Title: HB Litigation Conferences Chinese Drywall: Insurance Coverage Considerations
1HB Litigation ConferencesChinese Drywall
Insurance Coverage Considerations
2Overview
- 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.
3Overview
- 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.
4Overview
- 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
5What 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.
6Types 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)
7First-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
8Third-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.
9Trigger 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.
10Trigger 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).
11Policyholder 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.
12Insurer View
- Depending upon a particular insurers place in
the policyholders insurance program, insurers
may argue for either exposure or manifestation
trigger.
13Trigger
- 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)
14Insurer 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.
15Occurrence
- 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.
16Occurrence
- 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
17Occurrence
- 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.
18Occurrence 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.
19Occurrence 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.
20Pollution 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.
21Absolute 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
22Absolute 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)
23Four 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.
24The 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.
25Total 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.
26Cases 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.
27Cases 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.
28Recent 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.
29Insurers 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.
30Causation 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.
31Expected 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.
32Business 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).
33Business 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
34Impaired 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
35Impaired 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.
36Applicability 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.
37Recall/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.
38Additional 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.
39Additional 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.
40Current Listing of CDW Insurance Coverage Cases
41Subrogation
- 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.
42Subrogation
- 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
43Subrogation
- 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.