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Article of Interest

Texas Supreme Court Expands the Definition of “Seller” and a Manufacturer’s Duty to Indemnify
By:  Kenneth C. Riney, Hermes Sargent Bates, LLP

Recently, a unanimous opinion was issued by the Texas Supreme Court which held that in a products liability action, a contractor that installed construction materials on a home was also a “seller” of the product. The Court further held that unless a manufacturer establishes a contractor’s independent liability, a manufacturer’s statutory obligation to indemnify a seller covers a settlement payment made by a contractor to a homebuilder where the contractor was independently obligated by contract to indemnify the homebuilder. In Fresh Coat, Inc. v. K-2, Inc., the Texas Supreme Court held that a manufacturer is only relieved of its obligation to indemnify a seller if it proves that the loss was caused by the seller’s tortious or otherwise culpable act or omission for which the seller is independently liable.

Fresh Coat, Inc. contracted with Life Forms, Inc. to install exterior insulation and finishing system (“EIFS”) on the exterior walls of several homes that Life Forms was building. Fresh Coat purchased EIFS manufactured by K-2, Inc. and installed it on the buildings. Thereafter, multiple homeowners sued Fresh Coat, Life Forms and K-2 for negligence, negligent misrepresentation, breach of warranty and deceptive trade practices alleging the EIFS allowed water penetration that in turn caused structural damage, termite problems, and mold. Life Forms filed cross-claims against Fresh Coat and K-2 for indemnity. Fresh Coat, Life Forms and K-2 settled with the homeowners. Additionally, Fresh Coat settled with Life Forms to cover part of Life Form’s payment to the homeowners. Fresh Coat then sought indemnity from K-2 for not only the amount it paid to settle is claims with the homeowners, but also the amount it paid to settle with Life Forms.

The Texas Supreme Court began their analysis by concluding that EIFS is a “product” as that word is used in the text of Chapter 82 of the Texas Civil Practice and Remedies Code which in part addresses the circumstances in which a manufacturer is required to indemnify a seller for a loss arising out of a products liability action. The Court rejected K-2’s argument that products placed into the stream of commerce lose their status as products when they become integrated into real property. Instead, the Court concluded that a product is something distributed or otherwise placed, for any commercial purpose, into the stream of commerce for use or consumption.

The Court continued their analysis by concluding Fresh Coat was a “seller” for purposes of Chapter 82. The Court rejected K-2’s argument that Fresh Coat was merely a service provider that installed a product and not a seller than placed a product into the stream of commerce. Instead, the Court held that Chapter 82’s definition of “seller” does not exclude a seller who is also a service provider, nor does it require the seller to only sell the product.

Finally, the Court held that under section 82.002 of the Civil Practice & Remedies Code, Fresh Coat was entitled to indemnity from K-2 for the settlement payment Fresh Coat made to Life Forms. Section 82.002(a) imposes a duty on manufacturers to indemnify sellers for a loss arising out of a products liability action. However, an exception applies when it is established that the loss was caused by the seller’s negligence, intentional misconduct or other act or omission, such as negligently modifying or altering the product, for which the seller is independently liable. The Court rejected K-2’s argument that it should not have to indemnify Fresh Coat for the settlement payment Fresh Coat made to Life Forms because Fresh Coat’s contract with Life Forms contained an indemnity provision.

The Court reasoned that Fresh Coat’s settlement with Life Forms “arose out of a products liability action” as it arose out the homeowners claims against Life Forms that were settled. The Court further noted that section 82.002 does not except the manufacturer from its indemnity obligation whenever the seller is contractually liable to another. In fact, the Court noted that section 82.002(e) expressly provides that the manufacturer’s duty to indemnify is in addition to any duty to indemnify established by law, contract or otherwise. Rather, the statutory exception applies only for “any loss caused by the seller’s negligence, intentional misconduct, or other act or omission, such as negligently modifying or altering the product, for which the seller is independently liable.” The Court suggested that what is important is not merely whether a seller is independently liable, but why the seller is independently liable. The Court concluded that K-2 failed to establish that Fresh Coat’s settlement payment to Life Forms fell within the statutory exception merely because Fresh Coat had a contractual duty to indemnify Life Forms. Therefore, the Court ultimately held that the statutory exemption is limited to losses caused by the seller’s tortious or otherwise culpable act or omission for which the seller is independently liable.

In light of this decision, manufacturers will likely see an increase in indemnity claims from contractors and other service providers who sell and install products. As such, it will become increasingly important for a manufacturer to establish the installer’s independent liability whether through negligent installation, negligent modification or alteration of the product or otherwise to avoid its potential indemnity obligation.

Mr. Riney is a senior associate in the general civil litigation section at Hermes Sargent Bates, LLP in Dallas. He can be reached at ken.riney@hsblaw.com.