December 07, 2015 Practice Points

Almost No Coverage for Replacing Defective Component That Has Not Failed

The Texas Supreme Court rejected the argument that incorporation of defective flanges into diesel units should be considered property damage

by William T. Barker

In U.S. Metals, Inc. v. Liberty Mutual Group, Inc., No. 14-0753, 2015 Tex. LEXIS 1081 (Tex. Dec. 4, 2015), the Texas Supreme Court rejected the argument that incorporation of defective flanges into diesel units should be considered “property damage.” The insured sought coverage for removal and replacement of those flanges and for the loss of use resulting from the need to replace them.

But “property damage” was defined as “[p]hysical injury to tangible property, including all resulting loss of use of that property” or “[l]oss of use of tangible property that is not physically injured.” The court reasoned that “[a] thing whose use or function is diminished by the incorporation of a faulty component can fairly be said to be injured, even if the injury is intangible, latent, or inchoate. Here, the installation of the leaky flanges—or at least potentially leaky, and in any event below-standard—can certainly be said to have injured—harmed or damaged—the diesel units by increasing the risk of danger from their operation and thus reducing their value. But if that increased risk amounted to physical injury within the meaning of the CGL policy, then it is difficult to imagine a non-physical injury. Any lessening of property by adding a component would be not only injury but physical injury. The policy’s limitation of coverage to damages from physical injury necessarily implies that there can be non-physical, non-covered injuries. Otherwise, the requirement that injury be “physical” would be superfluous. To give ‘physical’ its plain meaning, a covered injury must be one that is tangible.” Id. at *9-10.

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