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.

Not all victims of Chinese Drywall are homeowners.   Oftentimes, a tenant is living at a property with Chinese Drywall, or a property owner is a landlord to an apartment or home with Chinese Drywall.

Take, for example, a news story from the Baton Rouge’s Advocate about a tenant who was forced to move out of their rented home because of Chinese Drywall.   Or, a news story about a Florida landlord to an apartment complex housing low-income elderly people, who were evicted en mass because the complex had imported drywall.

These scenarios present interesting legal questions:

• Can a tenant break a lease because of Chinese Drywall?
• Can a landlord evict a tenant because of Chinese Drywall?
• Is Chinese Drywall a “breach” of the lease?
• Should landlords evict / move tenants when properties have Chinese Drywall to avoid responsibility for future health effects?

While the answer to this question will greatly depend upon the terms and provisions with the lease agreement, here is what that Louisiana Civil Code may have to say about the matter.

The Landlord’s Warranties

The landlord makes a number of warranties to its tenants through the Louisiana Civil Code, and it can be argued that the existence of Chinese Drywall at the leased premises is a breach of these warranties.

La. C.C. art 2696, for example, provides that the “lessor warrants…that the thing is suitable for the purpose for which it was leased and…is free of vices or defects.”   This warranty extends to vices “that arise after the delivery of the thing.”    The following code article (2697) indicates that the warranty encompasses vices or defects not known to the lessor.

The landlord may be liable to the tenant for any damages that result from the landlord’s breach in warranty.   These damages may include the cost for alternative accommodations, moving expenses, and sustained personal injury or health damages.

For landlords who are leasing properties with Chinese Drywall, it is important to consider the statutory warranties made to tenants.  The existence of Chinese Drywall may be a breach of their warranties, and if so, landlords are likely liable to tenants for any ensuing damages.

Statutory Termination of the Lease

In addition to the landlord’s warranties, another area of Landlord/Tenant law implicated by Chinese Drywall regards the statutory termination of leases.

La. C.C. art 2714 provides that if a thing is lost or totally destroyed, without the fault of either party, the lease terminates and neither party owes damages to the other.  In the case of partial destruction or “substantial impair[ment], that is not the fault of the lessor, the tenant may dissolve the lease or reduce their rent.   If the lessor is at fault, the tenant may also seek damages.

What’s The Rub?

Chinese Drywall presents some interesting issues for Louisiana Landlord / Tenant law.   Is the existence of Chinese Drywall a vice or defect that breaches the landlord’s warranty, or a partial destruction or “substantial impairment” to the property?    Are landlords entitled to damages, or just dissolution of the lease?    Should the landlord relocate tenants to mitigate its damages?

As is the case with most Chinese Drywall scenarios, as to landlord/tenant laws, there are more questions than answered here.    Landlords and Tenants with Chinese Drywall should seek the counsel and advice of an attorney.

This blog is published by Wolfe Law Group, a construction law practice with offices in Seattle, WA and New Orleans, LA.

Thus far, the blog has focused a great deal on Louisiana news and law related to Chinese Drywall – and the reason is simple:  The amount of imported Chinese Drywall in Louisiana is second only to Florida.

Further, Chinese Drywall was by and large imported into Gulf Coast states like Florida, Louisiana, Mississippi, Georgia and Texas.

While the state of Washington is clearly worlds apart from the Gulf Coast region…it’s not out of the woods insofar as Chinese Drywall in concerned.  In fact, its among the 12 U.S. states who have imported at least 1 million pounds of tainted drywall from China since January 1, 2006.

A helpful graphic based on data published by the Herald Tribune shows that Washington has imported 2,437,491 pounds of Chinese Drywall since January 1 2006, which is enough to build approximately 270 homes.

As lawsuits gather stem in Florida and Louisiana, and across the Gulf Coast, Washington contractors and suppliers ought to remain viligent and cautious of Chinese Drywall claims.

Have questions about what to do if you installed or supplied tainted drywall?  We wrote an Avvo Legal Guide on the topic here…and you can always contact Wolfe Law Group.

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.

Across the county, each state has some type of statute or jurisprudential rule stating that every party to a dispute is burdened with the duty to “mitigate its losses.”   In addition to the legal requirements, this duty shows up contractually as well, and most famously in insurance contracts.

Here is what the Louisiana Civil Code says about mitigation in article 2002:

An obligee must make reasonable efforts to mitigate the damage caused by the obligor’s failure to perform.  When an obligee fails to make these efforts, the obligor may demand that the damages be accordingly reduced.

Earlier this week, we discussed whether builders were getting a “free pass” on the Chinese Drywall defect claims since most affected homeowners have thus far sought remedies through class-action litigation.   In essence, we were alluding to a question clearly posed by Donald Brenner at the Construction Litigation Law Blog:  How does a class action suit help me get the defective material out of my home?

Insofar as the Duty to Mitigate is concerned, how builders, suppliers and homeowners act now is important to how they will remedy this situation.

Sooner or later, insurance companies are going to get involved with these claims, and individual actions are going to be filed against builders and suppliers.   When this happens, there will be questions of whether each party has fulfilled their duty to mitigate.

Here are some example issues:

•  If the imported drywall causes health problems, and a builder / supplier knows it installed the drywall in certain homes.  Do they have a duty to notify the homeowner of the danger, to avoid the homeowner from getting sick or sicker?

•  If defective drywall has ruined approximately 10% of electrical wiring and 25% of the building studs as of today, who is liable for additional damage if the drywall stays in the home is allowed to continue damaging building elements?  In 2 years, if 75% of electrical wiring and 75% of building studs are ruined, is it the homeowners fault for not fixing the drywall problem when it arose?

•  Under the same scenario, will a homeowner be responsible for increased damage if they fail to report the problem to their builder to allow the builder to fix it at that time?

Contact A Construction Litigator

As Mr. Brenner discusses on the Construction Litigation Law Blog, class action suits may not help homeowners for years….or ever.   The simple phone call to a class-action attorney puts your name on their list, but those class action attorneys will not work to get your home repaired in the immediate future…and its likely that they will not help you take precautions as per your duty to mitigate.

Homeowners and condominium associations, contact your builder and exercise your rights under warranty and redhibitation laws while you still have time.

Builders and contractors, investigate your duties under warranty and defective construction laws, contact your insurer, and consider making claims against your suppliers and installers.

All in all, contact an experienced construction litigation attorney to get advice on how to deal with this volatile issue.

New Orleans’ Fox 8 has been reporting on the Chinese Drywall crisis as it’s appearing in Louisiana.   They recently turned the tables on the story, asking not about problems faced by homeowners, but those problems faced by builders, contractors, suppliers and other participants in the construction industry.

This has been a focus of Wolfe Law Group, who recently launched a practice group to advise and represent contractors and suppliers with regard to the Chinese Drywall crisis.   Fox’s Nancy Parker interviewed Scott Wolfe, Jr., partner at Wolfe Law Group, with respect to how contractors and suppliers are affected by the Chinese Drywall problem.

The story itself is here.  Here is a video from the newscast:

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.

Just last week, the Construction Law Monitor posted that the Chinese Drywall situation could possibly broaden in scope, and effect the states of Louisiana and Washington.

This evening, New Orleans’ WVUE reported on the first confirmed case of Chinese Drywall contamination in Louisiana, occurring in Pearl River, Louisiana, at the home of John Oertling and Jill Donaldson.

Louisiana’s Becnel Law Firm has already filed suit on behalf of the homeowners, a proposed class action, and the federal suit is now pending before the Honorable Zainey in the United States Eastern District Court of Louisiana (09-2981).

Discouraging news for contractors about the new suit, is Mr. Becnel’s (the plaintiff’s attorney) comments during his interview with the New Orleans new-station when asked who is being sued:

It’s against anybody who had a hand in it.

Encouraging news for contractors, however, is that Mr. Becnel may not mean precisely what he says, as the home in controversy was built by David Stewart Custom Homes…who are not named in the action.

We’ll update the Construction Law Monitor with updates on the Chinese Drywall situation, and this particular case, as news unfolds.  Further, we’ll soon post about what your company can do in the event it is named in one of these lawsuits.

For those interested, the case is officially captioned:

Jill M. Donaldson, wife of/and John “Jared” Oertling, on behalf of themselves and all others similarly situated v. Knauf Gips KG, Knauf Plasterboard Tianjin Co., Ltd., Taishan Gypsum Co., Ltd. f/k/a Shandong Taihe Dongxin Co., Ltd., USG Corporation, L&W Supply Corporation d/b/a Seacoast Supply, Interior Exterior Building Supply, Independent Builders Supply Association, Inc. and Rothchilt International Limited.

You can download a copy of the 55-page complaint here.