Crownover v. Mid-Continent Cas. Co., 2014 U.S. App. LEXIS 20737 (5th Cir. Oct. 29, 2014)
A few months ago, I discussed an insurance decision that narrowed coverage for builders and others in the construction industry. See here for that post. The Fifth Circuit has now changed its mind and, on motion for rehearing, vacated its earlier opinion and substituted one handing the policyholder (or rather the homeowners who sued the policyholder) a complete victory. That rarely happens, a court changing its mind, I mean.
In its earlier decision, the Fifth Circuit held that a builder was not covered under a general liability policy when sued for breach of an express warranty to repair defective workmanship. In so doing, the appellate court drew a distinction between breach of an express warranty and breach of an implied warranty of good workmanship, which the Texas Supreme Court had already deemed was covered in Ewing Contr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014). The insurance company denied coverage in Crownover based on a standard exclusion for liability that the insured assumed in a written contract, the so-called "assumed contract" exclusion. The builder in this case expressly warranted that it would competently repair defective work. In its initial decision, the Fifth Circuit court held that this express warranty triggered the assumed contract exclusion.
In this reissued decision, the federal appellate court reconsidered the standard laid down in the Ewing case. If the insured builder would have liable anyway under general law or common law principles, even absent the contract, then the fact that the insured warranted in its contract that it would be responsible for the work, then the assumed contract exclusion does not apply, held the Ewing Court. On reconsideration, therefore, the Crownover court determined that the builder would have had a duty to repair its defective work even absent the express warranty to repair. The court had earlier thought that the Ewing holding applied only in the case of implied warranties, not express warranties. However, on reconsideration, the Fifth Circuit court recognized that that distinction was irrelevant. The court reversed the lower court's judgment in favor of the insurance company and sent the case down to allow the homeowner plaintiffs to calculate attorneys' fees in addition to the costs of repair.
Alls well that ends well. Those in the construction industry are probably relieved that the scope of the assumed contract exclusion appears to be limited to unusual circumstances in which the insured has agreed to assume extraordinary liabilities, such as to assume liability for persons with no connection to the contract at all.
David S. White