Crownover v. Mid-Continent Cas. Co.

• Citation: 772 F.3d 197
• Decision Date: 29 October 2014
• Docket Number: No. 11–10166.,11–10166.
• Parties: Doug CROWNOVER and Karen Crownover, Plaintiffs–Appellants v. MID–CONTINENT CASUALTY COMPANY, Defendant–Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

772 F.3d 197

Doug CROWNOVER and Karen Crownover, Plaintiffs–Appellants
v.
MID–CONTINENT CASUALTY COMPANY, Defendant–Appellee.

No. 11–10166.

United States Court of Appeals, Fifth Circuit.

Oct. 29, 2014

Reversed and remanded.

Opinion, 757 F.3d 200, withdrawn and superseded on rehearing.

[772 F.3d 198]

Gregory A. Harwell, Esq., Slates Harwell, L.L.P., Stacy R. Obenhaus, Gardere Wynne Sewell, L.L.P., Dallas, TX, for Plaintiff–Appellant.

Richard Brent Cooper, Esq., Diana L. Faust, Michelle Elaine Robberson, Cooper & Scully, P.C., Dallas, TX, for Defendant–Appellee.

Lee Howard Shidlofsky, Esq., Douglas Paul Skelley, Esq., Shidlofsky Law Firm, P.L.L.C., Austin, TX, for Texas Association of Builders, National Association of Home Builders and Leading Builders of America, Amicus Curiae.
Patrick J. Wielinski, Esq., Cokinos, Bosien & Young, P.C., Irving, TX, for Texas Building Branch of the Associated General Contractors of America and American Subcontractors Association Incorporated, Amicus Curiae.
Appeals from the United States District Court for the Northern District of Texas.
Before KING, BENAVIDES, and DENNIS, Circuit Judges.

[772 F.3d 199]

ON PETITION FOR REHEARING

JAMES L. DENNIS, Circuit Judge:

The petition for panel rehearing is GRANTED. The prior opinion, Crownover v. Mid–Continent Casualty Co., 757 F.3d 200 (5th Cir.2014), is WITHDRAWN, and the following opinion is substituted:

Doug and Karen Crownover contracted with Arrow Development, Inc. (“Arrow”) to construct a house for them. Arrow performed defective work and then failed promptly to correct the work. The Crownovers spent a significant amount of money paying to correct the work themselves. An arbitrator found Arrow liable to the Crownovers for breaching its express warranty to repair non-conforming work and awarded them damages. Because Arrow filed for bankruptcy, however, the Crownovers were limited to recovering what they could from Arrow's insurance policies. They therefore sued Mid–Continent Casualty Co. (“Mid–Continent”), Arrow's insurer, in federal court for the damages owed to them by Arrow, and both sides moved for summary judgment. The principal question in this diversity case is whether a contractual provision in the construction contract between the Crownovers and Arrow, which obligated Arrow to repair its work where that work failed to conform to the requirements of the construction contract, was an “assumption of liability” that exceeded Arrow's liability under general Texas law, thereby triggering a “contractual-liability exclusion” in Arrow's insurance contract with Mid–Continent. If the contractual-liability exclusion does not apply, the question becomes whether any other exclusion from coverage applies.

The district court held that the contractual-liability exclusion in Arrow's contract with Mid–Continent prevented indemnity and granted summary judgment for Mid–Continent. We conclude that, consistent with Texas law and considering the Texas Supreme Court's decisions in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118 (Tex.2010), and Ewing Construction Co. v. Amerisure Insurance Co., 420 S.W.3d 30 (Tex.2014), the contractual-liability exclusion from coverage does not apply and therefore Mid–Continent was not entitled to summary judgment on that ground. We further conclude that no other exclusion from coverage forecloses the Crownovers' claim. Accordingly, we REVERSE summary judgment for Mid–Continent, RENDER summary judgment for the Crownovers, and REMAND for calculation of legal fees.

CONCLUSIONII. A.

In Gilbert, the Texas Supreme Court held that a contractual-liability exclusion applied to bar recovery where the only viable claim was for breach of contract, since all other claims were barred by governmental immunity. The insured party was Gilbert Texas Construction (“Gilbert”), which contracted with the Dallas Area Rapid Transit Authority (“DART”) to build a light rail system. Id. at 121–22. As part of the contract, Gilbert agreed to “protect from damage ... adjacent property of a third party ... [and] repair any damage to those facilities, including those that are the property of a third party, resulting from failure to comply with the requirements of this contract or failure to exercise reasonable care in performing the work.” Id. at 122. “During construction, Dallas suffered an unusually heavy rain, and a building adjacent to the construction area flooded.” Id. The adjacent building's owner (“RTR”) sued Gilbert, among others, under various theories of liability, including tort and breach of contract. Id. Based on defenses of governmental immunity, the trial court granted motions for summary judgment on all claims except RTR's breach of contract claims against Gilbert. Id. at 123. Gilbert eventually settled with RTR, but Gilbert's insurer, Lloyd's of London (“Lloyd's”), refused to indemnify Gilbert on the ground that the contractual-liability exclusion applied. See id. at 122–23. Gilbert sued Lloyd's, and the case eventually reached the Texas Supreme Court. Id.

The Texas Supreme Court laid out the steps for determining whether a contractual-liability exclusion applies:

[1] Initially, the insured has the burden of establishing coverage under the terms of the policy. [2] If the insured proves coverage, then to avoid liability the insurer must prove the loss is within an exclusion. [3] If the insurer proves that an exclusion applies, the burden shifts back to the insured to show that an exception to the exclusion brings the claim back within coverage.

Id. at 124 (citations omitted). Applying this framework, the Gilbert court first noted that Lloyd's did not deny that RTR's claim was within the general terms of the policy. Id. at 125. The Texas Supreme Court next explained that the contractual-liability exclusion “means what it says: it excludes claims when the insured assumes

[772 F.3d 203]

liability for damages in a contract or agreement, except ... when the insured would be liable absent the contract or agreement.” Id. at 128; see also Ewing, 420 S.W.3d at 37 (“[W]e ... determined in Gilbert that ‘assumption of liability’ means that the insured has assumed a liability for damages that exceeds the liability it would have under general law.” (citing 327 S.W.3d at 127)). The court concluded that Gilbert had “assumed” liability by taking on liability in its contract that it would not otherwise have had under the law:

Independent of its contractual obligations, Gilbert owed RTR the duty to comply with law and to conduct its operations with ordinary care so as not to damage RTR's property[ ].... In its contract with DART, however, Gilbert undertook a legal obligation to protect improvements and utilities on property adjacent to the construction site, and to repair or pay for damage to any such property “resulting from a failure to comply with the requirements of this contract or failure to exercise reasonable care in performing the work.” (emphasis added). The latter obligation—to exercise reasonable care in performing its work—mirrors Gilbert's duty to RTR under general law principles. The obligation to repair or pay for damage to RTR's property “resulting from a failure to comply with the requirements of this contract” extends beyond Gilbert's obligations under general law and incorporates contractual standards to which Gilbert obligated itself.

Gilbert, 327 S.W.3d at 127.

Since governmental immunity foreclosed all of RTR's theories of liability apart from breach of contract, all that remained was RTR's claim that Gilbert had breached the contract by causing damage “resulting from a failure to comply with the requirements of th[e] contract.” See id. When Gilbert settled with RTR (a stranger to the contract), its “only potential liability remaining in the lawsuit was liability in excess of what it had under general law principles.” Id. Thus, the court concluded that RTR's breach-of-contract claim “was founded on an obligation or liability contractually assumed by Gilbert within the meaning of the policy exclusion.” Id.; see also Ewing, 420 S.W.3d at 36 (“In other words, Gilbert did not contractually assume liability for damages within the meaning of the policy exclusion unless the liability for damages it contractually assumed was greater than the liability it would have had under general law—in Gilbert's case, negligence.”).

The Gilbert court then considered whether the exception to the exclusion brought Gilbert's liability to RTR back into coverage. See 327 S.W.3d at 133–35. The relevant exception stated that the exclusion “does not apply to liability for damages ... [t]hat the insured would have in the absence of the contract or agreement.” Id. at 133 (alterations in original). To determine whether the exception applied, the court ruled that it had to “decide whether Gilbert proved it would have had liability for RTR's damages absent its contractual undertaking.” Id. at 134. The court pointed out, however, that “[b]ecause RTR's tort claims were properly dismissed, the only viable claim underlying Gilbert's settlement was for breach of contract.” Id. Thus, the court held “[t]he exception for liability for damages Gilbert would have in the absence of the DART contract is inapplicable where, as here, the insured has governmental immunity and liability is based on its contract.” Id. at 135.

B.

Following oral argument in this case, a panel of this court certified two questions

[772 F.3d 204]

to the Texas Supreme Court that are germane to the Crownovers' dispute with Mid–Continent. See Ewing Constr. Co. v. Amerisure Ins. Co., 690 F.3d 628, 633 (5th Cir.2012). Those questions were:

1. Does a general contractor that enters into a contract in which it agrees to perform its construction work in a good and workmanlike manner, without more specific provisions enlarging this obligation, “assume liability” for damages arising out of the contractor's defective work so as to trigger the Contractual...