Cokinos | Young recently received a favorable summary judgment ruling from a Texas federal judge for its general contractor client in a coverage action initiated by the client’s liability insurer, Mt. Hawley Insurance Company. The judge ordered Mt. Hawley to provide a defense for the underlying claims related to alleged defects in the construction of a municipal sports complex in a San Antonio suburb.
Mt. Hawley’s policy included a “breach of contract exclusion” endorsement, which precludes coverage for property damage “arising directly or indirectly” out of a breach of contract or express or implied warranty. Mt. Hawley denied coverage for the claim and immediately commenced a declaratory judgment action against its insured, seeking a ruling that it owed no duty to defend or indemnify in the underlying lawsuit. In its briefing, Mt. Hawley argued that so long as there was any allegation that the general contractor breached its construction contract, coverage for the entire lawsuit was excluded.
Chief Judge Orlando Garcia of the Western District of Texas rejected Mt. Hawley’s broad reading of the breach of contract exclusion. Instead, the court held that for the exclusion to apply, a breach of contract by the insured must be a “but for” cause of all alleged property damage. Mt. Hawley argued in its briefs that the exclusion should apply to the entire lawsuit because all of the general contractor’s liability was derived from the construction contract. But the court clarified that this argument “conflated” the concepts of liability with causation of property damage. The court held:
[M]erely because [the general contractor] may ultimately be liable for certain of the City’s economic losses under a breach of contract theory does not mean that all of the alleged property damage was causally attributable to [the general contractor’s] alleged breach of contract with the City.
In other words, a breach of contract by the insured must be a “but for” link in the causal chain that initially caused the alleged property damage. The fact that, later on, the insured may be liable in contract for property damage initially caused by a subcontractor’s defective work does not trigger the exclusion. Because an insurer must defend the entire lawsuit if there are any allegations of covered property damage, the court held that Mt. Hawley owed a duty to defend.
Though the court reached the correct conclusion in this instance, it took a careful, nuanced examination of a broadly worded exclusion to arrive at this result. In fact, the court went out of its way to distinguish previous Fifth Circuit cases where the courts interpreted similar exclusions much more broadly. In many circumstances, this type of exclusion can still be very dangerous for coverage as to construction defect claims involving breach of contract. Cokinos | Young advises its clients to watch out for this and similar exclusions when purchasing insurance.
The entire opinion can be found at Mt. Hawley Ins. Co. v. Slay Engr., Texas Multi-Chem, and Huser Constr. Co., Inc., 5-18-CV-00252-OLG, 2018 WL 3946547, at *1 (W.D. Tex. Aug. 15, 2018).