Manufacturer Remains On the Hook in EIFS Litigation in Texas

Since the 1990s, EIFS litigation has been a thorn in the side of the construction and insurance industries. Improper installation of EIFS (Exterior Insulation and Finishing System), sometimes called “synthetic stucco,” on homes across the United States resulted in a tremendous amount of litigation. Class action suits and individual litigation have been plentiful, with defendants often pointing the finger at each other as they ferret out responsibility for who must pay for the damages.

The Texas Supreme Court recently weighed in on some of these issues in Fresh Coat, Inc. v. K-2, Inc., —S.W.3d —-, No. 08-0592, 2010 WL 3277130 (Tex. August 20, 2010). The Court addressed the duty of a synthetic stucco manufacturer to indemnify a contractor that installed the stucco against claims of more than 90 homeowners who sued for structural damage, termite problems, and mold. The defendants settled the litigation with the homeowners, and the case proceeded to trial on the various claims that the defendants brought against each other. The jury awarded judgment to the contractor, Fresh Coat, for all damages requested against the manufacturer, K-2, Inc., which included indemnification for settlements that Fresh Coat made to the homeowners and to the homebuilder. The intermediate court of appeals in Beaumont affirmed the decision, with the exception of the amounts that Fresh Coat paid to the homebuilder. Both K-2, Inc. and Fresh Coat appealed.

In its appeal, K-2 urged the Supreme Court to rule that Fresh Coat, as a contractor for the installation of the synthetic stucco, did not qualify as a “seller” and that EIFS is not a “product,” such that K-2 would not have indemnity obligations arising under Chapter 82 of the Texas Civil Practices and Remedies Code. K-2 claimed that products placed into the stream of commerce and integrated into a house are transformed into real property and no longer retain their status as “products.” The Court disagreed, holding that a product is something distributed or otherwise placed, for any commercial purpose, into the stream of commerce for use or consumption. Here, EIFS was a synthetic stucco system made of component parts manufactured by K-2, that it was placed into the stream of commerce, and it was used in construction of homes.

K-2 further argued that Fresh Coat, as a contractor that obtained and installed EIFS, was not a seller. If Fresh Coat could be characterized as a service provider only, K-2 would not have a statutory requirement to indemnify. The Supreme Court held that Chapter 82’s definition of “seller” neither excludes a seller who is also a service provider nor requires the seller to sell only the product. The Court commented that its approach was consistent with the Third Restatement of Torts, which recognizes that a product seller may also provide services. As Fresh Coat provided the EIFS system and the services to install it, Fresh Coat qualified as a seller.

The Texas Supreme Court also ruled that the manufacturer’s statutory obligation to indemnify covers a settlement payment made by the contractor to the homebuilder, even where the contractor was independently obligated by contract to indemnify the homebuilder. The only exception under Civil Practices and Remedies Code Section 82.002(a)) to a manufacturer’s duty to indemnify sellers for losses arising out of a products liability action is for losses caused by the seller’s negligence, intentional conduct or other act or omission for which the seller would be independently liable. Because Fresh Coat made itself independently liable by contract, K-2 contended that it should not have to indemnify it. The Court held none of the statutory exceptions applied, leaving the manufacturer to bear the full loss.

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