Patrick Bracher
Insurers cannot use the contractual liability exclusion in a construction policy to deny coverage for defective work unless the builder assumes special liabilities in the contract that they would not otherwise have had.
This was held in a long-awaited decision in Texas USA (Ewing Construction Co v American Insurance Co). The outcome should be similar in South Africa on the same facts.
Ewing Construction built tennis courts which crumbled because of faulty workmanship. When the client sued the contractor, the insurers denied Ewing Construction an indemnity on the grounds that the liability arose out of faulty workmanship which was done in terms of a contract. The contractual liability exclusion does not apply to a construction defect just because the contractors contracted to perform the work in a "good and workmanlike manner”. They had that obligation outside the contract anyway. The contractors had not "assumed liability for damages in a contract” for the purposes of the exclusion.
To the relief of the construction industry, the case overturned a number of earlier judgments in Texas to the opposite effect and brought Texas into line with the law nationally.
First published by the Financial Institutions Legal Snapshot
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