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HB Litigation Conferences Chinese Drywall: Insurance Coverage Considerations

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Title: HB Litigation Conferences Chinese Drywall: Insurance Coverage Considerations


1
HB Litigation ConferencesChinese Drywall
Insurance Coverage Considerations
2
Overview
  • Following Hurricane Katrina and during the height
    of the construction boom, a shortage of domestic
    drywall resulted and some builders and
    subcontractors began using imported drywall from
    China.

3
Overview
  • In late 2008 and early 2009, complaints began to
    appear about the failure of HVAC coils in homes
    with Chinese drywall. Several class action cases
    have been filed alleging that sulfur gases
    emitted from the Chinese drywall have caused
    property damage and possibly bodily injury.
  • This has led to several insurance coverage
    actions and there will likely be more coverage
    disputes and coverage litigation.

4
Overview
  • Scope of the problem
  • 60,000 to 100,000 homes nationwide may have
    Chinese drywall
  • 555,000,000 pounds were imported from China
    between 2004-2008
  • Chinese drywall was also used in commercial and
    municipal buildings

5
What Is Drywall?
  • Gypsum Board
  • ? Dihydrous Calcium Sulfate (one part)
  • Water (two parts)
  • Calcium Sulfate (one part)
  • Plaintiffs contend that there were sulfur
    compounds in gypsum extracted from certain mines
    in China that results in off-gassing of sulfur
    compounds from the drywall, primarily in humid
    environments.

6
Types Of Insurance Policies
  • First Party Policies (Homeowners and Business
    Owners Policies)
  • Third Party Policies (General Liability Policies
    Covering Lawsuits And Claims Against
    Policyholders)
  • Specialty Policies (Homebuilder Protection
    Program)

7
First-Party Property Claims
  • Homeowners Insurance Claims
  • Property Damage drywall, HVAC coils, copper
    wiring, refrigerators and other appliances,
    jewelry, carpeting, furniture, dry cleaning
  • Commercial Property Policies
  • Property Damage -- Repair or Replacement Cost
  • Business / Contingent Business Interruption

8
Third-Party Claims
  • Claims for bodily injury and property damage
    brought by homeowners against builders,
    suppliers, and subcontractors.
  • Disputes between builders and their suppliers and
    subcontractors over the costs of repair and
    damages associated with bodily injury.
  • Defense costs for class actions and individual
    lawsuits.
  • Most of our presentation addresses coverage
    issues under standard form general liability
    policies.

9
Trigger Applicable Policy Period
  • Exposure Policy in place when the drywall was
    installed.
  • Manifestation Policy in place when the bodily
    injury or property damage manifests itself or is
    discovered.
  • Continuous Trigger Implicates all of the policy
    periods from initial installation through
    manifestation.

10
Trigger Applicable Policy Period
  • Injury in fact Covered property damage must, in
    fact, occur during the policy period to trigger
    the policy in effect at that time.  Maryland Cas.
    Co. v. W.R. Grace Co., 23 F.3d 617 (2d. Cir.
    1993).

11
Policyholder View
  • In progressive property damage/bodily injury
    situations, such as the Chinese drywall claims,
    the damage/bodily injury is the result of the
    total and cumulative effect of all exposure to
    Chinese drywall.
  • Policyholders claim that all policies are
    triggered because there is new property damage
    and/or bodily injury that occurs during each
    policy period.

12
Insurer View
  • Depending upon a particular insurers place in
    the policyholders insurance program, insurers
    may argue for either exposure or manifestation
    trigger.

13
Trigger
  • Continuous Trigger Keene v. Ins. Co. of N. Am.,
    667 F.2d 1034 (D.C. Cir. 1981)
  • In sum, the allocation of rights and obligations
    established by the insurance policies, would be
    undermined if either the exposure to asbestos or
    the manifestation of asbestos-related disease
    were the sole trigger of coverage. We conclude,
    therefore, that inhalation exposure, exposure in
    residence, and manifestation all trigger coverage
    under the policies. (emphasis added)

14
Insurer View On Allocation Of Losses
  • Insurers claim that their policies only respond,
    if at all, to that portion of the loss that
    actually occurred during their policy period.
  • Example
  • For a home completed in 2007 in which property
    damage is discovered in 2009, insurer for the
    2007 policy year will contend it is responsible
    at most for 1/3 of the loss.

15
Occurrence
  • Insurers could also argue that all claims arising
    from losses (a) in one subdivision or (b) in
    which drywall was installed by the same
    contractor arise the same occurrence.
  • Insurers may argue that the policyholder cannot
    prove when specific property damage or bodily
    injury occurred, thereby precluding coverage.

16
Occurrence
  • An accident, including continuous or repeated
    exposure to substantially the same general
    harmful conditions.
  • Insurers Will argue that each drywall
    installation is a separate occurrence, which
    could effectively nullify coverage if the repair
    for each unit does not exceed the deductible or
    retention.
  • General Electric New York coverage case on
    multiple occurrences

17
Occurrence
  • Policyholders -- will argue that the multiple
    occurrence position is inconsistent with
    reasonable expectations of coverage and purpose
    of insurance.
  • The cause test Owens-Illinois v. Aetna
    Casualty and Surety Co., 597 F. Supp. 1515
    (D.D.C. 1984)
  • The calculation of the number of occurrences
    must focus on the underlying circumstances which
    resulted in the personal injury and claims for
    damage rather than each individual claimants
    injury.

18
Occurrence Damage Resulting From Faulty
Subcontractor Work
  • Recent case of Stanley Martin Cos. v. Ohio Cas.
    Group, 2009 WL 367589 (4th Cir. Feb. 12, 2009)
    The Court reaffirmed that an insured general
    contractor cannot seek recovery for damage caused
    by its own faulty workmanship, notwithstanding
    the general contractors ability to recover for
    damage caused by the faulty workmanship of a
    subcontractor.

19
Occurrence Damage Resulting From Faulty
Subcontractor Work
  • Insurers will argue that the entire home is the
    general contractors work, and that failure to
    properly supervise subcontractors is the GCs own
    faulty work.
  • Drywall installers will likely be unable to take
    advantage of the subcontractor exception to the
    your work exclusion.

20
Pollution Exclusions
  • Insurers will attempt to deny claims based on
    pollution exclusions.
  • Traditionally, pollution exclusions were designed
    to preclude coverage in certain circumstances for
    industrial environmental pollution. Insurers
    have argued that the pollution exclusions should
    be applied as written.
  • The Chinese drywall claims may provide insurers
    with an opportunity to attempt to press for broad
    interpretations of various pollution exclusions.

21
Absolute Pollution Exclusion (1984 I.S.O.).
  • Bodily injury or property damage arising out of
    the actual, alleged, or threatened discharge,
    dispersal, release or escape of pollutants
  • At premises you own, rent or occupy
  • Site or location used for waste
  • Transportation, handling, or storage of waste
  • Sites on which you work if the pollutants are
    brought on or if the operations are to test for,
    contain, treat or neutralize pollutants

22
Absolute Pollution Exclusion (1984 I.S.O.).
  • Any loss, cost or expenses arising out of
    government cleanup.
  • Pollutants means any solid, liquid, gaseous or
    thermal irritant or contaminant including smoke,
    vapor, soot, fumes, acid, alkalis, chemicals and
    waste. (emphasis added)

23
Four Revisions To The Absolute Pollution
Exclusion
  • 1988 hostile fire is not excluded.
  • 1996 certain mobile equipment is not excluded.
  • 1998 fumes released from a faulty furnace are
    not excluded.
  • 2004 loss from utilities to cool or dehumidify
    a building are not excluded.

24
The Creation Of The Total Pollution Exclusion
  • After the four revisions to the Absolute
    Pollution Exclusion, insurers again sought a
    broader pollution exclusion.
  • ISO then drafted the so-called Total Pollution
    Exclusion.

25
Total Pollution Exclusion (Contd)
  • This insurance does not apply to
  • Pollution
  • (1) Bodily injury or property damage which
    would not have occurred in whole or part but for
    the actual, alleged or threatened discharge,
    dispersal, seepage, migration, release or escape
    of pollutants at any time
  • (2) Any loss, cost or expense arising out of any
  • (a) Request, demand, order or statutory or
    regulatory requirement that any insured or others
    test for, monitor, clean up, remove, contain,
    treat, detoxify or neutralize, or in any way
    respond to, or assess the effects of pollutants
    or
  • (b) Claim or suit by or on behalf of a
    governmental authority for damages because of
    testing for, monitoring, cleaning up, removing,
    containing, treating, detoxifying or
    neutralizing, or in any way responding to, or
    assessing the effects of, pollutants.

26
Cases Interpreting The Pollution Exclusions
  • Seventh Circuit case Pipefitters Welfare Educ.
    Fund v. Westchester Fire Ins. Co., 976 F.2d 1037,
    1043 (7th Cir. 1992)
  • The terms irritant and contaminant, when
    viewed in isolation are virtually boundless, for
    there is virtually no substance or chemical in
    existence that would not irritate or damage some
    person or property. . . . Without some limiting
    principle, the pollution exclusion clause would
    extend far beyond its intended scope, and lead to
    some absurd results.

27
Cases Interpreting The Pollution Exclusions
(Contd)
  • Sullins v. Allstate Ins. Co., 667 A.2d 617, 624
    (Md. 1995) pollution exclusion did not limit
    coverage for exposure to lead paint, exclusion
    intended to apply to environmental pollution
  • Donaldson v. Urban Land Interests, Inc., 564 N.W.
    2d 728, 732 (Wis. 1997) pollution exclusion did
    not bar coverage when applied to the buildup of
    carbon dioxide
  • See The Risk Report, Vol. XXXI, No. 7 (March
    2009) Richard J. Scislowski, A New Method for
    Interpreting Post-1986 Pollution Exclusions.

28
Recent Texas Pollution Exclusion Decision
  • Nautilus Ins. Co. v. Country Oaks Apartments
    Ltd., 2009 WL 1067587 (5th Cir. Apr. 22, 2009)
    held that the total pollution exclusion applied
    to buildup of carbon monoxide in apartment.
  • The court held that carbon monoxide was a
    pollutant as defined by the policy which did not
    contain an exception to the exclusion for bodily
    injury resulting from fumes or vapor from
    equipment used to heat or cool the building.
  • The court also held that the carbon monoxide also
    was discharged, dispersed, or released into the
    apartment.
  • Release into the environment was not required.

29
Insurers Position In CDW Claims
  • Insurers will argue that release or escape of
    hydrogen sulfide or other sulfur-based
    chemicals from Chinese drywall caused the
    property damage or bodily injury, and thus
    triggers the standard pollution exclusions.

30
Causation Arguments
  • Policyholders may argue that if non-excluded
    perils (i.e., negligence of third parties)
    contributed to the loss, there is coverage even
    if excluded perils (i.e., pollution) also
    contributed to the loss.
  • Insurers will argue that if any excluded peril
    contributed to the loss, there is no coverage.

31
Expected Or Intended Provision
  • Coverage may be precluded because the
    policyholder allegedly knew or should have known
    that the drywall would deteriorate in a manner
    that would lead to bodily injury and property
    damage.
  • Occasionally referred to as the concept of
    fortuity that is, insurers view that insurance
    covers only losses that are truly accidental.
  • This is a fact-intensive defense to coverage that
    is often difficult for insurers to satisfy.

32
Business Risk Exclusions
  • Own Product/Own Work Exclusion -- Your Work
    Exclusion
  • Policyholders own product/own work may be
    excluded but damage to property other than the
    insureds work should be covered.
  • ISO form reads Property damage to your work
    arising out of it or any part of it and included
    in the products-completed operations hazard.
    This exclusion does not apply if the damaged work
    or the work out of which the damage arises was
    performed on your behalf by a subcontractor.
  • Stonewall v. Asbestos Claims Mgmt. Corp., 73 F.3d
    178 (2d Cir. 1995) (own product exclusion did not
    apply because of damage to property other than
    insureds work).

33
Business Risk Exclusions
  • Insurers may argue that the entire house is the
    general contractors product for purposes of
    the business risk exclusions
  • Most standard form policies provide that the
    exclusion for loss arising from damage to your
    product does not apply to real property

34
Impaired Property Exclusion
  • Tangible property, other than your product or
    your work, that cannot be used or is less
    useful because
  • a. It incorporates your product or your work
    that is known or thought to be defective,
    deficient, inadequate or dangerous or
  • b. You have failed to fulfill the terms of a
    contract or agreement

35
Impaired Property Exclusion (Contd)
  • if such property can be restored to use by
  • a. The repair, replacement, adjustment or removal
    of your product or your work. or
  • b. Your fulfilling the terms of the contract or
    agreement.

36
Applicability Of The Impaired Property Exclusion
  • Ambiguous exclusionary language seems internally
    inconsistent.
  • In the drywall cases, there is damage beyond the
    work performed by the insured, although insurers
    will argue that the entire structure is the
    work of the builder.
  • Even if the allegedly defective drywall were
    repaired or replaced, the property (wiring,
    appliances) would not be restored to its original
    use unless additional repairs were done to other
    aspects of the property.

37
Recall/Government Order Exclusions
  • Some policies exclude coverage for losses arising
    from governmental-ordered recalls of products
  • Insurers may argue that future actions by the
    Federal CPSC or certain state agencies could fall
    within these exclusions.

38
Additional Insured
  • Accomplished by standard-form endorsement.
  • The builder should be an additional insured on
    the subcontractors policies.
  • The builder and subcontractor policies are
    supposed to work in concert.
  • builders policy covers everything other than
    specific defective subcontractor work.
  • subcontractors policy affords coverage for the
    work itself, i.e. the drywall installation.

39
Additional Insured
  • Policyholders should promptly collect all
    additional insured endorsements. If the
    policyholders contract files are not complete,
    AI endorsements should be requested from
    contractors.
  • Policyholders should assemble all subcontractor
    agreements and examine provisions obligating the
    subcontractor to procure insurance and list the
    policyholder as an additional insured.

40
Current Listing of CDW Insurance Coverage Cases
41
Subrogation
  • The insurer pays the policyholder for its losses
    arising from the property damage and bodily
    injury and then pursues recovery from third
    parties who are responsible for the loss, i.e.,
    the subcontractor who supplied or installed the
    drywall or the drywall manufacturer.

42
Subrogation
  • Policyholders need to be careful and avoid
    impairing their insurers subrogation rights
    against potentially responsible third parties
  • Voluntary Payments clauses in policies provide
    that policyholders cannot settle a potentially
    insured claim without the insurers consent
  • Any subrogation recovery by an insurer should
    serve to replenish the policy limits for the
    policyholders benefit

43
Subrogation
  • Insurers may seek to take advantage of
    policyholders efforts to get in front of the
    CDW problems
  • If insurers deny coverage, policyholders are
    generally free to resolve the CDW claims without
    the insurers consent, although policyholders
    should keep insurers informed about dealing with
    CDW claimants.
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