The Chinese Drywall phenomenon continues….and it seems that as each day passes, builders are drawn closer and closer to the crisis.

Last week, we asked whether builders were getting a “free pass” on the Chinese Drywall issue.

However, just a few days later Lennar Co. was named as a party to a class action suit, and this week a local North Carolina construction outfit – Stafford Custom Homes, Inc. – was sued for installing Chinese Drywall.

So how are builders handling Chinese Drywall claims and complaints?

This morning, the Herald Tribune has posted an interesting article on this topic. Comparing Lennar Co.’s Chinese Drywall methodology with other national builders, the article says this:

Within just a few square miles sit four developments with clusters of affected homes, built by at least three different builders: Lennar Corp., Taylor Morrison and WCI Communities.

The East Manatee homeowners who have been touched by tainted wallboard — tied to corrosion of metals and the subject of an investigation by state and federal health officials to determine whether it poses health risks — find themselves caught up in a situation largely beyond their control.

For many, their experiences have been shaped by the behavior of their builders — whose responses have run the gamut from tearing out the bad drywall in Lennar’s case to taking no action at all.

Read full article.

More important than the question of how builders are handling claims, however, may be the question of how they should be handling claims.

A few posts here at the Chinese Drywall Blog has hinted to this post – now, though, we’re going to lay it out there.

Lately, the class action legal community has been abuzz about Chinese Drywall, and class action suits have been lodged in at least three states. As this situation unfolds, however, some attorneys are beginning to question whether class action litigation is the best vehicle for homeowners to bring these claims.

Here are the top 3 reasons why Chinese Drywall class action suits are bad for homeowners:

It Won’t Replace Drywall…Or Resolve Itself For Years

The class action suits have mostly named huge foreign manufacturing companies responsible for creating or exporting the defective drywall. It’s virtually guaranteed that these large-scale suits won’t resolve themselves – much less get properly organized – for years.

Moreover, during the interim period homeowners will not receive any help in getting the defective (and potentially dangerous) drywall out of their homes.

Read more about this problem on Stark & Stark’s Construction Litigation Law Blog, under the article captioned: “Chinese Drywall Class Action Suit May Not Help Homeowners For Years If Ever.”

There Are Collection Problems

Just this morning at the China Law Blog, Dan Harris asked those involved with the class actions suits to “Show [Him] The Money.” And based on his experience with foreign judgments, here is what he had to say about the potential recovery by Chinese Drywall class plaintiffs:

The US plaintiffs are not likely going to be able to collect anything from the Chinese defendants by suing in them in the United States and collecting from the German defendants is likely to prove difficult as well.

After all the legal complexities and procedural hurdles are dealt with (read: time and money), if the class action plaintiffs are then able to persuade a court that these foreign manufacturers are liable…it might simply be downright difficult to enforce those civil judgments.

Time Is Ticking

Finally, time is now ticking on Chinese Drywall claims. The class action suits may be giving builders, suppliers and homeowners a bit of false security that all will be well with respect to these claims, allowing the statute of limitations on potential claims and defenses to steadily approach a closing date.

For homeowners, signing up with a class action attorney may give them a false sense of security that their claim is being properly asserted and handled.

However, is the class action attorney sending certified letters to the builders under the New Home Warranty Act? Is the class action attorney asserting a claim under a tort or contract theory against the builder / installer? Are homeowners mitigating their damages?

For builders, installers and subcontractors, no news feels like good news.

However, since they are not named in a class action, and suit is not brought against them, they are not mitigating their own damages, asserting necessary defenses, or bringing claims they may have against suppliers and manufacturers.

In the Chinese Drywall litigation world, the flame is getting closer and closer to contractors, suppliers and home builders. Just this week it was reported that Lennar Co. was named in a Florida class action and a comment on this blog suggested that an individual suit against a builder had been filed.

As these actions continue to turn up, will insurance policies cover builders and suppliers for damages caused by the installation of Chinese Drywall?

Those monitoring the matter have predicted that insurance companies may attempt to rely on a broad pollution exclusion in most GL policies to deny coverage. And in fact, the pollution exclusion clause makes a “center-stage appearance” in a lawsuit recently filed regarding insurance coverage for Chinese Drywall damages.

What is a “Pollution Exclusion”

Of course every insurance policy is different…but in the construction industry, a general liability policy usually has some form of “pollution exclusion” within it. And generally speaking, it looks a little something like this:This insurance does not apply to:

(1) “Bodily injury”, “property damage”, “personal injury” or “advertising injury” 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 or order 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 or others 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.

Pollutants means solid liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste. [Pg 3] Waste includes material to be recycled, reconditioned or reclaimed.

This exclusion does not apply to “bodily injury”, “property damage”, “personal injury” or “advertising injury” caused by heat, smoke or fumes from a hostile fire. As used in the exclusion, a hostile fire means one which becomes uncontrollable or breaks out from where it was intended to be.

Insofar as Chinese Drywall is concerned, the possible applicability of the pollution exclusion is clear: The drywall has been alleged to emit gases that cause physical problems and deterioration of property.

Courts, therefore, will be called upon to determine whether the damages caused by Chinese Drywall is caused by a “pollutant” as contemplated by the insurance contract.

If it is, builders, suppliers and other construction professionals will be liable for the losses without the benefit of insurance coverage.

If it is not, involved parties will breathe a huge sigh of relief as the potential offset of expense will tally in the millions.

How Louisiana Will Interpret the Pollution Exclusion

The seminal case on insurance pollution exclusions in Louisiana is Doerr v. Mobil Oil Corp., a 2000 Louisiana Supreme Court decision.

In that decision, Chief Justice Calogero examines the history of the pollution exclusion in insurance contracts to conclude that “there is no history in the development of the exclusion to suggest it was ever intended to apply to anyone other htan an active pollutor of the environment.”

Overruling a Louisiana Supreme Court case decided just 1 year prior (Ducote v. Koch Pipeline Co., L.P., 730 So.2d 432, La. 1999), the Doerr court stated as follows:

In light of the origin of pollution exclusions, as well as the ambiguous nature and absurd consequences which attend a strict reading of these provisions, we now find that the total pollution exclusion was neither designed nor intended to be read strictly to exclude coverage for all interactions with irritants or contaminants of any kind. Instead, we find that “it is appropriate to construe [a] pollution exclusion clause in light of its general purpose, which is to exclude coverage for environmental pollution, and under such interpretation, [the] clause will not be applied to all contact with substances that may be classified as pollutants.” The applicability of a total pollution exclusion in any given case must necessarily turn on several considerations:

(1) Whether the insured is a “polluter” within the meaning of the exclusion;

(2) Whether the injury-causing substance is a “pollutant” within the meaning of the exclusion; and

(3) Whether there was a “discharge, dispersal, seepage, migration, release or escape” of a pollutant by the insured within the meaning of the policy.

Using the Doerr analysis, it seems that builders or suppliers would not be considered a “polluter” within the meaning of the exclusion. However, as the Doerr court makes clear, this is a fact-based conclusion that must result after consideration of all relevant circumstances.

Additional Resources about Pollution Exclusions and Chinese Drywall

Since many are anticipating a fight over the applicability of the pollution exclusion to Chinese Drywall claims, there is a significant amount of commentary from lawyers across the Gulf Coast on the topic. Here are some valuable resources for those interested in learning more on this topic:

• Insurance and Financial Implications of Defective Chinese Drywall upon the Construction Industry, Saxe Doernberger and Vita, P.C.
• Applying the Absolute Pollution Exclusion in the ISO CGL Form, Bates & Carey, LLP
• Enforcement of Pollution Exclusions in Standard CGL Policies in the Wake of Doerr v. Mobile Oil Corp., G. Andrew Veazey
• Louisiana Court Strikes Pollution Exclusion for Workplace Exposure, Anderson Kill & Olick, P.C.

The shoe has dropped for one builder who has been working hard to avoid entanglement in the Chinese Drywall defective drywall class actions. According to reports all over the web, Lennar Co. has been officially named in a Florida class action suit over defective drywall.

The significance of Lennar Co.’s involvement with the class action is fairly great, as it begs the question of what exactly distinguishes it from smaller builders who may have also installed Chinese Drywall in homes. Will these smaller builders soon be named in class actions as well?

It also begs the question of whether class action suits are the answer to homeowner’s woes in the Chinese Drywall crisis. The question has been hinted here, and written about by Donald Brenner at the Construction Litigation Law Blog.

With regard to the class action suit, Lennar Co. said it had “already established reserves for the estimated cost of replacing the drywall” it has confirmed to be defective Chinese product “to the extent such costs are not covered by insurance.”

As the risk and exposure of builders opens up, the role of a company’s GL insurance will be examined. More on this later…

Chinese Drywall is all the rage in construction news across Florida, Louisiana and the Gulf South. While some reports have discussed builder liability, the majority of news coverage relates to the potential health effects of the imported drywall and the class actions being filed by plaintiffs attorneys across the country.

All of this news and activity leaves two things curiously out of the conversation:

1) How are homeowners going to get this drywall out of their homes; and

2) Should builders be called upon to replace the defective materials and damages?

Class Actions Aren’t Getting the Drywall Out

Right now, class action attorneys across the Gulf South are collecting names for mega-product liability lawsuits that could last for years. In the interim, however, the class action suits aren’t likely to get the Chinese Drywall out of homes.

So, what are homeowners doing about getting the drywall wall out of their property? What can they do?

Well, unfortunately, the answer to this question leads to the next section of this post, and precisely the reason we’re asking whether builders are getting a ‘free pass’ on Chinese Drywall claims.

It seems that realistically, the only way a homeowner is going to get rid of defective drywall is to either (a) replace it themselves; or (b) contract their builder and make a warranty claim.

The class-actions are focusing on product liability claims against the mega-manufacturers, and therefore, are not assisting their clients with option (b). Since they are tied up in class action litigation, this could leave homeowners literally stuck with the less desirable option (a).

Where Builders Fit In

Builders, local suppliers and other involved parties – while victims themselves – appear to be largely slipping through the cracks in this Chinese Drywall crisis.

Granted, some large builder outfits like Lennar Co. have been involved with litigation, and have even taken the initiative to repair defective drywall. In large part, however, perhaps due to the direction of press on imported drywall, it seems that affected homeowners are contacting class action attorneys and not their contractors.

Should builders be at the center of Chinese Drywall complaints? And notwithstanding this question, should homeowners be at least contacting their builders to take advantage of their warranties, their builders’ insurance policies and more?

More to come…

NHWA as a Theory of Recovery

The Chinese Drywall situation is complex, and homeowners will seek recovery from builders, suppliers and manufacturers under a number of legal theories.

Like many other states, Louisiana has a “New Home Warranty Act” which mandates that a contractor warranty its work to the homeowner for a certain period of time.

In Louisiana, if the home is a new construction, the act is clear that owners with defective construction can only recover from the builder under the act:

…provides the exclusive remedies, warranties, and peremptive periods as between builder and owner relative to home construction and no other provisions of law relative to warranties and redhibitory vices and defects shall apply.

Ramifications if Act is Exclusive Remedy

The ramifications of the act applying to Chinese Drywall are many:

1. The warranty period is “peremptive,” meaning that the warranty periods start at a certain time (delivery of the home) and end at a certain time, and is not suspended because the homeowner was without knowledge of the defect.

2. The owner is required to give the builder written notice, by registered or certified mail, of the defect and give the builder a reasonable opportunity to comply with the provisions of the Act.

3. The Act may completely exclude or significantly limit claims for health damages caused by the defects.

Issues in Determining whether NHWA applies

So, will the New Home Warranty Act apply to Chinese Drywall claims? Only time will tell.

The Act does exclude certain types of damages or “defects” from applicablity under the act, and Chinese Drywall may be excluded if it is considered (§9:3144(B)):

a) Dampness, condensation or other damage due to the failure of the owner to maintain adequate ventilation or drainage. This exception may apply if results from lab testing of the Chinese Drywall confirm that dampness or poor ventilation exasperate the problem with the imported drywall.

b) Any defect in, or any defect caused by, materials or work supplied by anyone other than the builder, or any employee, agent, or subcontractor of the builder. It will be interesting to see how this particular exclusion is interpreted as it applies to imported drywall.

c) Mold and mold damage. Of course, the Chinese Drywall contamination is not “mold,” but owners may attempt to argue that its effects fall under this exclusion of the Act.

Applicable builders will [and probably should] argue that the Act applies, and use the Act to limit its exposure. Louisiana judges will be called upon to determine whether any of the §9:3144(B) exclusions apply.

Wolfe Law Group’s Scott Wolfe just published a Legal Guide on the lawyer rating web-service, Avvo.com, titled “What To Do If You Supplied or Installed Chinese Drywall?”

The Legal Guide goes on to answer that precise question, offering builders, suppliers and other construction participants with helpful tips on how to proceed if they are wrapped up in an imported drywall claim.

The Legal Guide’s summary states as follows:

Enough Chinese Drywall was imported into the United States to build 60,000 average-sized homes. Many now fear the drywall was contaminated, and to blame for the rapid corrosion of building elements and health concerns. What to do if your company supplied or installed Chinese Drywall? Read on.

And here are the tips (stripped of commentary):

• Determine Whether Your Company Supplied or Installed Chinese Drywall;
• Mitigate Your Damages
• Get Prepared
• Get Counsel and Consider Legal Options

Read the full legal guide on Avvo.com here.

Lennar Co. used Chinese Drywall in the construction of some of its Florida homes. Now that the drywall is earmarked contaminated, and causing problems across the country, the nationwide builder has dealt with the problem with a one-two punch.

First, it is working to rebuild the affected homes. That’s right, rebuild them. According to press releases, Lennar Company is removing and replacing contaminated drywall, and even paying the relocation expenses for customers while they are out of the home.

Second, to protect itself from future legal liability and to recover the expenses of its first move (above), it has filed suit against its suppliers and installers for the damages caused to them.

This proactive approach is perhaps one of the most aggressive responses to the Chinese Drywall situation from builders or suppliers. And, arguably, it may be the best approach a company with Chinese Drywall exposure can take.

Lennar’s approach seemingly has the following positive affects for its company:

1. By repairing the contaminated homes, Lennar has fulfilled any of its warranty obligations;
2. The pro-active approach resulted in positive press for the company’;
3. By filing a lawsuit against its suppliers and installers, Lennar preserved its legal rights against those parties (read the 105 page complaint here);
4. Lennar has proof that it mitigated its damages after exposure to contamination liability. The mitigation efforts will pay off in Lennar’s claims against its insurers, suppliers and installers.
5. Lennar has homeowners whose homes are repaired sign waivers to limit the company’s future exposure.

Of course, Lennar’s efforts are not without its critics.

InjuryBoard.com reported that some homeowners regret signing Lennar’s waiver because they were not completely compensated for damages. Further, in response to Lennar’s suit against Knauf, the supplier released a statement complaining that it only supplied approximately 20% of the drywall at controversy – yet is the only company sued.

The Chinese Drywall situation is clearly a bad situation…and any company involved must simply perform damage control. Lennar Company is one of the first to aggressively protect themselves – legally, publicly, and practically. It serves as a very fair example of how some companies involved with the contamination may approach the controversy.

As part of Lennar’s PR campaign, they recently spoke out about their response to finding Chinese Drywall contamination. The video is reproduced below.

As feared, recent reports confirm that Chinese Drywall was imported and installed throughout homes in Louisiana. According to WWLTV.com, as much as 60 millions pounds of contaminated drywall may have been unloaded at Louisiana docks – which, unfortunately, is enough to build 7,000 homes.

As the region grows concerned about how the situation may displace and effect homeowners and property owners, there are other victims: The contractors and suppliers.

Ultimately, its local contractors and suppliers who unloaded the Chinese Drywall and installed them into homes and businesses across the state. As complaints and lawsuits surface, these local business could be facing long, expensive legal battles.

The Chinese Drywall situation is mature news in Florida, and so Louisiana victims (homeowners and contractors alike) can look to the experience in that state for an understanding of what’s to come.

The Naple Daily News reported just a few weeks ago that there is no quick fix for Chinese Drywall problems, and addressed how the situation is affecting builders and suppliers:

Mark Boyle and Geoffrey Gentile of Boyle & Gentile advised builders in the audience of steps to take should customers contact them with a claim of Chinese drywall.

They should put their insurance companies, all of them dating back several years, on notice so they can be involved in the process, Boyle said.

Gentile added that builders should get their documents together, such as contracts, master agreements with subcontractors, insurance policies, warranties and builders risk policies to understand their involvement.

They also can review warranty calls to see if any homes they built have had recurring problems indicative of Chinese drywall, including air conditioning unit failures.

“Everyone thinks about fault,” Boyle said. “No contractor in this community knew or had any reason to believe there was anything wrong with this drywall.”

But the law isn’t just about fault, he said. If your product is defective, you’re responsible.

The advice is good.

For construction companies and suppliers who has encountered Chinese Drywall, it’s only a matter of time before a complaint affects your business.

The expense for your company will be two-fold:

1. You may have the expense of fulfilling your warranty to the homeowner, which could mean extensive property repairs; and
2. You may have legal expenses associated with the property owner’s health concerns, loss of use of the property, and more.

What do you do?

As mentioned in the Naples Daily News article, businesses should quickly report the exposure to their insurance carriers (all of them), work with the property owner to “mitigate its damages,” have the property inspected and tested to confirm the suspicion, and retain counsel to discuss its rights.

Wolfe Law Group has recently launched a new practice area related specifically to Chinese Drywall defense, where the firm can help advise contractors, subcontractors and suppliers on how to best protect themselves in light of the Chinese Drywall contamination problem, and if necessary, defend them in suit.

In some instances, it may be prudent for your company to file suits against your suppliers and installers. Lennar Co. did exactly this in Florida as reported by Builder Online when they sued 8 drywall suppliers and 12 installers, charging them with breach of contract and breach of express and implied warranties.

The long and short of the matter is this: Chinese Drywall is here in Louisiana to stay, and if your business was involved with the supply or installation of the materials, you’ll likely encounter related legal and economic challenges.

Businesses should be aware of the problem and prepare to limit its exposure as best as possible.