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by Megan Zeller

In TIG Insurance Company v. Woodsboro Farmers Cooperative, the Fifth Circuit once again relied on Texas’ well-established “physical injury” definition in its latest “property damage” analysis under a Commercial General Liability (“CGL”) policy. See 2024 WL 4247287 (5th Cir. September 20, 2024).

Here, Woodsboro Farmers Cooperative hired a general contractor to construct two grain silos. The general contractor subsequently retained a subcontractor to assist with the construction. Although the general contractor observed some cosmetic issues to the silos during its inspections of the subcontractor’s work, the general contractor nonetheless determined that the silos were structurally sound. After the subcontractor completed the assembly, the general contractor then completed the rest of the project. By the end of the project, however, it became clear that the work was highly defective, causing the silos to significantly deteriorate.

As a result, Woodsboro Farmers Cooperative sued the general contractor in state court, which was later removed to arbitration. Woodsboro Farmers Cooperative won the arbitration award, with the arbitration panel finding that there was a breach of contract claim against the general contractor as a result of the subcontractor’s defective assembly of the silos. Based on the arbitration award, the general contractor’s insurer brought an action against Woodsboro Farmers Cooperative and the subcontractor for a declaratory judgment that it did not owe a duty to defend or duty to indemnify based on the breach of contract claim and the subcontractor’s defective workmanship. The United States District Court for the Southern District of Texas granted the insurer's summary judgment motion in part and denied it in part, and later, entered a summary judgment in favor of the insurer. The owner appealed, and the Fifth Circuit reversed and remanded the Southern District’s ruling.

Specifically, the Fifth Circuit reviewed what constituted as “property damage” under the applicable CGL policy when providing only a duty to indemnify analysis. While the parties generally agreed on the meaning of “property damage” and “physical injury,” the parties disputed, whether the problems were defective assembly, or whether the general contractor caused tangible, manifest harm to the silos. As a result, the Fifth Circuit had to review both the policy’s terms as well as the facts established in the underlying arbitration.

The general contractor’s CGL policy defined “property damage” in two ways:

1. 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
2. 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.

Like most CGL policies, this policy failed to define “physical injury,” and as a result, the Fifth Circuit relied on the accepted definition that is well-established in Texas courts, where “physical injury” “requires tangible, manifest harm and does not result merely upon the installation of a defective component in a product or system.” Court. U.S. Metals, Inc. v. Liberty Mut. Grp., Inc., 490 S.W.3d 20, 27 (Tex. 2015). According to Texas’ definition, “faulty workmanship that merely diminishes the value of the [property] without causing physical injury or loss of use does not involve ‘property damage.’” Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 10 (Tex. 2007).

The Fifth Circuit also reviewed facts established during the arbitration award, which included the fact that the general contractor had “sole control of the means and methods of construction,” and the “erection work performed by [the subcontractor] was negligently performed.” The arbitration panel also found that the silos “required deconstruction, repair, and proper reerection.” Based on the policy language, Texas’ definition of “physical injury” and this evidence, the Fifth Circuit first found that “property damage” did occur in this matter. While the Fifth Circuit also reviewed the policy for any general exclusions, the important issue to note here is that despite its relatively long analysis, The Fifth Circuit did little to expound upon or disagree with Texas’ overall “physical injury” definition. Ultimately, the Fifth Circuit reversed and remanded the case back to the lower court to provide a more thorough indemnity analysis. By doing so, the Fifth Circuit continues to allow insurers to confidently rely on well-established caselaw in Texas when addressing construction defect issues in liability matters. 

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.