The U.S. Fifth Circuit Court of Appeals is looking to the Texas Supreme Court for guidance in interpreting the “your product” and “impaired property” exclusions contained in a typical CGL policy after finding no controlling Texas case law exists.  U.S. Metals, Inc. v. Liberty Mut. Group, Inc., No. 13-20433, 2014 WL 4652892 (5th Cir. Sept. 19, 2014), certified question accepted(Sept. 26, 2014).

The insured manufactured flanges intended for use in petroleum refineries.  After installation, the refinery operator discovered that all of the flanges which had been made by the insured’s subcontractor were manufactured improperly and failing, and replaced all of the flanges.  The manufacturer settled the refinery operator’s claim and asserted that the settlement was covered under its CGL and umbrella insurance policies.  However, its insurer denied coverage based on the “your product” and “impaired property” exclusions contained in the policies.

The manufacturer sued its insurer arguing that the policy exclusions did not apply.  Its insurer relied upon a Texas appellate case, Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651 (Tex.App.—Hous.[14th Dist.] 2006), which held that the mere incorporation of a defective product is not “property damage” to the defective product itself but which did not discuss whether damage to other integrated components would be considered “property damage.”  By contrast, the Fifth Circuit noted that the U.S. Seventh Circuit Court of Appeals has held that “physical injury” occurs to the other product at the moment of incorporation of the insured’s defective product.  In the end, the Fifth Circuit concluded that there is no controlling Texas Supreme Court case law and certified the following questions to the Texas Supreme Court:  1) whether the terms “physical injury” and “replacement” found in the common “your product” and “impaired property” exclusions are ambiguous; and 2) if not, what do these terms mean under Texas law?