In a recent court case, the Texas Supreme Court issued a ruling regarding insurance exclusions that greatly impacts builders’ and general contractors’ general liability insurance coverage. Before we look at the specifics of the case, let’s go over the terms of most insurance policies.
Usually, there is a clause within general liability policies that gets insurance providers off the hook when contractors assume liability “in a contract of agreement.” In cases such as these, the insurance provider is allowed to exclude liability claims, because the contractor has agreed to assume the liability. These circumstances usually call for the contractor to purchase additional coverage, because of the additional assumed risk.
However, there’s an exception to this clause, which is that the insurance company is required to cover any liability claims for property damage that occurs as a result of any general liability that would be applicable if there was no contract in place. This means that while the insurance company isn’t responsible for other aspects of liability coverage, such as personal injury, they still have to cover property damage.
Now onto the specifics in Texas…
Ewing Construction Company entered into a contract with Tuluso-Midway Independent School District to build a tennis court. They subsequently hired a subcontractor to do the actual work. The subcontractor performed subpar work, and the court began to fall apart, at which point the school district returned to Ewing and expected him to pay for the damages.
Ewing filed a claim with his insurance provider, Amerisure, but the company said they weren’t responsible for the damages because of “contractual liability insurance exclusions.” After Ewing sued Amerisure, and Amerisure won rulings in federal court, the case was taken further up the federal court chain to the 5th Circuit Court of Appeals.
The Texas Supreme Court was then asked to clarify exactly what insurance exclusions clauses should mean. If Amerisure had won the Appeals case, contractors in Texas would basically lose any coverage they have for construction mistakes. This is hugely problematic because most contractors don’t have the money to cover construction defects, which is why they have insurance protection in the first place. These insurance policies not only protect the contractors, but then ensure that homeowners are compensated when their property is damaged during a job.
The court determined that an insurance company cannot avoid paying claims based on the language of the contractual liability insurance exclusions, and said that companies are still responsible for paying on claims that would have been covered in the absence of a contract. The only way that the exclusion applies to property damage is if the insured were to assume the liability for damages that exceed the regular liability policy.