Texas High Court Sides with Lloyd’s in Contractual Liability Exclusion Case

June 7, 2010

The Texas Supreme Court has found in favor of an excess insurance provider in a case involving the contractual liability exclusion in a Commercial General Liability (CGL) policy.

In 1993, Dallas Area Rapid Transit Authority (DART) contracted with Gilbert Texas Construction LP, as general contractor, to construct a light rail system. Under the contract, Gilbert was required to protect the work site and surrounding property.

During construction heavy rains damaged a building adjacent to the construction site and the building’s owner “sued DART and its contractors, alleging that construction activities caused the water damage,” according to court documents.

RT Realty (RTR), the building’s owner, “sued the general contractor in tort and for breach of contract. In the breach of contract claim, the building owner alleged that the general contractor assumed liability for the damage under its contract with DART.”

Except for the breach of contract claim, the trial court found in favor of the general contractor on grounds of governmental immunity.

Gilbert later settled the breach of contract claim for $6.175 million and sought coverage from its insurers. Argonaut Insurance Company, which had provided Gilbert with primary insurance coverage under a CGL policy, had assumed Gilbert’s defense. But Underwriters at Lloyd’s London (Underwriters), with which Gilbert had several layered excess coverage policies, denied coverage, citing the contractual liability exclusion.

The primary issue in the case reviewed and recently ruled on by the Texas Supreme Court was “whether the contractual liability exclusion in a Commercial General Liability (CGL) policy excludes coverage for property damage when the only basis for liability is that the insured contractually agreed to be responsible for the damage, and if so, whether an exception to the exclusion operates to restore coverage,” wrote Justice Johnson delivering the opinion of the court.

Before the Court, Gilbert asserted “that (1) the contractual liability exclusion does not apply because Gilbert’s liability arises from its own breach of contract and not from another’s liability that Gilbert assumed; (2) even if the exclusion applies, an exception to the exclusion brings the breach of contract claim back into coverage because Gilbert would not have been liable to RTR in the absence of its contract with DART; and (3) in the alternative, Underwriters asserted control over Gilbert’s defense and prejudiced Gilbert, so under an estoppel theory Gilbert should be awarded damages for the amount it paid to settle RTR’s lawsuit,” Justice Johnson wrote.

The Court of Appeals for the Fifth District of Texas had previously ruled that the “contractual exclusion applies to the breach of contract claim” and that the exception that would have provided coverage absent the insured’s contract with DART is inapplicable. The state Supreme Court agreed.

It held “that the exclusion applies, the exception does not, and there is no coverage.” It also found that Underwriters never assumed “control of Gilbert’s defense, Gilbert was not prejudiced by Underwriters’ actions, and Underwriters is not required to pay damages to Gilbert under an estoppel theory.”

The case is Gilbert Texas Construction LP v. Underwriters at Lloyd’s London, No. 08-0246.

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