U.S. Metals, Incorporated v. Liberty Mutual Group, Incorporated, Doing Business as Liberty Insurance Corporation
57 Tex. Sup. Ct. J. 144
Tex.2015Background
- U.S. Metals sold custom stainless-steel weld-neck flanges to ExxonMobil for high‑temperature, high‑pressure refinery diesel units; post‑installation testing revealed the flanges leaked and failed to meet industry standards.
- ExxonMobil removed and replaced the welded flanges, a process that destroyed insulation, coating, gaskets, and original welds and required weeks of shutdown; ExxonMobil sued U.S. Metals for flange replacement costs and lost use damages.
- U.S. Metals settled with ExxonMobil and sought indemnity from its Commercial General Liability (CGL) insurer, Liberty Mutual, which denied coverage.
- The CGL policy covered "physical injury to tangible property, including all resulting loss of use" but excluded: (K) damage to "your product" and (M) damage to "impaired property" caused by a defect in "your product"; "impaired property" is property that cannot be used because it incorporates a defective product but can be restored by repair/replacement of that product.
- Central coverage questions: (1) whether incorporation of a defective component alone constitutes "physical injury"; and (2) whether replacing the defective component (even if removal damages other parts) constitutes "replacement" that restores the property to use (triggering Exclusion M).
- The Fifth Circuit certified four questions to the Texas Supreme Court about ambiguity and the meaning/application of "physical injury" and "replacement."
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does mere installation/incorporation of a defective product cause "physical injury"? | Installation of defective flanges diminished function/value and therefore caused physical injury upon incorporation. | "Physical" requires tangible, manifest harm; mere incorporation or latent risk is not "physical injury." | No — incorporation alone is not "physical injury." Tangible, manifest damage (e.g., cutting/welding that destroyed property) is required. |
| Were the diesel units physically injured during the replacement process? | (Implicit) Replacement is a repair act; any physical harm during replacement arises from the insured's defect. | The destructive replacement work produced tangible physical injury (so that those repair costs may be covered unless excluded). | Yes — the act of cutting out welded flanges destroyed insulation, gaskets, welds, etc., producing physical injury. |
| Does Exclusion M bar coverage when replacement of the defective product restores the property to use even if replacement requires destructive alteration? | U.S. Metals: Because replacement destroyed and required replacement of other components, the property was not restored to use by mere replacement and thus Exclusion M should not apply. | Liberty: Exclusion M defines "restored to use by the replacement of your product" without limiting the manner of replacement; efficacy, not incidental damage, controls. | Exclusion M applies to the diesel units — they were "impaired property" restored to use by flange replacement, so loss-of-use damages are excluded. |
| Are incidental replacement costs for destroyed ancillary components (insulation, gaskets) covered? | Those costs arise from insured's defect and should be indemnified. | Exclusion M applies only to property restored to use by replacing the insured product; replaced ancillary items are not "impaired property." | Covered — replacement costs for insulation and gaskets (which were destroyed, not "restored") are recoverable. |
Key Cases Cited
- Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805 (7th Cir. 1992) (panel adopting the "incorporation" theory that installation can constitute physical injury)
- Travelers Indem. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481 (Ill. 2001) (Illinois Supreme Court rejecting incorporation theory; physical injury requires tangible change such as a leak)
- Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) (defective workmanship does not constitute property damage absent physical injury)
- Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008) (property damage under CGL occurs when actual physical damage occurs)
- Esicorp, Inc. v. Liberty Mut. Ins. Co., 266 F.3d 859 (8th Cir. 2001) (incorporation of defective components does not constitute physical injury until tangible damage results)