Last night, I was preparing to give a webinar on the impact of the
Ewing opinion (the “Opinion”). Brent Cooper, the lawyer who argued for Amerisure, sent me a copy of his paper. In that paper, he stated that “we don’t know whether the decision applies to the duty to defend or the duty to indemnify, or both.” My reaction was: “That’s hogwash . . . there is no way the
Opinion can be read as applying only to the duty to defend.” Just to be careful, however, I pulled out the Opinion. What happened in the next few minutes impacted what would otherwise have been a very peaceful night of sleep.
As currently written, the Opinion skips from Section II directly to Section IV. In other words, the Opinion is either missing a Section III or Section IV is numbered incorrectly. No big deal, right? While I would love to pawn it off as a simple numbering error, it appears from the text of the Opinion that the Court
may have intended to include a separate section on the duty to indemnify. Notably, on page 4 of the Opinion, the Court states that the duties to defend and indemnify are separate and distinct and then, on page 5, the Court ends Section I with the statement: “We
first consider the duty to defend.” Opinion at 5 (emphasis added). Consistent with this statement, the heading of Section II is “Duty to Defend.” Within Section II, the Court further notes that “[a]lthough this case involves
both duties to defend and to indemnify,
Gilbert’s interpretation of the contractual liability exclusion guides our determination.”
Id. at 7 (emphasis added). The Court goes on to conclude why
Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s, 327 S.W.3d 118 (Tex. 2010), does not apply and, as discussed in our last
blog, the Court summarily rejects Amerisure’s expansive interpretation of the contractual liability exclusion. All of this wonderful analysis takes place under the Section II heading. As noted above, there is no Section III—where one would expect to see the heading “Duty to Indemnify.” And, on page 15, the heading “Conclusion” appears under Section IV. So where is Section III?
With my stomach acid rising, I quickly reached for a glass of milk (let’s just go with that) and began the process of trying to solve the mystery of the missing Section III. After all, before last night, I had read the Opinion at least 50 times, and I have it on good authority that Doug won’t go to sleep without tucking the Opinion under his pillow. Yet, neither of us caught the omission of Section III. Moreover, there have been over 100 blogs discussing the Opinion and not a
single one mentions the missing Section III or even posits that the holding could be limited to the duty to defend.
Many have theorized about a mystical second bullet in the Kennedy Assassination. Here, there is no Zapruder film to dissect. So, the mystery remains—at least for now. Legal positions could be staked based on the missing Section III. CNN and FOX could interpret the same Opinion in a completely different way. Grisham may write a novel about it if Dan Brown doesn't beat him to it. Oliver Stone and Michael Moore have made inquiries about buying the movie rights. Chaos could ensue. The stock market already has been impacted. I oftentimes ask myself in turbulent times: What would Jack Bauer do? For this mystery, however, I ask: What would Geraldo Rivera do? The answer is clear. Accordingly, this blog will explore the mystery of the missing Section III and explain why it is much ado about nothing.
The first question is, “Why, before last night, did no one notice the missing Section III?” The answer is that the Opinion, as written, clearly applies to both the duty to defend and the duty to indemnify. In fact, at no point did the Court ever attempt to circumscribe its analysis with the “eight corners” rule. And, the certified questions themselves do not distinguish between the duty to defend and the duty to indemnify. To that point, the original motion to certify to the Supreme Court of Texas included three questions—two of which were specific to the duty to defend. The Fifth Circuit, for whatever reason, chose to certify only two questions and even then made the two questions devoid of any distinction between the duty to defend and the duty to indemnify. The numerous blogs and newsletters from both policyholders and carrier lawyers certainly did not pick up on any distinction in the Court’s analysis. In fact, when the Opinion was issued, you could almost hear the collective sigh of relief from
both policyholder lawyers and carrier lawyers. Truth be told, although the Opinion was picked up by the AP newswire (yes, it was a slow news day), the fact is that the Court’s ruling in favor of coverage is far less newsworthy than had the Court ruled the other way. Simply put, the insurance world
expected the decision to come out exactly the way that it did.
Indeed, the Court’s entire analysis of “assumption of liability” in the contractual liability exclusion does not lend itself to any meaningful distinction between the duty to defend and the duty to indemnify. That being said, conspiracy theorists may point to Footnote 7 for support—much like the mystery figure on the grassy knoll. In Footnote 7, after noting that the claims against Ewing that it failed to perform in a good and workmanlike manner and that it negligently performed under the contract were substantively the same, as well as the fact that Ewing correctly noted it had a common law duty to perform its contract with skill and care, the Court specifically disavowed any retreat from its prior holdings on the “economic loss” rule. Opinion at 6 n.7. Although this does nothing to support the notion that the Opinion is limited to the duty to defend, the “contrived” theory would go something like this: Assume the construction defect lawsuit proceeds to trial. The negligence count gets dropped or dismissed on economic loss grounds and Ewing’s ultimate liability (remember, this is a hypothetical) is premised on a breach of contract theory. Amerisure then would argue that the Opinion only addressed the duty to defend and, because the only liability found against Ewing was a breach of contract, the Court’s prior decision in
Gilbert controls and the breach of contract is excluded. Nice theory, except for the fact that it is just plain wrong, it is not at all how the Opinion reads and, in fact, it is directly contrary to the analytical framework employed by the Court. In fact, the Court cited
American Family Mutual Insurance Co. v. American Girl, Inc., 268 N.W.2d 65, 80–81 (Wis. 2004), noting that “[r]eading the phrase [assumption of liability in a contract or agreement] to apply to all liabilities sounding in contract renders the term ‘assumption’ superfluous.” Opinion at 12. Moreover, in that vein, the Court distinguished
Gilbert because that case involved the “assumption of liability” for damages that exceeded the liability Gilbert would have had under general law.
See Opinion at 12. The claims that Ewing failed to perform its work in a good and workmanlike manner simply did not include a similar assumption and, therefore, while
Gilbert guided the Court’s determination in
Ewing, it did not mandate the same result. Further, logic dictates that the Court’s interpretation of the phrase “assumption of liability” would be the same in both the duty to defend and duty to indemnify context. Either Ewing assumed liability in the contract or it didn’t.
So, what does Footnote 7 mean? Far from supporting a distinction between the duty to defend and the duty to indemnify, a literal reading of the Opinion demonstrates that the Court did not care whether Ewing’s ultimate liability (read: duty to indemnify) sounded in tort, warranty or contract. Rather, the issue—as argued by Ewing and as adopted by the Court—is whether the construction contract added duties that would not ordinarily exist. Whether the
damages that are awarded when those duties are breached are recoverable in contract or tort is of no relevance to the coverage determination. Accordingly, Footnote 7 merely emphasized that the Court was not creating a tort duty that would not otherwise exist because of application of the economic loss rule. Nowhere does the Opinion even hint that the Court’s conclusion would have been different had the trial court in the underlying lawsuit knocked out the tort claims based on the economic loss rule leaving only a judgment based on a breach of the contract.
We now know who shot J.R. In time, this mystery also may be solved. The Court, by way of letter brief, is now aware of the issue. Of course, the Court has various options at its disposal. The Court could: (i) issue a revised opinion that includes a discussion of the duty to indemnify; (ii) simply renumber Section IV to make it Section III; or (iii) do absolutely nothing and leave the Opinion the way it currently is written. While I sincerely hope that the Court issues some form of a revised opinion, so as to clarify any “perceived,” “fabricated” or “contrived” ambiguity or limitation, the reality is that the Opinion—as written—narrowly construes
Gilbert by recognizing its “unusual” facts and, at the same time, holds that a contractual undertaking to perform construction in a good and workmanlike manner simply is not an “assumption of liability” within the meaning of the contractual liability exclusion. That is true at the duty to defend stage and remains true if a judgment is rendered on that same breach. Cue the dramatic music.
Although I firmly believe that this may all be much ado about nothing, Shidlofsky Law Firm will leave no stone unturned (and no wine bottle uncorked). We will monitor Wiki-Leaks, we will send our newest associate to Russia to find Edward Snowden, we will seek the sage advice of Mayor Rob Ford and we will purchase a Ouija Board. Alternatively, if none of those work, we will continue to hit “refresh” on our Internet browser every 2.5 seconds starting at 9:00 a.m. every Friday morning (for as many Fridays as is necessary) waiting to see if the Court solves the mystery. Stay tuned . . .
P.S. In the midst of last night’s “crisis,” my youngest son informed me that the world is not flat. Hogwash, again! I’ll jump on that mystery next!
