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 "impaired property." The Court first acknowledged that all of the damages arose out of the defective flanges, and noted that US Metals did not claim coverage for the flanges themselves. The Court then commented that its responses to the certified questions would turn upon two essential inquiries: (1) did the installation of the faulty flanges physically injure the diesel units when the only harm was the risk of leaks, and (2) was the property at issue restored to use by replacing the faulty components, even though property would inherently be altered or damaged during the repair process?

The court initially determined that injury alone was not enough to trigger the policy's coverage; rather there must be "physical injury." Thus, even though there may be an intangible, latent, or inchoate injury, - here, for...