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A contractor entered into an AIA standard form construction contract with a project owner to build additions to a school, including construction of tennis courts.  After the courts were completed they began flaking, crumbling, and cracking – making them unusable.  The owner sued the contractor for breach of contract and negligence.  The contractor tendered defense to its CGL carrier, but the carrier denied coverage on the basis of the contractual liability exclusion that excludes claims for damages based on an insured’s contractual assumption of liability.  The carrier argued that the exclusion applied because the contractor contractually undertook the obligation to construct tennis courts in “a good and workmanlike manner.”

By that language, the carrier asserted that the contractor assumed liability for damages if the construction did not meet that standard.  To the contrary, the contractor argued that the words “good and workmanlike” manner did not add anything to its obligation under the general common law to comply with the terms of the contract and exercise reasonable care in doing so.  It argued that merely agreeing to construct in a “good and workmanlike” manner did not enlarge its obligations and was not an “assumption of liability” within the meaning of the policy’s contractual liability exclusion.  The Supreme Court of Texas agreed with the contractor and held against the carrier. Ewing Construction v. Amerisure Insurance Company, No 12-0661, TTX 2013).

The court explained that the policy “excludes liability for damages the insured assumes by contract unless the exceptions bring the claim back into coverage”.  “Assumption of liability” “means that the insured has assumed liability for damages that exceeds the liability it would have under the general law.”   The court noted that it must be read this way, “otherwise the words ‘assumption of liability’ are meaningless and are surplusage.”  

With regard to the significance of the allegations that the contractor failed to perform in a  “good and workmanlike” manner, the court stated this is “substantively the same as … claims [that contractor] negligently performed under the contract because they contain the same factual allegation and alleged misconduct.”  “[Plaintiff’s] claims that [contractor] failed to perform in a good and workmanlike manner and its claims that [contractor] negligently performed under the contract are substantively the same.”

The court said that it had previously defined “good and workmanlike” as “that quality of work performed by one who has the knowledge, training, or experience necessary for the successful practice of a trade or occupation and performed in a manner generally considered proficient by those capable of judging such work.”

The court concluded that a contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract, and thus does not “assume liability” for damages arising out of its defective work such that the contractual liability exclusion would be triggered to bar coverage.

The insurance company argued that if the contractual liability exclusion were not applied here it would result in the policy being treated like a performance bond instead of an insurance policy.  In rejecting that argument, the court stated that there were other business risk exclusions in the policy that a carrier could look to bar coverage instead of applying the contractual liability exclusion.

Comment:  I would go so far as to say that, even if a contract had no particular language in its contract at all, or perhaps even worked without a written contract, the duty of performing a contractor’s work in a “good and workmanlike manner” would apply.  That is a duty imposed by common law and the fact that the contract reiterates what the common law already requires, adds nothing additional to the contractor’s duty – and therefore nothing that would fall within the “contractual liability” exclusion.

In contrast, however, whenever I see those same words included in a design professional contract to describe the duty owed by the design professional, I recommend the words are inappropriate and they be deleted.  This is because those words belong in a construction contract and not a professional services contract.  Design professionals are held to a different standard as established by the generally accepted standard of care.  This typically requires expert testimony to determine what is the applicable standard and whether the design professional failed to meet it.

To state that a design professional will perform in a “good and workmanlike manner,” is to treat the design professional like a contractor. It is at best confusing to say that a design professional does “work” instead of “service” and to suggest that service that requires the exercise of professional judgment and opinion is somehow to judged by whether it is “good” or “workmanlike.” In the context of a design professional services contract, I could better understand why an insurance carrier might assert that inclusion of those words might create uninsurable liability.

 

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 16, No. 2 (Feb 2014).

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