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Texas Case Shows Why Contractors Should Require Insurance Coverage from their Suppliers

A recent Supreme Court of Texas case highlights the need for contractors to require contractual indemnity when engaging suppliers.  When faced with product liability stemming from defective products, contractors in Texas may have relied on the manufacturer’s indemnity mandated by the Texas Product Liability Act.  But according to this new decision, the statutory indemnity is not universally available to general contractors. The court determined that a general contractor cannot expect to be indemnified by the supplier of bad goods without a contract for indemnity by the manufacturer.

In Centerpoint Builders GP, LLC v. Trussway, Ltd., (June 17, 2016, 2016 Tex. LEXIS 505.), a general contractor unknowingly purchased defective trusses and incorporated them into the construction of an apartment complex. When a subcontractor’s employee was hurt because the trusses gave way, the general contractor relied on the Texas Product Liability Act to argue for indemnity from the truss manufacturer.  The Supreme Court of Texas ruled that the Texas Product Liability Act* did not entitle the general contractor to indemnity. The Act requires manufacturers to indemnify sellers of their faulty products. But the court ruled that the general contractor was not a “seller” of the trusses. The Act 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 distinguished between the act of selling a service requiring a component product, and being “engaged in the business” of selling that product.

In deciding that the general contractor was not a seller, the court likened the general contractor’s role in installing the trusses to that of a barber who applies hair product.  The product used is incidental to the service offered.  The particular product is not something that general contractor, or the hypothetical barber, is actively selling to the customer.  This conclusion stands in contrast to a previous decision where the court determined a subcontractor who sold and installed a specific stucco product was a “seller” of that product for purposes of the Act.  The stucco subcontractor was contracted to supply a specified product and install that product.  In contrast, in Centerpoint, the general contractor was contracted to build the apartment complex, providing “innumerable” products, each incidental to the construction.

This case emphasizes the court’s willingness to scrutinize the facts of each situation. As a result, contractors in Texas are not guaranteed indemnity under the Act from their suppliers. The decision means general contractors may bear the risk of installing defective materials they purchase from suppliers. Contractors must take control of their own risk transfer by securing indemnity and insurance coverage from their suppliers by requiring it in their contracts and purchase orders.

Click here to read the entire decision.

* Texas Civil Practice and Remedies Code Chapter 82.
** Tex. Civ. Prac. & Rem. Code § 82.001(3).

 

MVP4-bio

Aug 04, 2016
Michael V. Pepe

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