Court Applies Contractual Liability Exclusion to Preclude Coverage for Breach of Contract
Insurance Law Update
Texas Supreme Court
In Gilbert Texas Const. v. Underwriters at Lloyd’s London, ___ S.W.3d ___, 2010 WL 2219645 (Tex. Sup. Ct. June 4, 2010), the Texas Supreme Court held that the contractual liability exclusion in a CGL policy excludes coverage for property damage where the only basis for liability is that the insured contractually agreed to be responsible for the damage.
Gilbert Texas Construction, L.P., was the general contractor on a Dallas Area Rapid Transit (DART) construction project. Unusually heavy rains resulted in water damage to a building adjacent to the construction site. The building owner sued Gilbert, alleging that construction activities caused the water damage and asserting claims for negligence and breach of contract. In the breach of contract claim, the building owner alleged that Gilbert assumed liability for the damage under its contract with DART. The trial court granted summary judgment for Gilbert on the negligence claim, leaving only the breach of contract claim. Gilbert settled the contract claim and then sought indemnity from its insurer.
The contractual liability exclusion bars coverage for “property damage” where the insured’s liability is based on its assumption of liability in a contract or agreement. However, the exclusion does not apply to liability for damages: (1) assumed in “insured contract”; or (2) that the insured would have in the absence of the contract or agreement. Among other things, an “insured contract” is one in which the insured assumes “the tort liability of another to pay damages because of ‘bodily injury’ or ‘property damage’ to a third person or organization . . . .”
The Texas Supreme court held that the “insured contract” exception did not apply because the case did not involve the assumption of tort liability. In particular, Gilbert had not assumed tort liability since DART already had governmental immunity from tort liability. In addition, the second exception to the exclusion did not apply because Gilbert’s only liability was contractual, i.e., Gilbert’s contract with DART obligated Gilbert to pay for damages to any improvements or utilities on property adjacent to the construction site. Accordingly, the contractual liability exclusion operated to bar coverage for Gilbert’s contract-based liability.