FIFTH CIRCUIT COURT OF APPEALS HOLDS THAT INSURER HAS DUTY TO DEFEND MANUFACTURER-INSURED AGAINST CLAIMS OF LEAKS AND WATER DAMAGE

In Siplast, Inc. v. Employers Mutual Casualty Co., No. 20-11076, 2022 WL 99303 (5th Cir., Jan. 11, 2022), the Archdiocese of New York (the “Archdiocese”) purchased a roof membrane system from roofing manufacturer Siplast, which was installed at a high school in the Bronx, New York. After installation, leaks and water damage in the ceiling tiles occurred, which the Archdiocese’s consultant subsequently found to be the result of issues with both the workmanship and the materials that were compromising the entire roof membrane system.  

Consequently, the Archdiocese sued Siplast (the “Underlying Lawsuit”). In response, Siplast submitted a claim to Employers Mutual Casualty Company (“EMCC”) asserting coverage under commercial general liability policies Siplast had purchased. Those policies required that EMCC “pay those sums that the insured becomes legally obligated to pay as damages because of ... ‘property damage’ to which this insurance applies” and that EMCC “will have the right and duty to defend the insured against any ‘suit’ seeking those damages.” The policies were also subject to a “Your Product/Your Work Exclusion”, which excluded coverage of “property damage to Siplast’s product arising out of it or any part of it or property damage to Siplast’s work arising out of it or any part of it ….” 

EMCC denied coverage, including its duty to defend Siplast in the Underlying Lawsuit.  In response, Siplast filed suit against EMCC, seeking a declaratory judgment that EMCC was obligated to provide a defense to Siplast in the Underlying Lawsuit.

Applying Texas law, the Fifth Circuit concluded that the Archdiocese’s complaint alleged damage to property beyond the product and work of Siplast and, therefore, EMCC had a duty to defend based on those allegations. The Court began its analysis by stating the type of factual allegations necessary to trigger a duty to defend: “If the complaint alleges damage to and seeks damages for any property that is not the insured's product or directly subject to the insured's work, then the claim falls outside of a “your product/your work” exclusion and the insurer has a duty to defend. However, if the complaint solely alleges facts and damage to the insured's own products, or solely seeks to recover the costs to repair the insured's work, then it is covered by a “your product/your work” exclusion and the duty to defend remains dormant.” The Court reasoned that Underlying Lawsuit repeatedly pointed to damage to property other than Siplast's roof membrane system. That is, the Underlying Lawsuit alleged that there was “water damage in the ceiling tiles throughout the school after a rainstorm” and that Siplast recommended the Archdiocese “contact a designated Siplast roofing contractor to address the damage and leak.” Additionally, the Underlying Lawsuit alleged that “despite the work performed by Siplast's designated contractor, the School continued to suffer from additional leaks and water damage.”