COURT CONCLUDES INSURER HAD NO DUTY TO DEFEND - UNDERLYING LAWSUIT ALLEGED CLAIMS OF DEFECTIVE PRODUCT, NOT PROPERTY DAMAGE

Recently, the U.S. District Court of the Southern District of Texas concluded that the insurer had no duty to defend because the underlying lawsuit did not claim covered property damage.  In MT. Hawley Ins. Co. v. J2 Resources LLC, No. 4:20-CV-2540, 2022 WL 1785483 (S.D. Tex., June 1, 2022, mem. op.), J2 Resources LLC (“J2”), a seller of industrial pipes, sold Buckeye Partners, L.P. (“Buckeye”) piping for a project. According to Buckeye, the pipe was defective (i.e., exhibited extensive chipping and coating failure, and the coating was not adhering to the pipe and also failing in flexibility), and Buckeye had to remove all the pipe, replace that pipe, and reinstall new pipe to complete the subject project.  J2 refused to pay for the removal and replacement of the defective pipe, so Buckeye sued J2 to recover the original purchase price and costs associated with the inspection, investigation, removal, replacement, and reinstallation of the pipe to complete the project.  Buckeye's pleadings did not allege that the pipe was damaged after it was installed or that the defective pipe caused damage to any other property.

Mt. Hawley filed suit seeking a declaration and summary judgment that it need not defend or indemnify J2 in Buckeye’s lawsuit against J2, arguing that Buckeye's lawsuit did not involve property damage as the policy defines that term.

The Court agreed with Mt. Hawley. The policy defined “property damage” as “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.” The Court began its analysis by noting that “under a standard commercial general liability policy like the one here, ‘physical injury requires tangible, manifest harm and does not result merely upon the installation of a defective component in a product or system.’” The Court concluded that Mt. Hawley had no duty to defend because the underlying lawsuit did not claim covered property damage. The court reasoned that “Buckeye's pleadings alleged that the pipe sold by J2 was defective because of “a manufacturing defect that existed prior to the pipe being delivered to Buckeye” and “Buckeye's pleadings did not allege that the pipe was damaged after it was installed or that the defective pipe caused damage to any other property.” Further, “the relief that Buckeye sought was limited to the original purchase price and costs associated with the inspection, investigation, removal, replacement, and reinstallation of pipe to complete the project.”