iStock_000001424126XSmallThe Texas Supreme Court recently ruled that a general contractor has coverage for construction defects under its Commercial General Liability (CGL) insurance where the contract required the work to be performed in a good and workmanlike manner. While this may sound like no big deal, this was the most anticipated opinion of the year.

As is often the case in litigation over insurance policies, the debate over coverage delves deeply into the language of the policy. Here, the parties agreed that the CGL provided coverage on the project and that the poor workmanship was an occurrence triggering coverage. The question for the court was whether the exclusion to coverage applied.

The exclusion provided that the insurance does not apply to property damage for which the insured is obligated to pay by reason of the assumption of liability in a contract. But, the exclusion does not apply if the insured would have had liability in the absence of the contract.

So, the court looked at whether the general contractor would have had liability even if there was no contract. Not too surprisingly, the court found that a general contractor has a common law duty to perform in a good and workmanlike manner and even though the underlying contract obligated the general contractor to do the same thing. In essence, the contract did not expand the contractor’s underlying duty. Because the general contractor’s duty to do good work existed independently of the contract language, the exclusion to coverage did not apply and the insurer had to cover the loss.

This case is a big deal for contractors in Texas and around the country. If the court had ruled against the general contractor, virtually no contractors would have had coverage for construction defects.

Take Away—Review your contracts to see whether you are taking on additional liabilities that may not be covered by your CGL policy.