Woodsboro hired Buck Pitcock to inspect the silos after it became clear Erwin could not complete the requested repairs. Pitcock made a list of all the defects he found, which he attributed to "poor workmanship" on the part of AJC. The roofs were especially problematic because they made the silos more susceptible to movement during high winds and other weather. Due to the extent and physical location of the damages, the silos had to be deconstructed and rebuilt. Unfortunately, some of the key components had been damaged beyond repair, forcing Woodsboro to purchase new kits. Woodsboro contracted with Pitcock to complete the work, which came with a price tag of almost $806,000.

Litigation Ensues

Woodsboro subsequently filed a suit for breach of contract against AJC, which went to arbitration. The panelists found in favor of Woodsboro. They had determined that, in addition to AJC's negligent construction, the silos were defective and not built in accordance with the construction contract, and Erwin either could not or would not make the necessary repairs. Woodsboro was awarded $988,000 in damages, an award that was not confirmed for nearly four years.

Shortly after arbitration concluded, TIG Insurance Company, who provided CGL coverage to Erwin, sought declaratory judgment that it was not obligated to defend or indemnify Erwin. Though the court ruled in favor of TIG regarding the duty to defend based on an alleged lack of property damage, the judges made no ruling on indemnity because Woodsboro's underlying suit against Erwin and AJC had not yet concluded.

After Woodsboro's arbitration award was confirmed, the district court judges also granted TIG's motion for summary judgment regarding the duty of indemnity, reasoning that the only physical injury caused by Erwin's breach had been defective construction, which had been corrected by Pitcock, and Woodsboro had only suffered lost profits. Woodsboro appealed, challenging the finding of no duty to indemnify and arguing the district court had erred in determining the damage to the silos did not constitute "property damage."

Was There Property Damage?

The question before the Fifth Circuit boiled down to whether the damage to Woodsboro's silos qualified as covered "property damage" within the meaning of Erwin's TIG policy. The policy said "property damage" meant either "physical injury to tangible property, including all resulting loss of use of that property…or loss of use of tangible property that is not physically injured." Though the policy did not define "physical injury," a case from the Supreme Court of Texas, U.S. Metals, Inc. v. Liberty Mut. Grp., Inc., 490 S.W.3d 20 (Tex. 2015), said "physical injury" meant "tangible, manifest harm [that] does not result merely upon the installation of a defective component in a product or system" (emphasis added).

In that case, U.S. Metals sold faulty parts to ExxonMobil that fell below industry standards, which had to be replaced after the parts caused leaks in the units where they had been installed. The Supreme Court of Texas ruled there had been no physical damage because, though the units had leaked, the issue had been discovered and the faulty parts replaced before the leaks had caused actual physical damage. The district court in the present case had reasoned that the negligently constructed silos in this case, like the faulty parts in U.S. Metals, "had [the] future potential to cause harm or injury to other property but was replaced before it could actually do so" (italics omitted, bold added).

Woodsboro argued wind and weather had damaged exposed parts of the silos to the point they became unusable. During arbitration, the panel had determined that "the silo bins, as originally constructed by AJ[C], were defective" (emphasis added) and could not be used as intended, even after Erwin's attempted repairs. Erwin had had complete control over the construction process; the contractor he had hired, AJC, negligently performed their work, and the negligent work had caused damage to Woodsboro.

The Fifth Circuit disagreed and said U.S. Metals wasn't an appropriate comparison. The arbitration panel did find the silos were negligently constructed, but that issue didn't eclipse the other harms the silos had experienced. Unlike the faulty parts in U.S. Metals, the negligent construction of the silos had led to actual physical damage. The arbitration panelists determined that "the silo bins, as originally constructed by AJ[C], were defective" (emphasis added) and could not be used as intended, even after Erwin's attempted repairs. These defects exposed parts of the silos to the elements. Over time, wind and weather caused so much damage that "the silos were not structurally sound," which made them unusable. These damages, according to the court, "constituted a harmful change in appearance, shape, composition, or some other physical dimension to the claimants' property."

Conclusion

Based in part on this argument, the Fifth Circuit found there were genuine issues of material fact in the case that could not be resolved by summary judgment. The judges reversed the district court's award of summary judgment to TIG and sent the case back for further review.

Editor's Note: In this case, the coverage trigger for Erwin's policy was actual physical damage. The district court had found no coverage because the root of the problem was the negligent construction that had occurred on Erwin's watch. The Fifth Circuit, however, said the scope of the district court's analysis had been too narrow. Looking at the full picture, the judges found the negligent construction of the silos had been a precursor to the physical damages as a result of wind and other weather.

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