damages within the
meaning of the policy exclusion unless the liability for damages it
contractually assumed was greater than the liability it would have had under
general law.”). Just as Mid-Continent must establish more than that the duty to
repair is an express duty found in the contract, Mid-Continent cannot avoid
indemnification merely by noting that the duty to repair refers to the
requirements of the contract documents. We must determine whether that duty
actually represents an expansion of obligations as applied.
The general law creates a duty to perform
under the terms of a contract with reasonable care. See, e.g., Ewing, at
37 (“Ewing . . . had a common law duty to perform its contract with skill and
care.”); Sipes v. Langford, 911 S.W.2d 455, 457 (Tex. Ct. App. 1995)
(“Implicit in every contract is a common-law duty to perform the terms of the
contract with care, skill and reasonable experience.”). Paragraph 23.1
articulates a duty to “promptly correct work . . . failing to conform to the
requirements of the Contract Documents.” Essentially, this is a contractual
obligation to carry out work consistently with one’s contractual obligations.
Since there is a general law duty to perform the terms of a contract with
reasonable care, it is unclear how Arrow’s express duty to repair, without a
showing that the “requirements of the Contract Documents” exceeded common law
duties, could constitute an expansion of Arrow’s obligations beyond those it
owed under general law. Mid-Continent has not shown that Arrow’s duty to repair
non-conforming work under the contract increased Arrow’s liability; it has not
been able to point to any relevant element of liability that was increased due
to Arrow’s failure to comply with the duty to repair clause.
The Crownovers claim that where
Mid-Continent has failed to prove that the express duty to repair
non-confirming work expanded Arrow’s obligations, they have proven the
converse. They allege that the arbitrator’s findings of fact and resultant
award demonstrate that coverage under paragraph 23.1 was well within the
principles of general law. “[T]he insurer’s duty to indemnify is determined
based on the facts actually established in the underlying suit.” Burlington
N. & Santa Fe Ry. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.,
334 S.W.3d 217, 219 (Tex. 2011). The arbitrator’s award clearly lists the
findings of fact that led it to conclude that Arrow violated its duty to
repair. Mid-Continent is bound by the arbitrator’s findings. E.g.,
Mid-Continent Cas. Co. v. Castagna, 410 S.W.3d 445, 452 (Tex. Ct. App.
2013). Under the facts as determined by the arbitrator, there can be little
doubt that Arrow’s adjudicated liability was no greater than that called for by
general law. The arbitrator found that both the foundation and HVAC system
began showing signs of problems shortly after the Crownovers moved in; the HVAC
system was not installed properly, did not perform as required, exhibited
numerous deficiencies and failures, and the units eventually had to be
replaced; the foundation failed and Arrow did not repair it; and Arrow was
responsible for the associated costs of repairing or replacing both the
foundation and the HVAC system. The Crownovers submitted evidence that
functional problems in the HVAC system caused the mechanical units to run
excessively, such that replacement was ultimately necessary. Paragraph 23.1 did
not expand Arrow’s obligations by articulating a duty to repair such defects.
This obligation is “substantively the same” as Arrow’s obligations under
general law. See Ewing, 420 S.W.3d at 37 (finding no expansion of
liability where allegation of failure to perform in a workmanlike manner was
“substantively the same” as claim of negligent performance under the contract
“because they contain the same factual allegations and alleged misconduct.”).
The Crownovers have convincingly shown that Arrow’s adjudicated liability
reflected a duty no broader than that required by general law, and
Mid-Continent has failed to show otherwise.
Rather than demonstrate how paragraph 23.1
enlarged Arrow’s obligations in any relevant sense, Mid-Continent stresses the
similarity between the duty to repair here and the duty to repair in Gilbert.
There, Gilbert undertook the “obligation to protect improvements and utilities
on property adjacent to the construction site.” Gilbert, 327 S.W.3d at
127. The Gilbert court held that “[t]he obligation to repair or pay for
damage to RTR’s property ‘resulting from a failure to comply with the
requirements of this contract’ extend[ed] beyond Gilbert’s obligations under
general law and incorporate[d] contractual standards to which Gilbert obligated
itself.” Id. While this case also involves an express duty to repair
work failing to conform to the requirements of contract documents, the
pertinent liabilities in Gilbert are clearly distinguishable. In Ewing,
the Texas Supreme Court stressed that the decision in Gilbert “involved
‘unusual circumstances’ because Gilbert ordinarily could have been liable in
tort for damages to RTR absent its contract, but under the facts of the case,
the only basis for Gilbert’s liability to RTR was RTR’s claim for Gilbert’s
breach of the contract with DART.” Ewing, 420 S.W.3d at 36. Gilbert was
a unique case because governmental immunity foreclosed all relief except relief
sounding in contract. See id. It was therefore simply impossible for
liability to be based on anything other than contract. Furthermore, Gilbert’s
contractual obligation that triggered the liability exclusion was its obligation
to repair or pay for damage to property of “third parties” resulting from its
failure to comply with its contract with DART. Id. Neither governmental
immunity nor contractual language creating obligations to third parties is
present here. While the arbitrator specifically held that Arrow had breached a
contractual duty in this case, nothing prevents us from exploring whether the
breach of the express duty to repair represented an actual expansion of
liability beyond that provided by general law. In fact, Ewing mandates
that we conduct this analysis. See id. at 37. We hold that although
Arrow’s violation of its duty to repair reflected a breach of contract, Arrow’s
liability was no greater than what Texas general law conferred.
In sum, Gilbert, 327 S.W.3d at 124,
127, and Ewing, 420 S.W.3d at 37, maintain that for a
contractual-liability exclusion to apply, the insurer must prove that a
contractually-assumed duty effected an expansion of liability beyond that
supplied by general law. The arbitrator in this case determined that Arrow
violated an express duty to repair work that did not conform to the
requirements of its construction contract with the Crownovers. Mid-Continent
has failed to proffer evidence creating a dispute of fact as to whether the
arbitrator’s award was based on liability greater than that dictated by general
law. Therefore, the contractual-liability exclusion from coverage does not
apply. Because we conclude that the contractual-liability exclusion is
inapplicable, we need not consider whether the Crownovers can establish an
exception to that exclusion. See Gilbert, 327 S.W.3d at 124.
IV.
Mid-Continent proffered two additional
exclusions from coverage in the event that the district court did not find the
contractual-liability exclusion applicable. The district court saw no cause to
address these additional exclusions, having determined that the
contractual-liability exclusion foreclosed the Crownovers’ claim. Since we
disagree with the district court’s conclusion, we must consider whether
Mid-Continent’s alternative arguments exclude the Crownovers’ claim from
coverage.
A.
Mid-Continent alleges that the “your work”
exclusion contained in its insurance policy with Arrow bars coverage in this
case. The first two policies (2001-02 and 2002-03) between Arrow and
Mid-Continent contained the following exclusion:
This insurance does not apply to:
. . .
l. Damage To Your Work
“Property damage” to “your work” arising out
of it or any part of it and included in the “products-completed operations
hazard”. [sic]
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.
The second paragraph of the exclusion, which
created an exception to the exclusion for work conducted by a subcontractor,
was removed from the policies starting in August 2003. See generally Lamar
Homes, 242 S.W.3d at 11-12 (discussing the history of the subcontractor
exception). The provision “generally excludes coverage for ‘property damage’ to
the insured’s completed work with one notable exception for work performed for
the insured by a sub-contractor.” Id. at 11. “‘With [the subcontractor
exception], the insurance industry essentially agreed to cover a huge portion
of faulty workmanship claims, particularly those arising out of home building
or other construction.’” Id. at 12 n.12 (quoting 2 JEFFERY W. STEMPEL, STEMPEL
ON INSURANCE CONTRACTS § 14 [13][D] at 14-224.9). The Crownovers contend that
the property damage to the HVAC system and foundation arose after completion of
the work and that the damage was to the subcontractor’s work. Unless the
subcontractor exception applies, their claim will fall squarely within the
“your work” exception, foreclosing indemnity. As a result, the fulcrum of the
Crownovers’ argument on this point is that the property damage arose prior to
August 2003, when the subcontractor exception was removed.
Mid-Continent argues that the foundation did
not move “excessively,” and thus did not give rise to “property damage,” until
June 2004 at the earliest. Mid-Continent bases this claim on its expert’s
affidavit and deposition testimony, in which he opined that the foundation
first exceeded deflection limits (as defined by the Texas Section of the
American Society of Civil Engineers (“ASCE”)) within six to nine months of
March 2005. Mid-Continent cites to no authority, however, for the proposition
that deflection limits as defined by the ASCE provide the threshold for a
finding of property damage. Indeed, available case law suggests otherwise. For
example, this court has applied Texas law to hold that cracks in the walls of a
structure can constitute property damage, thus triggering coverage under a CGL.
Wilshire, 581 F.3d at 225 (“The complaint alleges that ‘cracks in the
walls and ceilings’ were ‘suddenly appearing’ in late 2005. The cracks
themselves are physical damage allegedly caused by the faulty foundation. . . .
[T]hey are the damage itself.”).
The uncontested evidence indicates that
cracks in the walls and concrete, as well as damage to the HVAC system,
appeared within six months after the Crownovers moved into their home, in late
November 2002. The arbitration award indicates that “[b]oth the HVAC system and
the foundation began showing signs of problems in the year following
substantial completion of the home.” Thus, the evidence establishes that the
damage first occurred before August 2003. That the damage to the Crownovers’
home continued to worsen thereafter does not alter the fact that the damage had
already occurred before the subcontractor exception had been removed from the
insurance policy. See Don’s Bldg. Supply, 267 S.W.3d at 22 (“the
insurer’s duty is triggered under Texas law[] . . . when injury happens”); Landstar
Homes Dall., Ltd. v. Mid-Continent Cas. Co., No. 3:10-CV-0014-K, 2010 WL
5071688, at *7 (N.D. Tex. Dec. 13, 2010) (unpublished) (holding, under similar
circumstances, that damage first occurred before the subcontractor exception
was removed from the CGL policy and therefore dismissing Mid-Continent’s claims
that a significant proportion of the damage to the home occurred after work
performed by subcontractors was no longer covered); see also Lennar, 413
S.W.3d at 758 (“For damage that occurs during the policy period, coverage
extends to the ‘total amount’ of loss suffered as a result, not just the loss
incurred during the policy period.”). Because the evidence establishes that the
defective work was performed by Arrow’s subcontractors and that the damage
first arose while the subcontractor exception to the “your work” exclusion was
still in effect, the “your work” exclusion does not prevent coverage in this
case.
B.
Lastly, Mid-Continent alleges that
exclusions j(5) and j(6) bar the Crownovers’ claim for indemnification.
Exclusions j(5) and j(6) state:
This insurance does not apply to:
. . .
j. Damage To Property
“Property damage” to:
. . .
(5) That particular part of real property on
which you or any contractors or subcontractors working directly or indirectly
on your behalf are performing operations, if the “property damage” arises out
of those operations; or
(6) That particular part of any property
that must be restored, repaired or replaced because “your work” was incorrectly
performed on it.
. . .
Paragraph (6) of this exclusion does not
apply to “property damage” included in the “products-completed operations
hazard”. [sic]
In its “Definitions” section, the insurance
contract defines “products-completed operations hazard”:
16. “Products-completed operations hazard”:
a. Includes all “bodily injury” and
“property damage” occurring away from premises you own or rent and arising out
of “your product” or “your work” except:
(1) Products that are still in your physical
possession; or
(2) Work that has not yet been completed or
abandoned. However, “your work” will be deemed completed at the earliest of the
following times:
(a) When all of the work called for in your
contract has been completed.
(b) When all of the work to be done at the
job site has been completed if your contract calls for work at more than one
job site.
(c) When that part of the work done at a job
site has been put to its intended use by any person or organization other than
another contractor or subcontractor working on the same project.
Work that may need service, maintenance,
correction, repair or replacement, but which is otherwise complete, will be
treated as completed.
Mid-Continent argues that even if none of
the other exclusions were to apply, exclusions j(5) and j(6) would prevent
coverage. Mid-Continent acknowledges that these exclusions apply only to
property damage that occurred while work was ongoing, not damage to completed
work. See Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207, 213
(5th Cir. 2009); see also Lamar Homes, 242 S.W.3d at 11.
Mid-Continent argues that under the
Crownovers’ theory, the damage to both the foundation and the HVAC system
occurred at the time they were installed, and that both were installed before
construction of the home was completed. The Crownovers contend that the damage
to tangible property occurred in early 2003, after construction was complete
and during the coverage period. “[T]he key date [for insurance coverage] is
when injury happens, not when someone happens upon it.” Don’s Bldg. Supply,
267 S.W.3d at 22. The Crownovers provided affidavits and testimony indicating
that the foundation-related elements and HVAC system of the home were initially
satisfactory when they moved in in late 2002. The uncontested evidence
indicates that the first cracks appeared shortly after the Crownovers moved
into their home, thus after work was completed. “The cracks are not merely a
warning of prior undiscovered damage; they are the damage itself. It is of no
moment that the faulty foundation work occurred in 1999, or that the damage was
discovered in 2005; it matters only that damage was alleged to have occurred in
2005.” Wilshire, 581 F.3d at 225. Therefore, the damage to the
foundation occurred at the time that the cracks actually appeared, not when the
foundation was improperly designed or installed. See id.
Similarly, the Crownovers contend that they
limited their damage request to the replacement of the HVAC units, which were
originally satisfactory but subsequently ran excessively starting in early
2003. There is no evidence that the HVAC
units were strained and required replacement when they were first installed, or
indeed at any time before Arrow had finished its work on the home. In sum, because
neither the foundation nor the HVAC system was damaged until after construction
on the home was complete, exclusions j(5) and j(6) do not prevent indemnity.
CONCLUSION
For the foregoing reasons, we REVERSE
the grant of summary judgment for Mid-Continent, RENDER summary judgment for
the Crownovers, and REMAND for calculation of legal fees.