Favorable Decision in NAHB-Supported Liability Insurance Case

Filed in Construction Industry, Legal by on November 7, 2014 0 Comments

ContractAgreemen_450wWith insurers increasingly citing the “contractual liability exclusion” as a reason to avoid paying for damages covered by home builder liability insurance policies, a recent decision by the Fifth Circuit Court of Appeals is good news for the housing industry.

On Oct. 29, the court determined in Crownover v. Mid-Continent Casualty Co. that a builder who agreed in his contract to repair damages caused by a failure to perform in a good and workmanlike manner did not violate the “contractual liability exclusion” in the builder’s insurance policy.

This exclusion is a narrow provision with limited scope and applies only to the liability of a third party. However, in June 2014 the Fifth Circuit held in Crownover that a contractual provision agreeing to repair damages caused by a failure to perform in a good and workmanlike manner violated the exclusion.

In July, the Crownovers asked the Fifth Circuit to rehear the case. NAHB, the Texas Association of Builders (TAB), and the Leading Builders of America filed an amicus brief in support of the Crownovers’ petition for rehearing. NAHB and TAB had previously filed an amicus brief in support of the Crownovers in 2011 when the case was first appealed to the Fifth Circuit.

The Crownovers contracted with Arrow Development Inc. to build a house for them. Arrow performed defective work and then failed to promptly correct it. The Crownovers spent a significant amount of money to correct the defective work themselves. An arbitrator later found Arrow liable to the Crownovers for breaching its express warranty to repair non-conforming work and awarded them damages.

However, Arrow had filed for bankruptcy, and the Crownovers were limited to recovering what they could from Arrow’s insurance policies. They therefore sued Mid-Continent Casualty Co., Arrow’s insurer, in federal court for the damages owed to them by Arrow, and both sides moved for summary judgment. The district court held for the insurer and the Crownovers appealed.

The principal question was whether a provision in the contract between the Crownovers and Arrow that required Arrow to repair work that didn’t meet the terms of the contract, was an “assumption of liability” that exceeded Arrow’s liability under general Texas law.

If the provision requiring Arrow to repair defective work was deemed an assumption of liability, it would trigger the “contractual-liability exclusion” in Arrow’s insurance contract with Mid-Continent and the insurer would not be liable to pay damages to the Crownovers.

In the new opinion, the Court of Appeals stated that “there is no doubt that the general law provides a duty to repair.”

Accordingly, since “[t]he remedy for failure to fulfill the duty to repair is the same as for failure to perform work in a workmanlike manner [i.e., the cost to repair the defective work],” the contractual duty to repair clause in the construction contract did not expand Arrow’s liability. Thus the contractual liability exclusion did not apply.

The panel further pointed out that Mid-Continent could not demonstrate how the contractual duty to repair increased the insured’s liability in any manner.

 

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