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SIGNIFICANT OPINION: TEXAS SUPREME COURT HOLDS NO COVERAGE FOR INSURED THAT BREACHED CONTRACT TO REPAIR DAMAGE TO WORK SITE AND SURROUNDING PROPERTY: Gilbert Texas Construction LP, as general contractor, contracted with the Dallas Area Rapid Transit Authority (DART) to construct a light rail system. In the contract, Gilbert agreed to protect the work site and surrounding property. During construction, heavy rains caused flooding that damaged buildings adjacent to the construction site. The building owners, including RT Realty, sued Gilbert and others, alleging various theories of liability, including breach of contract. The owners contended they were third party beneficiaries of Gilbert’s agreement in the DART contract to be responsible for damage to neighboring property. Gilbert’s primary general liability insurer, Argonaut Insurance Company, provided a defense. Gilbert’s excess carrier, Underwriters, issued a reservation of rights generally questioning Gilbert’s coverage for breach of contract claims.
As the case proceeded, Underwriters exercised a policy provision allowing it to “associate” in the defense by engaging its own counsel to evaluate the claims and participate in forming litigation strategy. Underwriters advised Gilbert to seek summary judgment on property owners’ tort claims based on the defense of governmental immunity conferred by statute. Gilbert’s counsel was reluctant due to coverage concerns, but Underwriters informed Gilbert that if it did not seek summary judgment on the tort claims it would consider Gilbert to have forfeited coverage due by violating the policy’s cooperation clause. If Gilbert did seek summary judgment, however, Underwriters would participate in mediation. Gilbert and the other contractor defendants obtained summary judgment against the tort claims, leaving only the breach of contract theory pending against Gilbert. Underwriters then denied coverage based on the contractual liability exclusion in the policy.
Gilbert settled the contract claims and sued Underwriters for indemnification. The trial court ruled for Gilbert but the court of appeals reversed and the SCOT affirmed the court of appeals. The SCOT found the property owners’ breach of contract claim against Gilbert fell within the scope of the policy’s contractual liability exclusion and that the exceptions to the exclusion did not apply. The court rejected Gilbert’s arguments that the exclusion applied only when the insured assumed a third party’s existing tort liability, and in the alternative that the exception to the exclusion applied because Gilbert would have been liable but for the contract which triggered its right to assert immunity. The court wrote: “We do not hold that the exclusion . . . precludes liability for all breach of contract claims . . . [w]e hold that it means what it says: it excludes claims when the insured assumes liability for damages in a contract or agreement, except when the contract is an insured contract or when the insured would be liable absent the contract or agreement.” Because only the breach of contract claim remained for Gilbert to settle, it could not have been liable outside the terms of the contract.
The court also denied Gilbert’s theory that Underwriters was estopped to deny liability for Gilbert’s settlement because it controlled the defense and prejudiced Gilbert by insisting that it seek summary judgment on the only potentially covered claims. The court held that Underwriters did not have a duty to defend and did not control the defense because Gilbert was free to disregard Underwriters’ advice and litigate coverage. Further, the court indicated that Underwriters was justified in asserting its position that Gilbert’s failure to comply with litigation recommendations would constitute a failure to cooperate.
Gilbert has filed a motion for rehearing arguing that the court’s ruling effectively eviscerates its holding in Lamar v. Mid-Continent because the Gilbert holding essentially recognizes a breach of contract exclusion in the standard CGL policy. Underwriters has responded that the court correctly applied the exclusion and that the Gilbert opinion was limited to its particular facts. The litigants also contest the effect of the court’s reasoning in disposing of the estoppel claim. Gilbert and several amici curiae, including contractor organizations and the Texas Association of Defense Counsel, have contended that the court’s opinion creates difficult conflicts for defense counsel that will cause policyholders to demand independent counsel in most cases, with substantial increases in defense costs. Underwriters responded again that the Gilbert reasoning was limited to its circumstances.
The case remains pending in the Supreme Court of Texas. Gilbert Texas Construction LP v. Underwriters at Lloyd’s London, No. 08-0246.