Source: http://www.lexology.com, May 8, 2014
By: Micah E. Skidmore, Haynes and Boone LLP
Texas operators and service companies need to carefully consider how a recent trend in Texas law affects the availability of insurance coverage – for themselves and their counterparties – for contractual liability.
Most general liability policies, which insure claims for bodily injury and property damage, exclude coverage for liability assumed under a contract, unless the liability either exists in the absence of the contract or was assumed in a defined “insured contract.” For many years, this “contractual liability” exclusion was understood to apply when an insured assumes a third-party’s liability in an indemnity agreement. In 2010, the Texas Supreme Court held, under a unique set of facts, that the contractual liability exclusion could apply outside the context of a third-party indemnity agreement. More recently, in January 2014, the Texas Supreme Court spoke again. In Ewing Construction Company v. Amerisure Insurance Company, the court held that an insured does not “assume liability” as required to trigger the contractual liability exclusion simply by agreeing to perform construction work in a good and workmanlike manner. “Assumption of liability” means that the insured has assumed a liability for damages that exceeds the liability it would have under general law.
While the Ewing decision correctly confirms that not all contractual claims are excluded, the court has left unaddressed what liability exceeds the general law and how that determination is to be made. As a result, some insurers have begun taking the position that any obligation in a contract triggers the exclusion unless there is a parallel duty under the common law or statute. In other words, as the insurer’s argument goes, when a party promises anything that the party is not already obligated to do, claims arising out of the failure of such a promise are excluded. Damages for the breach of an express warranty, the failure to complete work on time, or work that does not meet contractual specifications would, arguably, all be excluded as arising out of an “assumption of liability” under the insurers’ rationale.
As a preliminary matter, any interpretation of Ewing that characterizes contractual duties that have no statutory or common law equivalent as an “assumption of liability” is simply wrong. There is a difference between an assumption of “liability” and the promise to perform a contractual “duty.” There is no textual or underwriting basis to conclude that an insurer whose policy contains a “contractual liability exclusion” undertook to insure the policyholder against the failure to conduct operations in a good and workmanlike manner, but did not intend, for example, to insure a contractor that fails to drill a well to the correct depth or an operator that fails to commence drilling before a contractual deadline. If one “assumes liability” by promising something that is not already required under the “general law,” the exception to the contractual liability exclusion for liability that exists in the absence of the contract is meaningless.
While there are multiple reasons to reject the premise that any contractual promise without a statutory or common law parallel is an “assumption of liability,” policyholders should proactively take steps to avoid unnecessary disputes over coverage for contractual claims. Companies should request an endorsement confirming that the contractual liability exclusion applies to the assumption of “another’s” liability in a contract or agreement. Contractual insurance requirements should demand the same from counterparties. In preparing service agreements, companies should consider carefully what warranties and other obligations are given by the party and required from counterparties and how those contractual duties are described. When a breach occurs, companies on both sides of the dispute should craft their claims and defenses with the contractual liability exclusion in mind. Doing so could preclude conflicts over insurers’ erroneous, but increasingly common, interpretation of the contractual liability exclusion as embracing all contractual claims that are not redundant of statutory and common law claims.