U.S. Metals, Inc. v. Liberty Mutual Group, Inc.
No. 14-0753
Case Summary written by Laura Parton, Staff Member.
CHIEF JUSTICE HECHT delivered the opinion of the Court.
U.S. Metals provided ExxonMobil Corp. with 350 flanges for use in non-road diesel units. The flanges were welded to pipes and covered with a special coating and insulation. After instillation, several flanges leaked during testing, causing a risk of fire and explosion and requiring that they be replaced. The process to replace each flange required stripping and destroying the insulation, cutting out the flanges, removing and destroying the gaskets, and replacing the flanges, gaskets, and insulation.
This process suspended operation of the diesel units for several weeks. ExxonMobil settled its suit with U.S. Metals for $2.2 million. In indemnifying its insurer, U.S. Metals claimed that its liability for the delay and replacement costs was covered by its standard-form commercial general liability policy, which it held with Liberty Mutual Group. This policy covered “‘physical injury’ to property and the lost use of property that could not be restored by replacing the flanges.”
The United States Court of Appeals for the Fifth Circuit raised two issues in certifying four questions to the Supreme Court of Texas. The first issue was whether installing the defective flanges into the diesel units physically injured them. The second issue was whether the diesel units were restored to use when the flanges were replaced, which destroyed some of the property.
Exclusion M of the policy “d[id] not cover damages to property, or for the loss of its use, if the property was not physically injured or if it was restored to use by replacement of the flanges.” Since the defect was discovered during testing, the only harm suffered was the risk of dangerous leaks. The Court granted that the inclusion of defective products could certainly injure the property on which it was installed. The policy, however, required physical injury, implying the possibility of non-physical injuries. Thus, a physical injury must be a tangible one (the actual harm theory) and not merely the installation of defective products (the incorporation theory). Because they were replaced to avoid the risk of fire or explosion, the flanges in the instant case never caused an injury.
In rejecting the incorporation theory, the Court recognized the adverse policy consideration to its decision—Liberty Mutual Group’s policy would have covered U.S. Metals if ExxonMobil had not prudently tested the flanges and actual explosion or fire had resulted. Regardless, the Court found the policy patent: the diesel units were not physically injured by the mere instillation of the defective flanges.
Next, the Court considered whether the property was restored to use by replacing the defective product. Recognizing that the replacement process for the defective flanges was rather difficult, the Court nonetheless found that the degree to which the product to be replaced was defective was immaterial. The loss of use was excluded by the policy because “the diesel units were restored to use by replacing the flanges and were therefore impaired property.”
Still, the insulation and gaskets that were destroyed during the restoration of the flanges required complete replacement. Exclusion M did not apply, as they were not impaired property that was restored to use by replacing U.S. Metal’s defective product. The Court found that the policy covered the cost of replacing the insulation and gaskets.