After the Fifth Circuit issued its landmark opinion construing the “impaired property” exclusion in July 2016 in U.S. Metals,1 it remanded the suit for further proceedings giving the original district court the opportunity to apply the Fifth Circuit's ruling.  The district court recently issued its follow-up opinion, in which it made a determination of exactly what damages in the underlying suit the insurer must pay.  U.S. Metals, Inc. v. Liberty Insurance Corp. 4:12-CV-0379, 2017 WL 830398 (S.D. Tex. Feb. 27, 2017).

Liberty Mutual argued the Fifth Circuit only mentioned the “insulation and gaskets” in the key sentence of its coverage holding, while U.S. Metals argued the court's holding should be applied more broadly to mean that all property which was damaged or destroyed in the process of removing the faulty flanges should be covered.  Applying a careful analysis of the Fifth Circuit's wording, its statements in earlier portions of the opinion, and the coverage concepts at issue, the district court agreed with U.S. Metals and held the insurer must also indemnify U.S. Metals for the temperature coatings and welds that were also destroyed in the process of removing the faulty flanges.

In light of the Fifth Circuit's coverage ruling, the district court also re-examined U.S. Metals' claim for defense costs and associated Insurance Code Chapter 542 penalties.2 Here, the court made two troubling conclusions.  First, relying on the fact that Liberty Mutual knew its insured was going to be sued, the court held Liberty Mutual owed for defense costs incurred by U.S. Metals before the suit had even been tendered to Liberty Mutual.  This conclusion arguably contradicts well-developed Texas law which holds that tender of the suit is an essential condition precedent which must be fulfilled before any duty to defend can be triggered, even if the carrier has actual knowledge of the suit.3  Second, the court held that because neither party presented any evidence segregating defense costs from costs incurred by the same attorneys to pursue coverage issues, Liberty Mutual owed all the defense costs, even though it was undisputed that U.S. Metals' attorneys had spent some of their time also serving as coverage counsel.  By placing the burden on Liberty Mutual to segregate the covered versus non-covered defense costs, the court arguably disregarded clearly established Texas law placing that burden solely on the insured.

The district court, did however, grant summary judgment for Liberty Mutual on all extra-contractual claims.

See our previous coverage of this case on July 15, 2013, September 30, 2014,and December 8, 2015.

1 U.S. Metals, Inc. v. Liberty Mut. Group, Inc., 654 Fed. Appx. 664 (5th Cir. 2016).

2 Although Chapter 542 only applies to first party claims, current Texas law holds that an insured's claim for defense costs under a liability policy is a first-party claim. See Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007).

3 See Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Crocker, 246 S.W.3d 603 (Tex. 2008).

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