Exception to Contractual Liability Exclusion in CGL Policy Not Triggered by Property Owner's Suit
In Century Sur. Co. v. Hardscape Const. Specialties Inc., 2009 WL 2413935 [C.A.5 (Tex.) 2009], Hillwood Residential Services, L.P. and Hardscape Construction Specialties, Inc. contracted for Hardscape to construct a swimming pool facility for Hillwood at one of Hillwood's residential developments.
On the same day, Hardscape and Elite Concepts by Michael Nantz executed a contract wherein Elite agreed to construct the swimming facility pools. Elite, in turn, hired Wang Engineering, Inc. to design the pools and Tornado Excavation, Inc. to construct piers and beams for one of the pools.
Elite held an insurance policy issued by Century Surety Company that covered “occurrences,” which the policy defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy excluded “ 'bodily injury' or 'property damages' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement,” but excepted from that exclusion certain contractual obligations to pay for another party's tort liability.
After the subcontractors completed the swimming facility, Hillwood sued Hardscape, Elite, Wang, and Tornado in a Texas state court, alleging that faulty design and construction had caused physical and aesthetic damage to the pool and some of its surroundings. In response, Hardscape demanded that Elite defend and indemnify Hardscape, citing the Hillwood-Hardscape and Hardscape-Elite contracts, and Elite forwarded the demand to Century. After Century failed to respond, Hardscape made the demand directly upon Century, who failed to respond.
Century then sued Hardscape, Hillwood, and Elite. In cross-motions for summary judgment, Hardscape and Century sought judgment as a matter of law on issues of coverage and exclusion. The district court concluded that the Century policy's “occurrence” term did not cover the lawsuit-triggering construction errors, granted Century's motion, and denied Hardscape's. Hardscape appealed.
The parties disputed whether Hardscape demonstrated that the Hillwood suit fell within the definition of a covered “occurrence.” Century argued that the suit did not because “occurrence” did not encompass damage to a contract's object. Hardscape argued that “occurrence” included all negligent acts not expected by the insured.
The U.S. Court of Appeals, Fifth Circuit, explained that although Texas courts were divided on this question at the time of the district court's decision, Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex.2007) had since resolved the split by holding that “allegations of unintended construction defects may constitute an 'accident' or 'occurrence' ” under CGL policies. Because the terms of the contract and the Hillwood suit allegations aligned with Lamar Homes, the court held that the Century policy's “occurrence” term covered the Hillwood suit.
The parties also disputed whether Hardscape met its burden of demonstrating that the Hillwood suit fell within the policy's “insured contract” exception to the “contractual liability” exclusion. That exception provided, in part, that the contractual liability exclusion did not apply to damages assumed in “any other contract or agreement pertaining to your business … under which you assume the tort liability of another party to pay for 'bodily injury' or 'property damage' to a third person or organization,” and defined “tort liability” as “a liability that would be imposed by law in the absence of any contract or agreement.” Accordingly, the Hillwood petition triggered the exclusion's exemption only if it properly alleged a tort cause of action against Hardscape under the “eight corners” rule applied by Texas courts.
According to the court, in its simplest form the eight corners rule provided that the petition's allegations and the policy's language determined the insurer's duty to defend. Also, Texas adhered to a specific pleading requirement. Thus, to fall within the exclusion's exception, the Hillwood petition had to make specific factual contentions that, when construed liberally, could constitute “a liability that would be imposed by law in the absence of any contract or agreement.” Therefore, the court focused on the difference between common law tort and contract causes of action in Texas .
The court explained that to determine the nature of a Texas lawsuit, for purpose of ascertaining a liability insurer's duty to defend, it must look to the substance of the cause of action and not necessarily the manner in which it was pleaded.
Also, under Texas law, tort obligations were, in general, obligations imposed by law, apart from and independent of promises made and therefore apart from the manifested intention of the parties, to avoid injury to others. When the only claimed loss or damage was to the subject matter of the contract, the plaintiff's action was ordinarily on the contract.
The court therefore affirmed the lower court's decision, holding that the insured contract exception to the contractual liability exclusion in the CGL policy was not triggered by the suit alleging defective construction of the swimming pool. Although the suit alleged general negligence, the allegations gave rise to contract claims only and were not tort claims since the suit sought to recover for damage to the subject matter of the contract, which was the swimming pool itself and the surrounding deck.