Subcontractors and builders have not been frequent targets of the lawsuits over defective Chinese drywall so far, but that could soon change, a lawyer said recently.
“From articles and reports available, we understand that up to 550 million pounds of [Chinese] drywall may have been imported. In addition, one report indicated that it has been identified in 41 states and installed in at least 100,000 homes,” noted Michael Hamilton, chair of the national insurance coverage group of Nelson Levine deLuca & Horst.
“If these reports are correct, there is no question that a large number of claims will arise from its installation,” he said.
Besides the Lennar case (described in the accompanying article), which names drywall installers, Mr. Hamilton pointed to two other class actions brought by homeowners filed in the Southern District of Florida–Vickers v. Knauf Gips, et al., which names a construction company, and Foster v. Northstar Holdings Inc., which names as “John Doe” defendants installers and developers/builders.
Responding to the potential threat of lawsuits, builders associations have warnings on their Web sites. “What To Do If You Installed or Supplied Chinese Drywall…Get Prepared…Put your insurance companies on notice. It is important that you put all of them on notice going back several years, as there will be some debate as to which policies are liable,” one such Web site says.
Mr. Hamilton said “trigger of coverage” is just one of the insurance issues that will come up, pointing to concurrent-cause-of-loss debates on first-party policies, and exclusion language in both the first- and third-party context, among other things.
So far, the insurance industry itself has been relatively silent on the potential coverage implications of Chinese drywall.
One broker has been quoted saying that insurers may start putting drywall exclusions on contractor policies, and suggesting that contractors and suppliers should start seeking enhanced forms of coverage combining liability and environmental insurance under a single policy. (See related article.)
However, a half-dozen insurers that write contractors, products liability and environmental policies declined NU‘s invitation to comment for this article.
Mr. Hamilton doesn’t think “drywall-specific” exclusions are necessary. “We certainly have seen that for asbestos,” but asbestos exclusions became necessary, he added, because insurers “were on the losing end” of court battles as to whether asbestos falls under the pollution exclusion.
In this situation, “early reports on what the litigation is all about”–gas emissions from the drywall–suggest “the insurance industry has a potentially good argument for [the pollution] exclusion to apply.”
He did note, however, that some courts will continue to hold that the exclusion applies only to traditional environmental losses, such as Superfund sites and spills, rather than indoor pollution.
Representatives of Markel Corp. in Deerfield, Ill., who said the company writes contractors, architects and engineers, product liability, and environmental policies through various operating subsidiaries, said they see no need for underwriting changes.
Noting that the company will simply continue with careful and consistent underwriting practices, Nan Meyer, managing director of products liability, said Markel North America will share information with the Singapore office on drywall claims developments.
Ms. Meyer, who focuses on product liability, said Markel has no reported product claims arising from drywall to date.
In addition to pollution exclusions, Jeanette McDonough, claims counsel for Markel, said mold exclusions are generally included in Markel’s contractors, architects and engineers policies written in coastal areas. She speculated that mold exclusions might be raised by insurers in coverage actions, “because these are basically water intrusion-type claims.”
While the science is developing, Mr. Hamilton saw this as less likely. An insurer would have to assert that emissions were occurring via a mold or fungi, rather than simply because of the chemical makeup of the drywall, he noted.
To date, Mr. Hamilton said he is aware of only one actual drywall-related coverage case, which is a battle over the pollution exclusion in a first-party context.
In the case–Baker v. American Home Assurance filed in Florida’s Middle District–a homeowner is seeking coverage under a homeowners policy, saying the drywall emitted gases that interfered with the use and enjoyment of his property.
According to the complaint, the carrier verbally denied coverage based on an exclusion for “damage from a pollutant.” In the policy at issue, “pollutant” was defined as a contaminant, and “contaminant” (using a “Black’s Law Dictionary” definition) as an “impurity” resulting from “mixture or contact” with a foreign substance.
While the plaintiff claims that gases emitted from the drywall did not mix or come in contact with a foreign substance, negating the exclusion, Mr. Hamilton said some courts would take a different view of this type of situation.
In a case in Alabama dealing with pesticides, a court did apply the pollution exclusion, finding that indoor air became “impure through contact” with pesticide vapors, he noted.
One key issue to be decided for third- party property damage or construction-defect claims will be whether claims for faulty workmanship–claims that the insured must come in to repair the drywall or work done–give rise to an occurrence under a general liability policy.
Some courts reason that “this is not really an accident” and repairs don’t “fall under the normal understanding of an occurrence–that the insurance policies are not performance bonds,” guaranteeing the performance of a contractor doing installation. Insureds will counter, however, that “there was no expectation that damage would occur,” Mr. Hamilton said.
The lawyer also pointed to the potential application of “your work, your product” exclusions. In addition, referring to the possibility that federal legislation will be passed calling for a ban and ultimately a recall of Chinese drywall, he said a recall might implicate the “sistership” exclusion of liability policies.
The sistership exclusion “provides that coverage does not apply to damages caused by the repair or replacement of a product when it has been withdrawn from the market,” he said.
In late March, Sens. Bill Nelson, D-Fla., and Mary Landrieu, D-La., in the U.S. Senate, and Congressman Robert Wexler, D-Fla., in the House, introduced bills calling for the joint study of Chinese drywall samples by the Consumer Product Safety Commission and the Environmental Protection Agency, and for the commission to order manufacturers, distributors and retailers to cease distribution of hazardous drywall.
Sens. Nelson and Landrieu also submitted a resolution calling on the CPSC to order a recall.
Rep. Wexler wrote a letter to Florida Gov. Charlie Crist asking him to declare a state of emergency to make Florida citizens with Chinese drywall in their homes eligible for relief through the Federal Emergency Management Agency. The governor instead reached out to the EPA for assistance in developing chemical testing strategies.
Sen. Nelson wrote a letter to President Obama calling for the resignation of Nancy Nord, the chair of the CPSC. “The CPSC has the power to ban future imports or issue a recall on defective or hazardous products. But the commission hasn’t taken any action,” he wrote in an April 7 letter.