With more than 3000 homes involved in some form of litigation over Chinese Drywall, engineers of all sorts are being called upon to investigate the infected properties and report on its conclusions.

The Chinese Drywall problem, however, presents a lot of practical and scientific challenges. As engineers scratch the surface of these claims, they find more and more questions about the drywall and its damages.

Scott Wolfe has presented to the Louisiana Engineering Society and the American Society of Civil Engineers on precisely these questions, and specifically to answer this question: What Are You Looking For?

Scott’s presentation breaks down the search into three categories:

(1) Is it There? This is the most basic question posed to engineers; simply determining whether the home does or does not have contaminated drywall.

(2) How Deep Are The Damages? This question inquires as to just how deep into the home the damages go. Does it affect the wiring? Does it affect the building studs? Not only does this have relevance to the next category of inquiry, but is also has relevance to determine who is liable for the losses. A prime example of how this affects liability concerns builders and the New Home Warranty Act. If the damages go so deep as to create a structural defect, the NHWA will have broader applicability.

(3) What Type of Damages and How To Remediate. The final question requires determination of how to fix the problems, and to identify what type of damages the problem caused.

Here is the Keynote presentation used during these talks, brought to you by SlideShare:

Last week, it was widely reported that Orleans Parish Judge Medley issued a ruling striking certain policy exclusions relied upon by a home insurer in denying a Chinese Drywall claim.   We posted about the news on our blogs as well.

Since then, the plaintiff’s motion and the judge’s actual order has circulated through news agencies and the blogosphere, giving us attorneys some time to review the same.    It’s a practical certainty these issues will get appealed to the Louisiana 4th Circuit, and so reviewing the decision’s reasoning is important as other plaintiffs’ cases prepare to build upon it.

First, there is no need to reinvent the wheel in our review of this decision, as Merlin Law Group’s Property Insurance Coverage Law Blog posted an excellent analysis of the decision:   Chinese Drywall Claims May Be Covered Under Homeowners Policy – Favorable Developments in Louisiana.  I highly recommend reading this blog post, as it goes into significant detail about Judge Medley’s reasoning.

I also recommend reading the judge’s actual order and reasons for judgment (Judge Medley Order on Motion to Strike Exclusions).

General Analysis

Before getting into the court’s review of each policy exclusion, Judge Medley’s reasons provided the requisite overview of Louisiana’s jurisprudence in interpreting insurance policies.   Namely, that interpretation of insurance contracts is a question of law (Brown v. Drillers, Inc., 630 So.2d 741,749-50, La. 1994), and that insurance policies should be interpreted to effect, not deny, coverage (Breland v. Shilling, 550 So.2d 609-11, La. 1989).

To aid in the court’s determination of whether the insurance provisions were or were not ambiguous, the court quoted the deposition of Audubon Insurance Company’s corporate representative, Kathleen Spinella, who testified as follows:

Q:  I said, given your experience in working with insureds and how they might interpret or understand the policy, do you think that a person would read this and think that they would need to buy additional coverage to cover Chinese drywall?

A:  It would depend on the person.  If I read it, I would know it.  I’m a person.  There’s other persons that may not.

When an insured has an “all risk” policy, like the one in question in the case, the insured has only a very light burden to show that damage to the property occurred.   Thereafter, the insurance company must prove the applicability of its exclusions, and exclusions are strictly construed.

The Pollution Exclusion

Read the Chinese Drywall Blog’s previous discussions about the “Pollution Exclusion.”

The Audubon Insurance policy construed by the Orleans Court had a pollution exclusion as follows:

We do not cover any loss, directly or indirectly, regardless of any cause or event contributing concurrently or in any sequence to the loss, caused by the discharge, dispersal, seepage, migration or release or escape of pollutants.  Nor do we cover the cost to extract pollutants from land or water, or the cost to remove, restore, or replace polluted or contaminated land or water.  A “pollutant” is any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and “waste.”  A “contaminant” is an impurity resulting from  the mixture of or contact with a foreign substance.  ”Waste” includes materials to be disposed of, recycled, reconditioned or reclaimed.

Citing Doerr v. Mobile Oil Corporation, the court reminded Audubon Insurance that the pollution exclusion does not, and was never intended to apply to residential homeowners claims for damages caused by substandard building materials.   Both the precedent in Doerr and the Louisiana Department of Insurance have isolated a pollution exclusion’s applicability to incidents that cause “environmental damage.”

“The fact that Chinese Drywall releases various gases into the home is not sufficient to qualify as a “pollutant” under the policy exclusion.”

Gradual or Sudden Loss Exclusion

Audubon Insurance also claimed the “gradual or sudden loss” exclusion applied, which provided:

We do not cover any loss caused by gradual deterioration, wet or dry rot, warping, smog, rust or other corrosion.  In addition, we do not cover any loss caused by inherent vice, wear and tear, mechanical breakdown or latent defect.  However we do insure ensuing covered loss unless another exclusion applies.

Judge Medley’s decision reminded Audubon that the Gradual or Sudden Loss exclusion is designed to exclude expected losses.   In the case of Chinese Drywall, the losses relate to an off-gasing of the drywall and not by  normal wear, tear and/or gradual deterioration of the material.

The fact that the exclusion uses the phrase “rust and corrosion,” and there may be rust and corrosion in the home, does not change the purpose and meaning of the exclusion.    In the case of Chinese Drywall, the rust and corrosion is not the cause of the damage – the drywall is.

The more troubling component for the insured (plaintiffs) of the Gradual or Sudden Loss exclusion is the “latent defect” or “inherent vice” terms.   Homeowner policies typically exclude damages caused by a product that has a latent defect or inherent vice, which, although not defined in the insurance policy is typically defined as “a product imperfection that is not discoverable by reasonable inspection.”

Chinese Drywall, the court points out, is not damaging or destroying itself.   The drywall itself is working fine as drywall.   This fact runs afoul to jurisprudence and secondary analysis of the “Gradual or Sudden Loss” exclusion, which typically excludes coverage for losses caused by defects in a material causing damage or destroying itself as material.   Thus, justifying the exclusion because it is caused by a latent defect in the material causing expected damage.

Faulty, Inadequate of Defective Planning Exclusion

Finally, Audubon Insurance claimed the “FIDP” exclusion applied, which provided:

We do not cover any loss caused by faulty, inadequate or defective:
a.  Planning, zoning, development, surveying, siting;
b.  Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
c.  Materials used in repair, construction, renovation or remodeling, grading or compaction; or
d.  Maintenance; of part or all of any property whether on or off the residence.  However, we do insure ensuing covered loss unless another exclusion applies.

Here again, Judge Medley observes that the Chinese Drywall itself is not defective, and has the benefit of relying upon the insurance company’s own expert report and own testimony that the drywall itself is not defective.   It does not even address (d) of the exclusion, which it notes in a footnote, Louisiana courts have “permitted the ensuing loss provision to provide for coverage for damages resulting from a previous excluded loss.”

Conclusion

This is a really terrific decision for Louisiana homeowners who have filed insurance claims.   For those who have not filed a homeowners insurance claim, time is running out!

The decision will be appealed to the 4th Circuit, and the 4th Circuit’s review of the decision will be de novo.  So, this is not the end of the road.   It does, however, demonstrate that there is a real argument against homeowner insurance carries available to homeowners who are looking desperately for a remedy to their Chinese Drywall problems.

While grounded in good argument, there may be some problems in store for this decision.

First, as discussed previously on this blog, Louisiana is unlike most other states in its interpretation of the pollution exclusion, and so while it may not apply in Louisiana, it may still have application in other states.  Second, the insurance company in this suit (Aubudon) relied very heavily on the pollution exclusion, and was a bit unprepared for arguments concerning whether the drywall was or was not itself defective (see:   Lawmakers seek Chinese Drywall Fire Hazard Declaration).

More to come…

While the country waited for federal Judge Fallon to issue his ruling concerning the remediation requirements in homes with Chinese Drywall, the U.S. Consumer Product Safety Commission released a report of its own calling for applicable homes to remediate the problem by removing and replacing all drywall, fire alarm equipment, sprinkler systems, electrical equipment, wiring and gas piping.

Builders, Manufacturers, Insurers and anyone else who may have liability for the loss are calling the protocol overkill, while homeowners with the drywall are breathing a sigh of relief.

Read the reports and get more information from the U.S. Consumer Product Safety Commission’s online Drywall Information Center.

Good News for State Litigation

In the past, we’ve posted about why the federal class actions may not be optimal for homeowners with Chinese Drywall.  the recent decision by Orleans Parish Judge Medley holding a homeowner insurer’s feet to the fire is an example of how state litigation is proceeding faster than federal litigation, and the recent protocol from the CPSC is another example.

One of the items holding back plaintiffs in the state litigation is the lack of clarity for themselves, and their experts, as to how the Chinese Drywall should be remediated.   The release of the CPSC’s report, however, provides the plaintiffs and their experts with authority in proceeding in their state matters.

Break-Down of Interim Justifications

The remediation guidelines are styled “Interim Remediation Guidelines,” in that they are released by the Commission based on the “information available at this time.”   In other words, the science on these questions is not entirely complete but homes need to be remediated, and while the end result may change, these iterium guidelines will cast a wide net to ensure homes need not be remediated twice.

Read the Interim Remediation Guidelines in full here.

Item 1:  Remove all Drywall.    The justification for this is that there has been “scientific and practical” challenges identifying which drywall is contaminated, and which is not.  So, unless one can say positively that certain drywall is not contaminated, the safe bet is to remove it.

Item 2:  Fire safety alarm systems, electrical components, wiring, gas service piping, sprinker systems should all be removed according to the commission, as this should “address the metal components in the home at greatest risk of being affected by drywall-induced corrosion in a way that may affect the occupants’ safety.”

Here, the Commission is not making recommendations of removing these items because they are positively damaged, but simply because they are metal components of the home, they may be or become damaged, and damage of these items is a safety hazard.

Item 3:   The Commission’s focus on safety is illustrated by what they did not include in their guidelines:  the replacement of copper water service piping and HVAC evaporator coils.   The Commission says such items may be replaced, but it is not included in the guidelines because there is no direct connection to safety.

Overkill?

The Commission themselves comments on this:

The Task Force recognizes that other remediation approaches could ultimately prove more cost-effective and/or less invasive, such as the preservation of insulated wiring, but additional study is required on such approaches.  Ongoing CPSC studies on long-term corrosion, due later in 2010, should provide relevant scientific information.

In the past, we’ve discussed whether homeowner insurance policies will be liable for Chinese Drywall damages.   This week, Judge Medley in Orleans Parish Civil District Court gave Louisiana it’s first answer holding that the exclusions relied upon by the Defendant insurance companies didn’t make the cut.

Of course, the Defendant insurance company (Audubon Insurance Co) will appeal this ruling, but this is a really great first step for plaintiffs who are looking everywhere for a solution to Chinese Drywall woes.

So, which exact exclusions were adjudicated?

The pollution exclusion, which Judge Medley rejected based upon the Louisiana Supreme Court’s treatment of such clauses in cases like Doerr v. Mobil Oil Corp, which qualifies the pollution exclusion in insurance policies to only cover “environmental damage.”

The “latent defect” exclusion was also rejected, with Medley ruling that the clause didn’t apply because the drywall itself wasn’t a latent defect.    The drywall worked just fine as actual drywall, and therfore, wasn’t a latent defect in itself.

Homeowners Ought to Act Fact to Make Claims

In December 2009, we wrote that “Fast Action” was required for homeowners to make Chinese Drywall claims against their homeowners insurance policies.    Why?    Because policy-holders in Louisiana only have one year to bring claims (and file a lawsuit to enforce the claim) from when they knew or should have known of the loss.

Many homeowners are not making claims because they’re concerned about having their insurance policies cancelled.   Certainly, this is an issue as Louisiana insurance companies have already begun canceling policies on homes with contaminated drywall.    The danger cannot be explained away, but there are two important things to remember about this:  (1) policies are being cancelled regardless of whether claims are being made; and (2) homeowners insurance may be your best bet for fast recovery of drywall damages.

The particular case decided by Judge Medley isn’t part of the federal MDL (or class action).   Like many other homeowners with these problems, the plaintiffs in that case are seeking remedies against their builder and insurer through individual actions in state court.  As evidenced by the Medley decision, these actions are being adjudicated and are posting successful results.

This article was written by Chris Wilson.

Thousands of people across the country have purchased new homes that contain Chinese Drywall. Unfortunately, the result has been devastating financial and health problems. People living with Chinese drywall have had a number of health effects such as breathing difficulties, coughing, acne, asthma attacks, bloody nose, dizziness, irritated eyes, nausea, headaches, fatigue, gastrointestinal problems, rashes, sinus problems, and sore throats. As well, there are concerns that long-term exposure to Chinese drywall could cause cancer due to prolonged contact with radon. The question on many people’s minds is if their insurance company will cover their health care costs.

The claim most insurers are making regarding covering health care costs is that drywall is considered a builder defect which is not covered under a homeowners’ insurance policy. As well, they have deemed drywall a pre-existing condition that could lead to future damage, which is why insurance providers will not pay out for a claim or renew a homeowner’s policy until the drywall has been removed. They contend that it is a warranty issue and not an insurance issue. There are a number of insurers that have denied claims or canceled insurance policies based on this contention. Homeowners insurance is not designed to cover defective construction or materials; and as a result, they are not liable to pay out for the claim. It is their contention that homeowners must seek compensation from the manufacturer or a company associated with the installation of the drywall. As well, property insurance policies also have pollution exclusions; therefore, they will usually deny claims, which include any medical coverage. That is, Chinese Drywall claims involving sickness from inhaling unsafe gas odors will normally be denied because they do not fall under an insurance company’s definition of “bodily injury.”

When it comes to personal health insurance plans, you have to read the fine print of your policy to determine their definition of ‘bodily’ injury. Many insurance companies will consider a situation like this to be pollution caused by a third party so they do not cover the expenses associated with treatment. It is important to check to see if there is specific criteria outline in your health insurance policy that may result in coverage denial for treatment for drywall exposure.

Many homeowners have filed class action law suits against the manufactures, developers, general contractors, distributors, and builders, to seek compensation for their financial loss and health treatment costs. The lawsuits include claims for private nuisance, breach of warranty, breach of contract, negligence, and unjust enrichment. Most claims ask for financial compensation for medical expenses associated with illnesses resulting from inhaling toxic fumes originating from the drywall. If you have suffered the effects of drywall exposure, you need to consult with your homeowners’ insurance provider and health insurance provider to find out if the condition will be covered. If not, you should consult with a trial lawyer to learn about possible options on how to get compensation.

Those living with Chinese Drywall in Louisiana received good news today about the Louisiana Recovery Authority’s efforts to grant them financial relief.   While the news is good, the program is not complete and the funds aren’t quite ready to be distributed.

A few weeks ago, the Louisiana Recovery Authority set aside $5 million for Chinese Drywall victims in the state.   That set into motion a bureaucratic process to have the funds approved for disbursement and a structure set in place to approve future payments to victims.

The first step in the process was the actual setting aside of the $5 million in funds.

The second step in the process was having the U.S. Department of Housing and Urban Development approve the idea.   This second step was accomplished yesterday, December 22nd.

For those living with Chinese Drywall, it’s like an early Christmas present…but not one quite ready to be opened.   A spokesperson for the LRA said it best in an interview with the New Orleans Times Picayune, when she said “This is kind of like half the equation.”

As we stated in prior posts, local, state and federal governments certainly have Chinese Drywall aid on their minds…its just a matter of how and when.   This LRA program seems to be one of the most advanced in the country, insofar as planning is concerned.

But it’s the same punchline at the end of the day for victims:  more waiting.

Stay tuned.

In the past, we discussed whether Homeowners Insurance will be liable for Chinese Drywall damages in Louisiana.  While the jury is still out on this issue, we’ve posted on a number of occasions that the courts may very well find coverage for chinese drywall losses within homeowner insurance policies.

Now, many are reporting that a guest lecturer at the National Association of Public Insurance Adjusters just recently predicted that courts will find at least some coverage for Chinese Drywall damages (As per Merlin Law Group).   Earlier in the year, the folks at Merlin Law Group also posted that the FC&S Bulletin’s June 2009 edition also indicated that there would be coverage for Chinese Drywall losses under homeowner insurance policies.

So, while it’s far from certain that Chinese Drywall damages will be covered by standard homeowner insurance policies…it’s also far from certain that courts will disallow such coverage.   One thing is certain:  insurance companies have largely taken the position that the policies do not cover the damages, and are denying these claims across the board.

This begs the question:  what is the next step?

In Louisiana, most policy holders have just 1 year to file suit for insurance benefits.  The time period begins from when the policy holder knew or should have known of the occurrence or loss.

News of Chinese Drywall problems broke across Louisiana between January and March 2009.   Arguably, those with Chinese Drywall “should have known” of the problem starting at this time.   To be safe, homeowners with Chinese Drywall are facing a very important deadline as the new year approaches.

With so many questions about who is liable for this Chinese Drywall mess, it would be quite devestating for homeowners who may have a viable claim against their homeowners insurance, to lose that claim because they failed to take the necessary action before the alloted time expired.

News around the country is that the insurance industry may be liable for these Chinese Drywall losses.   If you have Chinese Drywall losses, you should consider filing suit to enforce your claim for coverage….or risk losing the opportunity.

Chinese Drywall talk is riddled with hearsay.

Is it or is it not bad for your health?   Must the drywall be replaced completely, or can a filtration system solve the problem?   Will the corrosive elements cross-contaminate into other components of the home, or is it isolated in the drywall only?

These questions certainly have practical implications.   After all, the answers to some of these questions will dictate how the drywall is actually repaired.

However, the questions also have implications in the legal arena.

Most notably in Louisiana, the severity of the damages related to corrosive drywall will be a large factor in deciding the question of whether the builder is or is not liable to homeowners for the installed drywall.

In previous posts here at the Chinese Drywall Blog, we discussed the Louisiana New Home Warranty Act and whether it will or will not create liability for builders who installed Chinese Drywall.   Because of the Act’s wording, it may simply come down to how severe the Chinese Drywall damages are.

Under the NHWA, builders are liable to homeowners for any “major strucutral defect” for a period of 5 years.   The question becomes, therefore, are the Chinese Drywall damages major structural defects?

If the damages can be remediated with a simple filtration system, you can count on the builders using this as evidence that the defect was not a major structural defect.  If they are successful, the 1 or 2 year warranty period, as opposed to the 5 year warranty period, would apply, and many of the currently filed claims would be considered as tardy.

If the damages cannot be easily remediated, however, and require the replacement of all sheetrock, and even the replacement of some elements of the framing…the homeowners will argue that this more closely resembles a major structural defect.   Accordingly, the 5 year warranty period would apply.

More specific information about whether the Chinese Drywall damages will be covered under the New Home Warranty Act is found on our blog here.

While knowing the severity of the damages is important to estimate the damage itself, and to understand how to fix the damages….the severity and scope of damages plays an even more important role in the litigation against builders who installed contaminated drywall.   It may be a very important question to answer when deciding whether the 5 year NHWA period applies.

Many folks with Chinese Drywall (clients and non-clients) have contacted our offices with this inquiry.   The logic makes sense:  If the mortgage on a property is x, and the value of the property has since dropped below x because of Chinese Drywall, is there some room for “a break” from the mortgage company?

Legally?   Not Really – At Least Not Yet

For the time being, the legal answer is “not really.”

Unfortunately, when you signed your mortgage agreement, you agreed to pay the amount of the note regardless of the property’s condition.   Therefore, the fact that the property condition is worsening because of Chinese Drywall does not act to modify any obligations under the mortgage note itself.

Now, this is usually not a problem because mortgage companies require the property to be insured.    In the case of Chinese Drywall, as we’ve previously discussed, the applicability of insurance to the loss is a bit complex.

There is some chatter on Capital Hill on this very issue, and a bill has recently passed the U.S. House of Representatives by a margin of 419-1 that would “encourage” banks and mortgage companies to provide homeowners with Chinese Drywall temporary forbearance on their mortgage payments.

What does this mean?

It means that the federal government would likely give the banking companies some incentive ($$$) to allow its mortgage holders with Chinese Drywall (you) to temporary not make mortgage payments.   If the bill passes, homeowners with Chinese Drywall may have some legal recourse to request mortgage forebearance, and avoid foreclosure on their home while actions to recover for the Chinese Drywall losses progress.

Practically Speaking…There May Be Room For Negotiation

While homeowners may not have the legal right to receive “a break” from their mortgage company, the financial realities of Chinese Drywall may open the window for some practical remedies.  Namely, to request a forbearance.

What is a forbearance? Wikipedia defines it as follows:

In the context of a mortgage process, forbearance is a special agreement between the lender and the borrower to delay a foreclosure. The literal meaning of forbearance is “holding back.”

Loan borrowers sometimes have problems making payments. This may cause the lender to start the foreclosure process. To avoid foreclosure, the lender and the borrower can make an agreement called “forbearance”. According to this agreement, the lender delays his right to exercise foreclosure if the borrower can catch up to his payment schedule in a certain time. This period and the payment plan depend on the details of the agreement that are accepted by both parties.

Forbearance is usually for temporary financial problems. If the borrower has more serious problems, for example if it is a variable-rate mortgage and the interest rate becomes unaffordable for the borrower, then forbearance is usually not a solution.

While you are not entitled to a forbearance without the U.S. legislation getting further along (and perhaps even being made stronger)…the realities you face as a homeowner are not lost upon mortgage companies.  After all, if the property is worth less than the mortgage, they really don’t have much motivation to foreclose on the property.

Contact your mortgage company and request a forbearance.  They will likely send you a forbearance application, and depending on the severity of your drywall problems, they may grant the forbearance.  Remember, however, that forbearance agreements are temporary, and interest usually continues to accrue during forbearance periods.

Since our last post here at the Chinese Drywall Blog was on September 2, 2009, you might be wondering if we disappeared?

We certainly don’t like to have so much time pass in-between posts, but sometimes, work and life gets in the way and it happens.   Sorry to all of our readers.    Over the past two months we’ve gotten very busy with Chinese Drywall claims, other work and even personal matters (my wife & I took a bit of trip for our anniversary at the end of Sept.).

The good news is that we’re back in the saddle and you can expect to the regular updates and discussion on Chinese Drywall law to continue.      A lot has happened…and continues to happen.