Fifth Circuit Puts Ewing Decision To Its First Test

Crownover v. Mid-Continent Cas. Co., No. 11-10166 (Tex. June 27, 2014)    In January 2014, the Texas Supreme Court issued a very important ruling that insurance coverage for construction-defect litigation was not excluded as an “assumption of liability in a contract,” based simply upon a contractor’s breach of its implied warranty to perform in a good and workmanship manner.  Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014).  See my discussion of the Ewing decision here, in which I surmised that both the construction and insurance industries should be relieved by this ruling because, otherwise, CGL insurers would likely have no obligation to cover most construction litigation, but builders, accordingly, would have little incentive to purchase the insurance in the first place.  The Fifth Circuit’s recent Crownover decision arguably moves a significant portion of construction litigation back under the exclusion.    The Crownovers hired a builder to construct their home.  Soon after completion, cracks appeared in walls and foundation.  The construction contract contained an express warranty to repair, which the Crownovers alleged in litigation that the builder breached after repair attempts failed.  The builder then went bankrupt, which automatically stayed the lawsuit, but the bankruptcy judge lifted the stay to allow the Crownovers to purse the builder’s CGL insurer for coverage in arbitration.  The arbiter held that (1) the builder had breached its express warranty and (2) that claim was not barred by the statute of limitations.  The Crownovers then sued Mid-Continent for coverage.    The lower court had granted the insurer summary judgment based on the exclusion of liability assumed in a contract.  This ruling, however, was issued before the Texas Supreme Court’s Ewing decision, which was actually responding to certified questions from the Fifth Circuit on that very issue.  See Ewing, 690 F.3d 628, 633 (5th Cir. 2012), a case in which the Fifth Circuit had reconsidered its own earlier decision (684 F.3d 512) that arguably would have consigned just about all construction defect cases to exclusion.  So, the lower Crownover court was not only unaware of Texas’s high court narrowing of the assumed-liability exclusion, that court would have considered itself bound by current controlling precedent to apply the exclusion broadly.  Nevertheless, the Fifth Circuit panel affirmed and distinguished Ewing based on the unusual facts of the case.    The panel held that an express warranty of repair was an assumption of duties beyond those imposed by law, like the implied warranty of workmanship at issue in Ewing.  Because the builder took the extra step of assuming a contractual duty it would not otherwise have, the exclusion should apply.  The Crownovers faced some other obstacles.  The arbiter had imposed liability solely due to the express warranty.  Therefore, the panel rejected their argument that the builder would have been required to repair defective work even without the express warranty by virtue of the implied warranty of workmanship or other law that already exists under Texas law.  Alas, held the panel, express warranties supersede implied warranties, and consideration of any other basis for liability would be speculative.  The Crownovers are just stuck with the facts of the underlying case.    How significantly Crownover will limit coverage for future construction defect cases remains to be seen.  Mid-Continent may well have had a duty to defend the builder against the Crownovers, given an insurer’s broader duties to defend based on the pleadings.  But duty to defend was not an issue after arbitration.  Future plaintiffs will probably take heed and plead implied warranties liberally, thus avoiding the exclusion.  Still, this case may give construction insureds, and their insurers, something to worry about.David S.