FIFTH CIRCUIT EXPANDS SUPREME COURT’S HOLDING IN GILBERT TO BREACH OF CONTRACT CLAIM

June 18, 2012

Last Friday, the Fifth Circuit extended the holding in the Texas Supreme Court’s decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118 (Tex.2010), to a coverage dispute involving a construction defect claim between the property owner and the general contractor. Ewing Const. Co., Inc. v. Amerisure Ins. Co., --- F.3d ----, 2012 WL 2161134 (5 Cir. June 15, 2012.)  The court began by setting out its reading of Gilbert, “the Dallas Area Rapid Transit Authority (DART) contracted with a construction company (Gilbert) to construct a light rail system.  The contract required the company to protect the area surrounding its work site, and the company contractually agreed with DART to repair damages to the property of third parties caused by its construction.  During construction, heavy rains caused flooding in a building near the work site, and the third party building owner sued the construction company under several theories. Id. The construction company's primary insurer assumed its defense, but its excess coverage insurer maintained that it had no duty to defend the company and might ultimately have no duty to indemnify either.  The Texas Supreme Court held that the excess insurer owed no duty to its insured construction company because the CGL policy's contractual liability exclusion applied. The court reasoned that in its construction contract with DART, the construction company had undertaken legal accountability to the third-party building owner by contract, and therefore the contractual liability exclusion applied by its plain meaning.”

The court then applied Gilbert to the claims by the property owner against the general contractor.  The court rejected the construction company’s argument that Gilbert did not preclude coverage for breach of contract claims.  The company argued: “the district court's reliance on Gilbert was misplaced because entering a construction contract is not the same as assuming liability for faulty workmanship performed under the contract. In Ewing's view, the construction company's promise to repair third party property in Gilbert was an assumption of liability, but the relevant promise here—an implied promise to the School Board to perform the contract with ordinary care—is not.”

The court stopped short of finding no coverage under the policy.  It determined that because the duty to indemnify was to be based on the facts to be adjudicated, resolving the duty to indemnify was premature. The court affirmed the summary judgment as to the duty to defend for the insurer.