In Century Surety Co. v. Hardscape Construction Specialties, Inc., No. 06-10930, 2009 WL 2413935 (5th Cir. Aug. 7, 2009), coverage turned on the fundamental distinction between tort and contract. Because the court concluded that the underlying suit alleged only a breach of contract, the insurer did not owe a defense to its insured.
Hardscape Construction Specialties, Inc., entered into a contract with Hillwood Residential Services, L.P., to construct a swimming pool facility at one of Hillwood’s residential developments. The contract required Hardscape to indemnify and hold harmless Hillwood for damage and liability arising out of the performance of the construction contract. Hardscape entered into a subcontract with Elite Concepts to construct the swimming facility pools. Elite Concepts agreed to be bound by the general contract. Elite in turn hired Wang Engineering to design the pools and Tornado Excavation to construct piers and beams for one of the pools.
Century Surety Company insured Elite under a CGL policy. The policy contained a standard form exclusion for “‘bodily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contractor agreement.” The exclusion excepted certain contractual obligations to pay for another party’s tort liability.
Following completion of the contract, Hillwood sued Hardscape, Elite, Wang, and Tornado in a Texas state court, alleging that defective design and construction had caused physical and aesthetic damage to the pool and some of its surroundings. Hillwood asserted claims for negligence, gross negligence, breach of contract, breach of implied warranty, and breach of expressed warranty. Hardscape demanded that Elite defend and indemnify Hardscape. Hardscape made demand directly upon Century, who failed to respond.
Century then sued Hardscape, Hillwood, and Elite in the United States District Court for the Northern District of Texas. The District Court granted summary judgment to Century, holding that the Century policy’s “‘occurrence’ term did not cover the lawsuit – triggering construction errors.” The Fifth Circuit affirmed.
The court concluded that it was “bound to hold that the Century policy’s ‘occurrence’ term covers the Hillwood suit.” In reaching this conclusion the court found controlling the recent decision from the Texas Supreme Court, Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007). There, the court held that “allegations of unintended construction defects may constitute an ‘accident’ or ‘occurrence’ under commercial general liability (CGL) policies,” but “a claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured’s actions, that is, was highly probable whether the insured was negligent or not.”
The court, however, held that the contractual liability exclusion excluded the claim. Applying the Texas eight corners rule, the court held that the allegations in Hillwood’s suit did not fall within the ambit of the policy’s “insured contract” exception to the “contractual liability” exclusion. The 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-party organization.” The policy defined “tort liability” as “a liability that would be imposed by law in the absence of any contract or agreement.”
The court explained the Texas law requires that it “look to the substance of the cause of action and not necessarily the manner in which it was pleaded.” Applying this standard, “most of these allegations are easily classified as giving rise to contract claims – namely, because the damages only occurred to the subject matter of the Hillwood-Hardscape contract, and because no liability would arise independently of the contract.” “Hillwood made contract claims when it alleged that Elite’s failure to properly design and construct the pools caused cracks in the walls and floor of the pool, esthetic damage, pool structural damage, and the like.”
The court, however, concluded that “one of the petition’s allegations deserves a closer analysis.” That is, the allegation that “the decking surrounding the pools, including the ‘cool deck’ installed over the original decking became uneven.” Hardscape argued that because the petition does not make clear who constructed the referenced cool deck, the ambiguity should be resolved in favor of Hardscape and coverage. “Hardscape’s argument fails because no such ambiguity exists – the Hillwood petition makes clear that Elite constructed all of the decking pursuant to the Hardscape-Elite contract.” Therefore, “the decking portion of the Hillwood petition’s allegations sounds in contract because the damage occurred only to the subject matter of the Hillwood-Hardscape contract, and because any liability arising from damage to the decking exists only as a result of the contract.” “A different result might obtain if, for example, Hillwood had alleged that the faulty pool construction damaged its business interest or adjacent property.”
The court concluded that “despite the fact that the Hillwood petition alleges a cause of action that falls within the Century policy’s definition of ‘occurrence,’ the policy’s ‘contractual liability’ exclusion operates to exclude the claims arising from the Hillwood suit, and no tort claim triggers the exclusion’s ‘insured contract’ exception.”
