On Aug. 20, the Texas Supreme Court effectively issued free liability insurance to contractors sued in products liability cases when it decided Fresh Coat v. K-2. Its characterization of contractors as “sellers” for purposes of indemnity will make indemnity suits commonplace in cases where plaintiffs sue both manufacturers and contractors alleging construction defects.
Fresh Coat is a products liability suit about an allegedly defective synthetic stucco-cladding system manufactured by K-2. The opinion sets out the following: Fresh Coat installed stucco-cladding systems on numerous homes. But purported design flaws in the stucco-cladding system allowed moisture to penetrate the exterior walls of the homes, leading to structural damage, termite problems and mold. More than 90 homeowners sued K-2, Fresh Coat and Life Forms, the homebuilder, claiming that the stucco-cladding system caused property damage and personal injuries.
K-2, Fresh Coat and Life Forms settled with the homeowners, but the case proceeded to trial on various claims brought between the defendants. Fresh Coat sought indemnity from K-2 under Chapter 82.002 of the Texas Civil Practice & Remedies Code for its settlements with Life Forms and the homeowners, as well as its attorneys’ fees. The claims were tried to a jury, which awarded Fresh Coat all its requested damages.
Chapter 82.002 requires a manufacturer to indemnify nonmanufacturing product sellers for losses arising from a product liability suit. In its brief to the high court, K-2 argued that because Chapter 82′s indemnity provision applies to sellers that place a product into the stream of commerce, Fresh Coat was a service provider, rather than a seller, and the stucco-cladding system was not a product because it was incorporated into real property.
But the Texas Supreme Court disagreed, holding that Chapter 82′s statutory indemnity provisions afforded Fresh Coat the right to indemnity from K-2 for all of its losses related to the suit.
This case is significant because the Texas Supreme Court extended Chapter 82′s indemnity protection to contractors. The court’s holding that the stucco-cladding system was a product is not earth-shattering. But the court’s ruling that a contractor can qualify as a seller for purposes of the statutewill have implications on construction litigation for years to come.
Because Chapter 82.002 applies to contractors, manufacturers now have greater incentive to assume their defense in construction cases. As the Texas Supreme Court noted in 2001′s Meritor Automotive Inc. v. Ruan Leasing Co. , plaintiffs need only join a contractor as a defendant in a products liability action to invoke a manufacturer’s duty to indemnify that contractor. The manufacturer must indemnify the contractor for its costs in defending the plaintiff’s negligence claims. Only a finding that the seller was independently negligent will extinguish the indemnity requirement. As a consequence, a manufacturer’s only opportunity to reduce litigation costs is to assume the defense of contractors in product liability actions.
As a practical matter, manufacturers rarely assume the defense of sellers. If a plaintiff sues the seller for independent acts of negligence, manufacturers and sellers often will find themselves at odds. This conflict usually precludes dual representation of the contractor and manufacturer. In fact, a manufacturer’s best defense can be that the contractor’s workmanship caused the plaintiff’s damages.
A manufacturer’s unwillingness or inability to assume the defense of a contractor only serves to give plaintiffs added settlement leverage. Fresh Coat gives plaintiffs the incentive to sue everyone in the supply chain — right on up to the homebuilder — to multiply a manufacturer’s defense costs. Now forced to indemnify numerous parties, a manufacturer can reduce its defense costs only through early settlements. But, if manufacturers become known for quick settlements, they often invite additional litigation in the future.
Despite the potential for abuse of statutory indemnity, Fresh Coat may entitle contractors to summary judgment in products liability actions. Chapter 82.003, titled “Liability for Nonmanufacturing Sellers,” protects sellers from products liability suits unless they significantly and intentionally participated in the design of the product.
If contractors are now sellers for purposes of indemnity under Chapter 82.002, they are sellers for purposes of liability under Chapter 82.003. Thus, they will be afforded the protections of Chapter 82.003, subject to its numerous exceptions. If Chapter 82.003 works as intended, contractors will no longer be sued in products liability cases.
Despite the decision in Fresh Coat and its interplay with Chapter 82.002, contractors probably will not disappear from products liability cases. Plaintiffs will continue to sue contractors for negligence and breach-of-warranty claims. Moreover, discovery may show that the contractor is not entitled to protection under Chapter 82.003 if, for example, the manufacturer becomes insolvent. Additionally, a products liability action requires only that the plaintiff prove the contractor was a producing cause of the damages, rather than the heightened proximate-cause standard required in negligence actions.
Fresh Coat effectively makes manufacturers the insurers of contractors, subcontractors and homebuilders sued in products cases involving construction disputes. Indemnity claims will be commonplace in every construction case involving product liability claims. The court’s opinion was the logical extension of a statute designed to protect innocent sellers of defective products. Nevertheless, it puts manufacturers in the unenviable position of settling quickly or paying exponentially higher defense costs.
Jason J. Irvin is a partner in Hawkins, Parnell, Thackston & Young, a national litigation firm in Dallas. He serves as national trial counsel for manufacturers and retailers.