Fifth Circuit Confirms: Insurer Must Defend Despite Your Work/Your Product Exclusion

The United States Court of Appeals for the Fifth Circuit recently confirmed that liability insurers have a duty to defend their insureds in construction defect cases when the underlying complaint alleges damage to property beyond the product and work of the insured – even if the complaint merely implies that the insured seeks such damage, without explicitly alleging so. Siplast, Incorporated v. Employers Mutual Casualty Company, No. 20-11076, 2022 WL 99303 (5th Cir. Jan. 11, 2022).

The Archdiocese of New York replaced the roof over Cardinal Spellman High School in the Bronx, using a roofing membrane manufactured by Siplast, Inc. (“Siplast”). After a rainstorm a few years later, school officials reported water damage to the ceiling tiles throughout the school, and repair attempts only made the leaking worse. Siplast disputed that the leaks were its fault and refused to replace the roof, so the Archdiocese sued.

Siplast tendered its defense to Employers Mutual Casualty Company (“EMCC”), which denied the claim pursuant to its policies’ “Your Product/Your Work Exclusion.” Siplast then sued EMCC, seeking a declaratory judgment that it was entitled to a defense. Both parties moved for summary judgment, and the District Court ruled in favor of EMCC, finding that – while the underlying complaint did allege “property damage” that was caused by an “occurrence” – the alleged damage nevertheless fell within the policies’ “Your Product/Your Work Exclusion.”

The Fifth Circuit reversed, explaining that, under Texas law, if a “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.” If, however, a 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 Fifth Circuit took exception with the District Court’s “overly narrow” reading that – while the underlying complaint mentioned damage to property other than Siplast’s roofing products – coverage was excluded because the complaint did not explicitly articulate a claim to recover for the damaged ceiling tiles. The Fifth Circuit confirmed that when determining whether the insurer owes a duty to defend, the insurer must focus on the factual allegations themselves, rather than the legal theories alleged. Here, the “factual allegations raised by the underlying complaint repeatedly point to damage to property other than Siplast’s roof membrane system.” These factual allegations create inferences that: (1) the Archdiocese asserted its cause of action based not only on damage to the roof membrane, but also on property damage to other parts of the school; and (2) that the water damage to non-roof-membrane property was caused by the failure of Siplast’s faulty roof membrane system.

Takeaway:

Siplast reinforces the rule in Texas that the duty to defend must be construed broadly. So broadly, in fact, that courts are willing to find coverage by drawing inferences from factual allegations, even when a complaint doesn’t expressly seek covered damage.