Not many. We should pay attention when one does.
Last June, a federal appeals court in New Orleans reached a decision in a Texas case involving a tennis court—where quite a few "do overs" get called—that would have essentially nullified contractors general liability insurance as it was understood to exist for the last several decades.
The issue involved is what creates an occurrence triggering coverage under a contactor’s policy. The insurance is generally understood not to cover the failure to fulfill the terms of a contract, and there is an exclusion for it.
In August, after numerous amicus briefs from concerned contractors, the judges sent the case back to the state Supreme Court for answers to specific questions.
The bigger question that may be decided is what is an occurrence under a contractor’s policy for which coverage by the insurer would kick in, including legal defense costs.
“Because the CGL (contractor’s general liability) policy has been in existence since 1986, there are a tremendous number of policies out there that are occurrence-based,” says Christine Kirchner, an attorney with Chamberlain Hrdlicka, White, Williams and Aughtry. “It has far-reaching consequences.”
The case involved Ewing Construction Co., which was hired in 2008 by the Tuloso-Midway Independent School District to construct tennis courts at a school in Corpus Christi. The job was worth $2.2 million.
After the work was done, the courts started cracking and flaking, and in early 2010 the school district sued Ewing in district court in Texas seeking damages for defective construction. When Ewing requested Amerisure Insurance defend Ewing in the lawsuit, Amerisure denied coverage. So Ewing sued Amerisure.
Okay so far.
Then in April, 2011, the district court denied Ewing’s motion and found in favor of Amerisure, saying it had no duty to defend Ewing and cited the contractual liability exclusion. That means that the liability insurance doesn’t cover the contractor failing to do its own work properly.
Complex legal reasoning had kicked in.
The parties agreed that the physical defects in the tennis courts were property damage caused by an “occurrence” in the coverage territory, but they disagreed about whether the liability would exist in the absence of a contract—which is the legal test for these types of things.
Two of the three appeals court judges decided that the CGL policy’s contractual liability exclusion excludes coverage in the Ewing lawsuit. That is, Ewing can’t collect from Amerisure.
A third appeals court judge dissented from the majority, but I’m not going to go into that.
In any case, the whole matter is up in the air again. It may take until spring for the Texas Supreme Court to answer the appeals court's questions.
What’s at stake here is the very sensitive issue involving what companies believe their insurance covers. “It’s a far reaching issue for the contractor who purchases the insurance,” says Kirchner. The contractor “paid a premium and expected coverage, and if this stands it will wipe out that coverage."
She is sensitive to the clients and owners who thought they could collect damages if needed under those policies.
“Not only did the industry pay premium dollars over years thinking it had coverage," says Kirchner. "Look at the homeowner and consumers that will stand to lose if they can’t sue for leaking windows."
They were suing for the insurance money, she adds, but it wouldn't necessarily be there any more if the appeals court had let stand its original decision.