Property Damage in Texas under CGL Policies
What constitutes “property damage” that would invoke an insurer’s obligation to indemnify under a commercial general liability (CGL) insurance policy? In TIG Ins. Co. v. Woodsboro Farmers Cooperative, the 5th Circuit for the U.S. Court of Appeals, looking to the Texas Supreme Court opinions in U.S. Metals and Lamar Homes, provided some guidance in construction defect disputes.
Woodsboro Farmers Cooperative (Woodsboro) contracted with E.F. Erwin, Inc. (Erwin) to construct two, 105-foot diameter grain silos. Erwin hired a subcontractor, AJ Constructors, Inc. (AJC), to construct the silos, with Erwin retaining supervision responsibilities. The silos were delivered to the project site as kits which were then assembled according to the manufacturer’s manuals and specifications. At various stages, Erwin inspected the quality and progress of AJC’s work. Although Erwin observed some cosmetic problems in the roofing, it determined the silos were structurally sound and not defective. AJC left the job site after completing the assembly. Erwin completed the rest of the project on November 1, 2013, and signed an affidavit of completion as required by the contract with Woodsboro.
Before Woodsboro tendered final payment, it noticed several defects that caused the silos to leak. To address the leaks, Woodsboro and Erwin signed an addendum to their original contract under which Woodsboro agreed to make the final payment to Erwin as consideration for repairing a list of deficiencies for each silo. Erwin attempted to repair the defects, but was unable to make them watertight. When it became clear Erwin would not be able to fully repair the silos, Woodsboro contacted Pitcock Supply, Inc. (Pitcock) to inspect them. Pitcock observed numerous faults with the silos’ assembly, including missing or loose bolts; gaps in the tank walls and ceiling; incorrectly installed tank stiffeners; improper sealing; and unsecured roofing. Pitcock concluded that the failure to secure the roofs properly allowed them to “flex and move” in the wind and weather, causing the silos’ metal parts to fatigue and bend.
As the overall condition of the silos deteriorated, damage from wind and weather accelerated. Pitcock attributed the damage to AJC’s “poor workmanship.” Because the silos were constructed by jacking up each section, starting with the roof, they had to be deconstructed in their entirety to fix the damage and then reconstructed. Woodsboro hired Pitcock to repair the silos. New kits had to be purchased because certain parts were so damaged they could not be re-used.
Woodsboro sued Erwin in Texas state court for breach of contract. The case was abated and sent to arbitration. Erwin was defended as an additional insured under AJC’s CGL policy. The panel awarded Woodsboro a total of $988,073.25 in damages. After the arbitration panel issued its award, TIG Insurance Company (TIG), Erwin’s CGL insurer, sued Woodsboro and Erwin in the U.S. District Court for the Southern District of Texas seeking declaratory relief on its duty to defend and indemnify Erwin. Ton the duty to indemnify, the district court granted summary judgment in favor of TIG, concluding there was no “physical injury to tangible property” caused by Erwin’s breach apart from defective construction, nor was there any “loss of use” of the silos. Woodsboro appealed.
The TIG insurance policy contained the usual definition of “Property damage” as follows.
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
The TIG policy did not define “physical injury”. Instead, the Court looked to the Texas Supreme Court’s decision in U.S. Metals for the following definition.
“Physical injury” to tangible property “requires tangible, manifest harm and does not result merely upon the installation of a defective component in a product or system.” Thus, “faulty workmanship that merely diminishes the value of the [property] without causing physical injury or loss of use does not involve ‘property damage.”
TIG and Woodsboro, not surprisingly, disagreed about whether the arbitration award included any damages for “physical injury”. TIG argued that the Award was for “defective installation requiring repair”, i.e., the entire silo was defective and required repairs. In contrast, Woodsboro argued that the defective work caused physical damage to other property, i.e., the damages were from wind and weather that caused the silos’ metal parts to degrade, bend, fatigue, and become unstable.
Despite a lack of written record of the arbitration hearing, the Court found that evidence was introduced at the arbitration hearing that wind and other weather caused the silos’ metal parts to bend, fatigue, and deteriorate to the point where the silos were not structurally sound. This, according to the Court, constituted “a harmful change in appearance, shape, composition, or some other physical dimension to the claimants’ property.”
Relying on the Texas Supreme Court case of Lamar Homes, the Court held that whether the damaged property was the silos themselves or “other” property is irrelevant to whether there was “property damage.” The issue of what was damaged, instead, was to be addressed by policy exclusions. Satisfied that the evidence, when viewed in the light most favorable to Woodsboro, supports the determination that “property damage” occurred, the Court then examined the exclusions that might negate coverage. Finding fact issues as to whether the exclusions applied, the Court remanded the matter to the trial court for further determination.
The Woodsboro decision, while not determinative of whether the insurer had coverage, but merely whether fact issues existed that prevented summary judgment in favor of the insurer, is still informative and illustrative. A more carefully pleaded complaint, delineated damages, and a written record of the arbitration hearing may have avoided or at least streamlined the coverage dispute. The attorneys in our Austin and Dallas offices are available to answer any questions you may have. Please contact us at info@gstexlaw.com.
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