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…
