     Case: 13-20433       Document: 00512775239         Page: 1     Date Filed: 09/19/2014




            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT
                                                                           United States Court of Appeals
                                                                                    Fifth Circuit


                                       No. 13-20433
                                                                                  FILED
                                                                          September 19, 2014
                                                                             Lyle W. Cayce
U.S. METALS, INCORPORATED,                                                        Clerk

                                                  Plaintiff–Appellant,
v.

LIBERTY MUTUAL GROUP, INCORPORATED, doing business as Liberty
Insurance Corporation,

                                                  Defendant–Appellee.




                   Appeal from the United States District Court
                        for the Southern District of Texas
                              USDC No. 4:12-CV-379


Before STEWART, Chief Judge, OWEN, Circuit Judge, and MORGAN ∗,
District Judge.
PER CURIAM: ∗∗
       This appeal arises from a dispute between U.S. Metals, Inc. (“US
Metals”) and Liberty Mutual Group, Inc. (“Liberty”) regarding coverage of
certain damages pursuant to two exclusions in a commercial general liability
insurance policy. This case involves important and determinative questions of


       ∗
         District Judge of the Eastern District of Louisiana, sitting by designation.
       ∗∗
          Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5th Cir.
R. 47.5.4.
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                                 No. 13-20433
Texas law regarding the interpretation of terms within common exclusions of
commercial general liability policies, as to which there is no controlling Texas
Supreme Court precedent. Accordingly, we decline to make an Erie guess and
instead certify questions to the Supreme Court of Texas.


CERTIFICATION FROM THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT TO THE SUPREME COURT OF TEXAS,
PURSUANT TO ART. 5, § 3–C OF THE TEXAS CONSTITUTION AND
RULE 58 OF THE TEXAS RULES OF APPELLATE PROCEDURE.


TO THE SUPREME COURT OF TEXAS AND THE HONORABLE
JUSTICES THEREOF:
                          I. STYLE OF THE CASE
      The style of the case is U.S. Metals, Incorporated, Plaintiff–Appellant, v.
Liberty Mutual Group, Incorporated, doing business as Liberty Insurance
Company, Defendant–Appellee, in the United States Court of Appeals for the
Fifth Circuit, on appeal from the judgment of the United States District Court
for the Southern District of Texas, Houston Division. Federal jurisdiction over
the issues presented in the case is based on 28 U.S.C. § 1332.


                      II. STATEMENT OF THE CASE
      Exxon Mobil Corporation (Exxon) filed suit against US Metals and
Maass Flange Corporation (Maass) in Texas State Court on June 20, 2011.
Exxon alleged that US Metals agreed to manufacture to sell to Exxon 350
“ASTM”-standard, weld neck flanges for installation in their Baytown, Texas,
and Baton Rouge, Louisiana, refineries in June 2009. These flanges were
irreversibly incorporated into “nonroad diesel project” (NRD) facilities by
welding and bolting the flanges into unit pipes that were insulated and
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buttoned up to the NRD equipment. In June 2010, Exxon discovered a leak in
one of the installed flanges while conducting testing before putting the NRD
systems into operation. Exxon’s subsequent investigation revealed that US
Metals had subcontracted out to Maass to manufacture the flanges, and that
the flanges had been improperly manufactured against ASTM standards.
      Exxon alleged that the only way to mitigate its damages was to order
new flanges from a different manufacturer and replace all the flanges supplied
by US Metals.      Bruce Bellingham, Exxon’s corporate representative and
refinery project manager, testified that the replacement of the flanges required
stripping the temperature coating, removing and damaging the bolts and
gaskets, and grinding down millimeters of the pipes. The replacement of the
flanges required portions of the refineries to be shut down for several weeks,
resulting in the loss of use of the refineries.
      In June 2011, Exxon brought suit against US Metals seeking damages
for the costs associated with investigating the flange defect, acquiring
replacement flanges, removing and replacing the defective flanges, and the
resulting loss of use of Exxon’s property, and incidental and consequential
damages. In August 2011, a settlement was reached between Exxon and US
Metals, and the settlement letter between the parties totaled the damage at
approximately $6,345,824. For the Baytown Refinery, the costs included labor
and material furnished by Exxon, and services, materials, and other costs
furnished by contractors. The costs at the Baton Rouge refinery included:
replacement flanges and pipe fabrication; subcontractors dismantling,
installing, and testing various parts of the flanges; subcontractor providing
insulation removal and reinstallation; subcontractor providing bolt tensioning
services for flanges; subcontractor providing scaffolding for dismantling and
reinstalling   flanges;    engineering    services   for    flange   issues;   and
overhead/consumables for flange replacement.
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                                   No. 13-20433
        US Metals claimed coverage with Liberty based on a Commercial
General Liability (“CGL”) Policy and Umbrella Policy (collectively, the
“Policy”), providing coverage from September 2009 to September 2010 for
“bodily injury” and “property damage.” US Metals requested that Liberty
defend and indemnify it in its lawsuit with Exxon, but Liberty denied the
request on August 21, 2011.
        Liberty denied US Metals’s request based on policy exclusions K and M.
Under exclusion K, the “your product” exclusion, “property damage” to “your
product” arising out of your product or any part of it is excluded from coverage.
The policy defines property damage as,
        (a) Physical injury to tangible property, including all resulting loss
            of use of that property. All such loss of use shall be deemed to
            occur at the time of the physical injury that caused it; or
        (b) Loss of use of tangible property that is not physically injured.
            All such loss of use shall be deemed to occur at the time of the
            ‘occurrence’ that caused it.

As defined by the policy, “your product” includes any goods or products, other
than real property, manufactured, sold, handled, distributed or disposed of by
you.    Under Exclusion M, “Damage to Impaired Property or Property not
Physically Injured” (the “impaired property” exclusion), the policy excludes
coverage of
        “Property damage” to “impaired property” or property that has not
        been physically injured, arising out of:
           (1) A defect, deficiency, inadequacy, or dangerous condition in
               “your product” or “your work.”
           (2) A delay or failure by you or anyone acting on your behalf to
               perform a contractor agreement in accordance with its
               terms.
        This exclusion does not apply to the loss of use of other property
        arising out of sudden and accidental physical injury to “your
        product” or “your work” after it has been put to its intended use.

The policy defines “impaired property” as
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                                  No. 13-20433
      Tangible property, other than “your product” or “your work”, that
      cannot be used or is less useful because
          (1) It incorporates “your product” or “your work” that is known
              or thought to be defective, deficient, inadequate, or
              dangerous; or
          (2) You have failed to fulfill the terms of a contract or agreement
      If such property can be restored to use by the repair, replacement,
      adjustment, or removal of “your product” or “your work” or your
      fulfilling the terms of the contract or agreement.

      US Metals brought suit against Liberty on December 8, 2011, in Texas
state court alleging Liberty’s duty to defend and duty to indemnify US Metals
in ExxonMobil Corporation v. U.S. Metals, Inc. et al. (“Exxon lawsuit”). Liberty
removed the suit to the United States District Court for the Southern District
of Texas on February 9, 2012. US Metals’s First Amended Complaint alleged,
inter alia, breach of contract to defend and indemnify. Liberty filed a motion
for summary judgment and US Metals filed an amended partial motion for
summary judgment on the issue of liability.          The district court granted
Liberty’s motions for summary judgment and denied US Metals’s partial
motions for summary judgment on July 2, 2013. US Metals appeals, arguing
that Liberty had a duty to defend and a duty to indemnify US Metals in the
Exxon lawsuit because the policy exclusions did not apply to Exxon’s claims.


                             III. LEGAL ISSUES
      Texas law governs in this diversity suit. To determine Texas law, this
court looks first to the final decisions of the Texas Supreme Court. See Austin
v. Kroger, Tex. L.P., 746 F.3d 191, 196 (5th Cir. 2014). In the absence of a
definite pronouncement from the Texas Supreme Court on an issue, we may
certify a question to the Texas Supreme Court. See id. Under Texas law, “[t]he
Supreme Court of Texas may answer questions of law certified to it by any
federal appellate court if the certifying court is presented with determinative

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                                  No. 13-20433
questions of Texas law having no controlling Supreme Court precedent.” Tex.
R. App. P. 58.1; see also Tex. Const. art. V, § 3–c(a).
      The resolution of this case turns on two questions of Texas law, neither
of which has been directly addressed by the Supreme Court of Texas: (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 pursuant to Texas law?
      Under Texas law, ordinary contract principles are applied to insurance
policies, which are interpreted as a question of law. See New York Life Ins. Co.
v. Travelers Ins. Co., 92 F.3d 336, 338 (5th Cir. 1996). When terms are defined
in the insurance contract, those definitions control. See Trinity Universal Ins.
Co. v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997). Undefined terms are to be
given their plain, ordinary, and generally accepted meaning, unless the
contract indicates otherwise. See Ramsay v. Md. Am. Gen. Ins. Co., 533 S.W.2d
344, 346 (Tex. 1976). If the language of the contract is subject to more than
one reasonable interpretation, then the contract is ambiguous and presents a
question of law that the court must decide.               See Glover v. Nat’l Ins.
Underwriters, 545 S.W.2d 755, 761 (Tex. 1977) (citing Continental Cas. Co. v.
Warren, 254 S.W.2d 762 (Tex. 1953).          Ambiguously worded exceptions or
limitations on liability shall be strictly construed in favor of the insured. See
id. Courts “must adopt the construction of an exclusionary clause urged by the
insured as long as that construction is not itself unreasonable, even if the
construction urged by the insurer appears to be more reasonable or a more
accurate reflection of the parties’ intent.” Id.
      The “your product” and “impaired property” exclusions are business risk
exclusions commonly found within many commercial general liability (“CGL”)
insurance policies, such as the one at issue in this case. Similar exclusions
have been litigated within this circuit as well as others, but there is no Texas
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                                  No. 13-20433
Supreme Court case law interpreting the language of these exclusions. The
Texas Supreme Court’s interpretation of these terms will have far-reaching
implications due to the commonality of these exclusions within CGL policies.
As such, the answer to our certified questions will affect a large number of
litigants. No Texas court or any other state or circuit court has determined
whether the terms “physical injury” or “replacement” found within the “your
property” and “impaired property” exclusions are ambiguous. This is purely a
question of Texas law, see Great Am. Ins. Co., 236 F.Supp.2d at 693, and would
be resolved by the Texas Supreme Court’s answer to our first certified question.
      The Texas Court of Appeals in Houston has, however, interpreted the
meaning of “physical injury” within a similar “your property” exclusion in
Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651 (Tex. App.—Houston [14th
Dist.] 2006), abrogated on other grounds by Gilbert Tex. Const., L.P. v.
Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010). Liberty used
Lennar in support of its argument that the incorporation of a defective product
standing alone is not “physical injury.” Lennar, 200 S.W.3d at 678–79. The
Lennar court held that the mere incorporation of a defective product is not
“property damage” to the defective product itself but does not discuss whether
damage to other integrated components would be considered “property
damage.” See id.
      The Seventh Circuit also interpreted “physical injury” but held that
“physical injury” occurred to the other product at the moment of incorporation
of the insured’s defective product. Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972
F.2d 805, 807–14 (7th Cir. 1992). In its detailed discussion of the drafting
history of the “property-damage clause” (similar to the “your property”
exclusion) in other form CGL policies, the Seventh Circuit held that “the
probable understanding of the parties to liability insurance contracts,
persuade[s] us that the incorporation of a defective product into another
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product inflicts physical injury . . . at the moment of incorporation . . . .” Id. at
814 (emphasis added).
      We have also found no controlling Texas case law discussing the meaning
of “replacement” within the commonly used “impaired property” exclusion, but
courts have interpreted the term. A Texas federal district court interpreted
“replacement” to include the cost of tearing down other injured components
even if the other components were “physically injured” upon the installation of
the defective flanges. See Bldg. Specialties, Inc. v. Liberty Mut. Fire Ins. Co.,
712 F.Supp.2d 628, 641 (S.D. Tex. 2010).          The court held that the other
components were still “impaired property” because their use was restored upon
the replacement of the defective flanges and thus, were excluded from coverage
under their duty to indemnify.
      We discussed the meaning of a similar “impaired property” exclusion in
Grapevine, an appeal from the Northern District of Texas, in which we found
the “impaired property” exclusion inapplicable to the facts of that case. Fed.
Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720, 722 (5th Cir. 2000).
There, the insured was meant to perform excavation, backfilling, and
compacting work in connection with the contractor’s construction of a parking
lot. Id. However, the “select fill materials provided and installed by [the
insured] failed to meet specifications and, as a result, [] caused damage to the
work of” one of the other subcontractors. Id. We compared Grapevine to a
Michigan case where the insured installed gasoline containment systems that
leaked and contaminated the surrounding soil. See Action Auto Stores, Inc. v.
United Capitol Ins. Co., 845 F.Supp. 417, 419 (W.D. Mich. 1993). We reasoned
in Grapevine that, as in Action Auto, the asphalt paving could not be “restored
to use” by “the repair, replacement, adjustment or removal” of the insured’s
defective product or work. Grapevine, 197 F.3d at 728.


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        A district court in Georgia applied the “impaired property” exclusion but
  interpreted “replacement” to include the other components attached to the
  insured’s defective product. See Gentry Mach. Works. Inc. v. Harleysville Mut.
  Ins. Co., 621 F. Supp. 2d 1288, 1298 (M.D. Ga. 2008). There, in applying the
  “impaired property” exclusion, the court held that
        [T]he Policy does not apply to damages to the boiler or its
        components directly caused by the repairs to the [insured’s]
        pedestals . . . . These parts may have been damaged in the process
        of their removal, and they often had to be replaced entirely after
        the repair to the pedestals was complete. Although these boilers
        sustained damage to component parts other than the pedestals
        themselves, no coverage exists for these damages as they were not
        caused directly by pedestal failure but rather were incurred during
        the repair and/or replacement of the faulty pedestals.

  Id. at 1298 n.6 (citing references omitted). The Gentry court also stated that
  Georgia “follows the majority position” when it comes to analysis of the
  business risk exclusions in CGL policies. Id. at 1294.
        There is no controlling Texas Supreme Court case law determining
  whether “physical injury” or “replacement” are ambiguous, nor is there
  controlling case law interpreting these terms. Thus, we look to the Texas
  Supreme Court to answer our certified questions. These are issues that have
  been, and will likely continue to be, the subject of far-reaching insurance
  litigation in this circuit and others.
                          IV. QUESTIONS CERTIFIED
     We hereby certify the following questions of law to the Supreme Court of
  Texas:
1. In the “your product” and “impaired property” exclusions, are the terms
   “physical injury” and/or “replacement” ambiguous?

2. If yes as to either, are the aforementioned interpretations offered by the
   insured reasonable and thus, must be applied pursuant to Texas law?


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3. If the above question 1 is answered in the negative as to “physical injury,” does
   “physical injury” occur to the third party’s product that is irreversibly attached
   to the insured’s product at the moment of incorporation of the insured’s
   defective product or does “physical injury” only occur to the third party’s
   product when there is an alteration in the color, shape, or appearance of the
   third party’s product due to the insured’s defective product that is irreversibly
   attached?

4. If the above question 1 is answered in the negative as to “replacement,” does
   “replacement” of the insured’s defective product irreversibly attached to a third
   party’s product include the removal or destruction of the third party’s product?

      We disclaim any intention or desire that the Supreme Court of Texas
   confine its reply to the precise form or scope of the questions certified.
   ***
   QUESTIONS CERTIFIED.




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