In August of this year, the Texas Supreme Court addressed whether a manufacturer of a product is responsible to indemnify a subcontractor under the Texas Products Liability Act (TPLA) for damages caused by the product after it was incorporated into a home. Before the Supreme Court was the case of Fresh Coat, Inc. vs. K-2, Inc. where Fresh Coat was the subcontractor who purchased K-2’s exterior insulation and finishing system (EIFS) for installation in approximately ninety homes constructed by the builder. The purchasers of ninety homes sued Life Forms, Inc. (the builder), Fresh Coat, Inc. (the subcontractor), and K-2, Inc. (the manufacturer) alleging the EIFS was defectively designed and allowed water penetration that in turn caused structural damage, termite problems, and mold.
Prior to commencing the work, Fresh Coat signed a contract where it agreed to indemnify the builder from any damages assessed against the builder regardless of fault. Ultimately before the case went to trial, the builder, Fresh Coat, and K-2 settled with the homeowners. Fresh Coat paid the homeowners just over $1 million. Fresh Coat also settled with the builder, paying $1.2 million to cover part of the builder’s payment to the homeowners. The case ultimately proceeded to trial on various claims K-2 and Fresh Coat asserted against each other. The Trial Court entered judgment in favor of Fresh Coat for all damages requested. K-2 appealed arguing that Fresh Coat was not entitled to indemnification for the payment Fresh Coat made to the builder because EIFS was not a “product” and Fresh Coat was not a “seller” as those terms are defined under the TPLA.
The TPLA provides that a manufacturer shall indemnify and hold harmless a seller against loss arising out of a products liability action, except 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. Generally, this means that a manufacturer of a product must indemnify the seller of its products so long as the loss was not caused by the seller’s actions.
The Texas Supreme Court rejected K-2’s argument that Fresh Coat was not a seller and the EIFS was not a product. In fact, the High Court held that EIFS and its components were a “product” (i.e., something that is distributed commercially for use or consumption and that is usually tangible personal property, the result of fabrication or processing, and an item that has passed through a chain of distribution before consumption), notwithstanding the fact that the EIFS was incorporated into the construction of a wall. Further, the Court noted that nothing within the TPLA excluded EIFS from being the type of defective product that can give rise to a products-liability action.
Regarding K-2’s argument that Fresh Coat was not a seller, the Court again rejected such argument. The TPLA defines seller as a person who is engaged in the business of distributing or otherwise placing, for any commercial purpose, in the stream of commerce for use or consumption a product or any component part thereof. The Court held that Fresh Coat was a seller as it distributed the EIFS into the stream of commerce for consumption or use.
Ultimately, the Texas Supreme Court held that the EIFS was a product, Fresh Coat was a seller, and K-2 was obligated to indemnify Fresh Coat for the settlement payment Fresh Coat made to the builder. Consequently, the TPLA does not limit the term “product” to exclude items that become incorporated into a home.
With respect to subcontractors, the effect of this case is quite clear. Subcontractors will benefit from the manufacturer’s obligations to indemnify them for all damages arising out of products liability actions. Some commentators are even of the opinion that this case provides a form of free insurance to subcontractors. The Fresh Coat case could realistically lead to manufacturers assuming the subcontractor’s defense in future cases. By manufacturer’s assuming such defense, subcontractor’s can avoid the cost of litigation and benefit from the indemnity provision, while manufacturers could reduce the cost of litigation and their ultimate indemnity obligations.
Given the Fresh Coat opinion, the obvious next question is: Will its holding and the indemnity requirement extend to general contractors and homebuilders? In this author’s opinion, the answer is yes. Clearly, the EIFS would remain a product regardless of whether the case is reviewed from a contractor or subcontractor’s perspective. Moreover, it is likely that general contractors and homebuilders would be considered a “seller” under the TPLA and entitled to the same indemnity that Fresh Coat received from K-2. Specifically, it would appear that a homebuilder who constructed a home with EIFS engaged in the business of distributing or otherwise placing, for any commercial purpose, in the stream of commerce for use or consumption a product or any component part thereof. The indemnity provisions of the TPLA, and possible assumption of a defense, will likely benefit general contractors as well.
The Fresh Coat case will ultimately have application to general and subcontractors for all manufactured products. Fresh Coat is an actual game changer that can effectively require the manufacturer to indemnify contractors for all liability arising from the product, regardless of whether the product was incorporated into a component or system of a home. In the future, contractors who are defending construction defect claims that are premised on defective products (i.e., EIFS, pex, fixtures, etc.) should consider Fresh Coat and potentially pursue indemnity from the product manufacturer.
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