chinese drywall: insurance coverage issues and...
TRANSCRIPT
Chinese Drywall: Insurance Coverage
Issues and Challenges
HB Chinese Drywall Litigation & Insurance Coverage Update San Francisco, July 28, 2009
Christopher J. Borders
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We are at the beginning
Evolving Science:
We do not know all of the damage that the drywall can cause and the circumstances when the damage is done
Undetermined whether all Chinese drywall is defective
Unknown whether defect is from natural gypsum, use of dry ash, humidity during shipping, or other
Still developing science for causation of personal injuries
Evolving Coverage Issues:
Traditional construction defect issues applied to new facts
New personal injury claims
Unusual property damage from absorption of sulfur by other metals
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We are at the beginning – cont’d
Media coverage is increasing.
New Orleans Saints football coach Sean Payton is a plaintiff in the consolidated multidistrict class action and speaking out. http://www.cnn.com/video/#/video/us/2009/07/19/calle bs.payton.drywall.cnn
April 2009 CGL insurer lawsuit against builder
Builders Mut. Ins. Co. v. Dragas Mgmt. Corp., USDC, ED Va., No. 2:09cv185 (4/23/2009).
Pollution exclusion and Your Work exclusion specifically cited.
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Coverage IssuesNot one analysis for all insurance claimsMust first determine:
The relationship of the insured to the construction of the home Homeowner with first party claimDeveloper, Manufacturer, Supplier, DistributorGeneral ContractorSubcontractor
The specific policy language
Controlling state law
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Coverage Questions - Overview
“Occurrence”
most Chinese drywall claims will satisfy common definition since sulfur gases will damage home contents and not just insured’s own work
“Property Damage” or “Bodily Injury”
Pollution Exclusions / Endorsements
Owned Property Exclusion (j(2))
Alienated Property Exclusion (j(1))
Your Work Exclusion (l)
Your Product Exclusion (k)
Loss of Use Exclusion (m)
Repair Exclusion (n)
Trigger of Coverage
Number of Occurrences
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Occurrence Issues
Majority view is that a breach of contract is not an occurrence…. [A] claim for faulty workmanship, in and of itself, is not an occurrence under a commercial general liability policy because a failure of workmanship does not involve the fortuity required to constitute an accident. Lee R. Russ & Thomas F. Segalla, Couch on Insurance, § 129:4 (3d ed. 1998).
Likely only a complete bar to coverage in those states that follow the majority view and where there is no damage beyond the insured’s scope of work.
Where sulfur fumes damage property other than the insured’s work, occurrence requirement would be met.
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Property Damage IssuesMost CGL policies limit coverage to “property
damage” that is “caused by an ‘occurrence.’” “Property Damage” usually means “Physical
injury to tangible property, including all resulting loss of use of that property.”
Damage to other property (i.e., appliances, wiring, piping, personal property) from gasses emitted by the drywall generally will meet definition.
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Property Damage Issues – cont’d
More complicated issue is whether the cost to remove the defective drywall itself is property damage since there is no evidence that the drywall itself has suffered any physical injury.
Faulty installation of drywall into a building is not itself “physical injury” in California
F&H Const. Co. v. ITT Hartford Ins. Co. of the Midwest (2004) 118 Cal.App.4th 364.
However, an exception may exist for inherently dangerous products (i.e., asbestos) if it causes injury to the entire property. See, Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co. (1996) 45 Cal.App.4th 1 and, Ward Gen. Inc. Services, Inc. v. Employers Fire Ins. Co. (2003) 114 Cal.App.4th 548.
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Property Damage Issues – cont’d
Related question is whether there is coverage for the cost to “rip and tear” the defective but undamaged drywall to repair or replace damaged property, such as electrical wiring or copper tubing.
One line of cases holds that these damages are covered since property other than the insured’s product or work was damaged in order to repair and replace the insured’s defective work.
In contrast, another line of cases holds that such damages are not covered since a non-covered event cannot be converted into a covered event during the repair process.
This will be a key area of litigation, especially in those states where the defective work itself is not property damage. Insurers will argue that a policyholder cannot convert an uncovered claim into a covered claim because of the restoration process, and insureds will argue that an interpretation of a policy that does not allow insureds to recover 100% of the costs to repair defective work is inconsistent with the fundamental purpose of a CGL policy.
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Owned Property Exclusion
“Owned Property” exclusion, typically Exclusion j(1), provides that a commercial general liability policy does not apply “to property damage to ... property owned or occupied by or rented to the insured.”
Purpose is to prevent coverage for first-party losses to property owned or controlled by the insured and to protect against the moral hazard where an insured has less incentive to take precautions because of the existence of insurance. See 7A J. Appleman, Insurance Law & Practice, § 4493.03 at 84 (Berdal ed. 1979).
May apply where an insured owned the property at any time.
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Alienated Property Exclusion
“Alienated property” exclusion, typically Exclusion j(2), precludes coverage for property damage to premises alienated (e.g., sold) by the named insured, if the damage arises out of the premises or any part of the premises.
Very little case law, but exclusion may preclude coverage for developers or general contractors who sold homes with Chinese drywall.
Georgia and Wisconsin courts have upheld.
California court (Maryland Casualty Co. v. Reeder 221 Cal.App.3d 961, 965. (Cal. App. 4th 1990)) rejected it based on drafting history argument.
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Your Work and Your Product Exclusions
CGL coverage does not insure a contractor for the contractor’s failure to perform its work in accordance with the contractor’s express or implied promises to do so in a workmanlike manner or according to the terms of the agreement.
The exclusions for your work (typically Exclusion l.) and your product (typically Exclusion k.) preclude coverage for the cost to repair and replace the insured’s work.
If the insured is a drywall installer, manufacturer, distributor, or seller, the exclusions would bar coverage for repair or replacement of drywall.
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Your Work and Your Product Exclusions – cont’d
In states where a construction defect can be an occurrence, however, the your work exclusion may not preclude coverage for general contractors or developers where the work is performed on their behalf by subcontractors, which falls into an exception.
Blackhawk Corp. v. Gotham Ins. Co. (1997) 54 Cal.App.4th
1090, 1096.
Regardless of the state, the exclusion probably does not apply to damage that the drywall causes to other property.
See, e.g., Aas v. Super. Ct. (2000) 24 Cal.App.4th 627; Blanchard v. State Farm Fire & Cas. Co. (1991) 2 Cal.App.4th 345.
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Pollution Exclusion / Endorsement
Whether a pollution exclusion precludes coverage will depend on the language of the particular exclusion at issue.
There are many forms of pollution exclusions and each should be analyzed carefully.
Court decisions vary, but under the most comprehensive pollution exclusions, the fumes emitted from the defective Chinese drywall meet the expansive definition of “pollutant.”
Florida applies exclusion to fumes.
Deni Associates of Florida, Inc. v. State Farm Fire and Cas. Co., 711 So. 2d 1135 (Fla. 1998).
California, Alabama and Louisiana are a few of the jurisdictions that have applied more narrow interpretations.
MacKinnon v. Truck Ins. Exch. (2003) 31 Cal.4th 635; Molton, Allen & Williams, Inc. v. St. Paul Fire & Marine Ins. Co., 347 So. 2d 95 (Ala. 1977); Thompson v. Temple, 580 So. 2d 1133, 1135 (La. Ct. App. 1991).
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Loss of Use Exclusion
The Loss of Use exclusion, typically Exclusion m., narrows coverage for claims involving reduced usefulness or impairment.
Excludes loss of use claims when the loss of use is caused solely by the insured’s failure to provide work of a quality or performance called for by the contract, or when there has been no physical injury to property other than the insured’s work itself.
The exclusion typically does not apply if there is damage to property other than the insured’s work, or where the insured’s work cannot be repaired or replaced without causing physical injury to other property.
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Repair / Sistership Exclusion
Typically exclusion n., excluding “damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal, or disposal of: 1) ‘your product’; 2) ‘your work’; or 3) ‘impaired property’;if such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.”
The exclusion is designed to shield insurers from liability for the cost associated with product recalls. Name arises from loss of use of airplane from grounding following a crash of a similar plane.
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Repair/Sistership Exclusion – cont’d
The exclusion may apply to preclude coverage for all cases where the drywall is removed before any damage has occurred since the defective drywall was withdrawn from the market place.
The exclusion would preclude coverage for those costs associated with the withdrawal and repair or replacement of the “sister” products which have not yet failed (i.e., caused damage).
But the exclusion would not apply to the product that has already failed while it is in use and caused damage to the property of others.
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Trigger of Coverage
Exposure, Continuous, Manifestation and Injury-in-Fact may all be possible depending on facts and jurisdiction.
California and many states have adopted a continuous trigger for continuous and progressively deteriorating property damage.
Montrose Chem. Corp. v. Admiral Ins. Co., et al. (1995) 10 Cal.4th 645, 678.
Fact question as to whether property damage or bodily injury is continuous and progressive
Many post-Montrose policies contain endorsements or revised occurrence definitions to avoid a continuous trigger.
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Number of Occurrences In California, an “[o]ccurrence has generally
been held to mean the underlying cause of the injury, rather than the injury or claim itself.” FMC Corp. v. Plaisted & Co., 61 Cal. App. 4th 1132, 1161 (1998).
“A decision to take action is not an uniterrupted proximate cause of the injury that occurs when the actions is eventually taken.” Dow Chemical Co. v. Associated Indemn. Corp., 727 F. Supp 1524, 1531 (E.D.Mich. 1989)
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Conclusion
Not yet any apparent basis to treat all drywall coverage claims as identical.
Different products, installed differently, failing at different times, causing a different combination of damages in each home.
Each claim must be investigated and adjusted individually.
The relationship of the insured to the claim is critical to the coverage analysis and which coverage issues may apply.
Established construction defect case law is instructive, as is the experience of mold claims as to bodily injury claims.
But new coverage law will likely be made.
