Texas Supreme Court Weighs In On Physical Injury Under CGL Policy - Incorporation Or Actual Harm?

Case: U.S. Metals, Inc. v. Liberty Mutual Group, Inc. U.S. 5th Circuit Court of Appeals (Texas) No. 14-0753

In what is an important case for property insurers and practitioners, the Texas Supreme Court responded to questions certified to it by the United States Court of Appeals for the Fifth Circuit. At issue was the definition of "physical injury" under the standard CGL policy.

ExxonMobil sued US Metals, with whom it had contracted to provide weld neck flanges for use in constructing diesel units for ExxonMobil refineries in Texas and Louisiana. The flanges were welded to piping of the diesel units; however, subsequent testing revealed some of the flanges were leaking and were apparently not as specified. ExxonMobil determined that the defective flanges increased the risk of fire and explosion and removed and replaced all of them. To replace the flanges, each flange had to be stripped of its temperature coating and insulation before cutting the flange out, the pipe surfaces had to be ground for rewelding, and then the flanges, and new gaskets, temperature coating and insulation were installed. This process was time-consuming and the work delayed operation of the diesel units for several weeks. Exxon Mobil claimed $6.3 million for the cost of replacing the flanges and $16.7 million for damages related to loss of use. US Metals settled with Exxon Mobil for $2.2 million, and claimed indemnification under its CGL policy.

The Texas Supreme Court reviewed the policy's Insuring Agreement and the "your work" and "impaired property" exclusions. In doing so, it also analyzed and applied the definitions of "property damage", "your product" and...