Friday, September 26, 2014

The Fifth Circuit asked the Texas Supreme Court last week for guidance to determine if commonly-used terms in commercial general liability (“CGL”) policies are ambiguous in a defective product suit.  In United States Metals v. Liberty Mut. Group, 2014 U.S. App. LEXIS 17966 (5th Cir. Tex. Sept. 19, 2014), U.S. Metals sought coverage for a $6.3 million settlement with Exxon Inc. The underlying suit was premised on an Exxon claim that U.S Metals provided defective metal flanges.  Exxon also alleged a refinery in Baytown, Texas had to be closed while the defective flanges were removed and replaced.

Liberty Mutual Group Inc. denied coverage on the basis that its policy excludes coverage for “property damage” arising out of “your product” and noted that U.S. Metals failed to fulfill the terms of the contract agreement as their “impaired property” could be restored through the “replacement” of “your product.”  U.S. Metals, on the other hand, argued that property damage arising from accidental “physical injury” is covered under the policy. The main issues certified to the Texas Supreme Court involve the definition of the terms “physical injury” and “replacement” as used in the CGL policy.

The Fifth Circuit noted an absence of both controlling precedent regarding whether the terms “physical injury” or “replacement” are ambiguous and any case law interpreting these terms.  For that reason and because these issues have been, and will likely continue to be, the subject of far-reaching insurance litigation, the Fifth Circuit certified these questions to the Texas Supreme Court: 

  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 such that they must be applied pursuant to Texas law?
  3. If question 1 above 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 question 1 is answered in the negative as to “replacement,” does “replacement” of the insured’s defective product irreversibly attached to third party’s product include the removal or destruction of the third party’s product?
The Texas Supreme Court accepted the certified questions today.  Stay tuned to see how the Court deals with the questions posed.  In the meantime, the issues in dispute may prompt the insurance industry to promulgate new definitions or exclusions designed to eliminate the potential ambiguity in existing CGL policies.