ASA Files Brief in Major Insurance Case

The case has widespread implications for contractors and subcontractors as to coverage for defective construction.

📅   Fri August 14, 2015 - National Edition
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The American Subcontractors Association, ASA of Texas, and other key construction industry organizations on July 31 filed an amici curiae brief in another major construction insurance coverage case that has percolated through the court system.

The case involves the incorporation of a defective product into a refinery, but has widespread implications for contractors and subcontractors as to coverage for defective construction and installation of particular parts, products and equipment into construction projects.

ASA, ASA of Texas, the Associated General Contractors of America, Texas Building Branch — AGC and ABC of Texas filed the brief in support of appellant U.S. Metals Inc., in U.S. Metals Inc. v. Liberty Mutual Group, 2014 WL 465892 (5th Cir. Sept. 19, 2014).

“Whether AGC, TBB — AGC, ABC of Texas and ASA members can depend on their commercial general liability insurance policies for coverage for the many risks they face is a matter of continuing and urgent interest to them,” Patrick J. Wielinski and RenĂ© R. Pinson of Cokinos, Bosien & Young, Irving, Texas, wrote in the brief.

In the underlying case, U.S. Metals, the insured, contracted to manufacture and supply 350 weld neck flanges for installation in Exxon refineries. U.S. Metals, in turn, subcontracted the manufacture of the flanges to Maass. The flanges were installed and welded in place by a separate contractor to Exxon. One flange leaked during pressure testing and Exxon contended that all of them were improperly manufactured and removed and replaced them all. Exxon sought damages from U.S. Metals for the costs associated with investigating the flange defect, requiring replacement flanges, removing and replacing the defective flanges, and the loss of use of its refineries, as well as incidental and consequential damages for a total of $20 million. U.S. Metals eventually settled with Exxon for $6.3 million, and sought coverage from Liberty Mutual under its CGL policy. Liberty Mutual denied coverage based on the Your Product Exclusion, as well as the Impaired Property Exclusion. The case was removed to the U.S. District Court for the Southern District of Texas, and the district court granted summary judgment in favor of Liberty Mutual.

On appeal, the Fifth Circuit Court of Appeals, applying Texas law, certified several questions to the Texas Supreme Court as to the applicability of the Impaired Property Exclusion, even though certification was apparently not sought by either party:

1. In the “your product” and “impaired property” exclusions, are the terms “physical injury” and/or “replacement” ambiguous?

2. If yes as to either, are the aforementioned interpretations offered by the insured reasonable and thus, must be applied pursuant to Texas law?

3. If the above question 1 is answered in the negative as to “physical injury,” does “physical injury” occur to the third party’s product that is irreversibly attached to the insured’s product at the moment of incorporation of the insured’s defective product or does “physical injury” only occur to the third party’s product when there is an alteration in the color, shape, or appearance of the third party’s product due to the insured’s defective product that is irreversibly attached?

4. If the above question 1 is answered in the negative as to “replacement,” does “replacement” of the insured’s defective product irreversibly attached to a third party’s product include the removal or destruction of the third party’s product?

In the brief, the amici curiae urged the court to answer “yes” to the first certified question, and in response to the second question adopted the arguments made by U.S. Metals that the ambiguity as to these policy terms must be resolved in favor of U.S. Metals. Regarding the third certified question, the amici curiae responded: “Regardless of the resolution of Certified Question No. 2, amici curiae urge the Court to determine that physical injury can take place at the time of incorporation of the insured’s defective product or work into other property in that there is an alteration in the color, shape or appearance of the other property due to the irreversible attachment to, or incorporation of the insured’s product or work into it. The other property into which the defective product or work is incorporated is also physically injured when the defective work or product is repaired, removed or replaced and in the process the other work is damaged.” Finally, they responded that the court should answer “no” to the fourth certified question, based on the plain language of the policy.

“The proposition that an insurer should not be obligated to pay claims that are outside the coverage of the policy it issued is not astounding,” the amici curiae wrote. “However, there is a tendency on the part of some insurers to deny claims that are more than arguably within the coverage of the policy. This is particularly true as to claims under commercial general liability [“CGL”] policies involving alleged defective products supplied by insured manufacturers and alleged defective workmanship performed by insured contractors. Despite the efforts of insureds to control the quality of their products or work, defects may occur, and insureds purchase CGL insurance policies to cover unintended property damage arising out of those circumstances.”

ASA’s Subcontractors Legal Defense Fund financed the brief. Contributions may be made to the SLDF via the ASA Web site.

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