Should Louisiana homeowners be filing homeowner insurance claims for their Chinese Drywall damages?   The answer is complicated, but ultimately, our answer is yes.

Will There Be Coverage?

Over the past few months, we’ve discussed whether insurance companies will cover losses related to Chinese Drywall (See Insurance Coverage category).

Our predication was that claims would be denied based on Pollution Exclusions, and from what we’ve seen so far, insurance companies across the country are beginning to churn out these types of denial letters.

While the talk amongst insurers and adjusters is that these damages are not covered, an insurance company declaring something to be true does not make it so.   The applicability of the “pollution exclusion” will ultimately depend on a number of factors, some known and others currently unknown: (1) the language of the exclusion; (2) The scientific explanation behind the damages; and (3) Your home’s jurisdiction.

What The Blogosphere Says

A quick read of our blog, and you’ll know what we’re saying about homeowners insurance claims:  that insurers may very well be liable for these losses.   But what are some others in the country saying?

An August 2009 article from Inside Counsel has a long discussion (and quotes us!) about suits against homeowner insurers, and notes that the “pollution exclusion” may not be as clear as the insurance companies would like to believe.    The debate is lively in Florida according to the Herald Tribune.  Merlin Law Group’s Property Insurance Coverage Law Blog has a great post about both sides of the argument.

We suggested in the past that Louisiana homeowners may have a better case than homeowners in other states, because of Louisiana’s narrow interpretation of the pollution exclusions applicability.

What To Do…What To Do

This much is clear:  If you don’t file your insurance claim now (or soon), the time available to you to file the claim will pass.   How depressing it would be for homeowners who sat on their hands for this debate to reach a judge 12 or 14 months from now, and the decision to favor homeowners!

This can happen.

Many of the claims available to homeowners, builders, suppliers, subcontractors and other parties to this Chinese Drywall mess are based on a lot of legal mysteries.   How will the New Home Warranty Act be interpreted?   Will insurance policies exclude or cover losses?   Are actions against the suppliers already prescribed?

Who knows – in 12 months, we may know that builders are absolutely not liable in Louisiana, but insurers are, or vice versa.   Homeowners should file insurance claims against their casualty policies, and should file suit against the insurer after the claim is denied, because there very well may be coverage.   And with insurers denying all Chiense Drywall claims, pursuit of the claim through litigation is the only way to get paid.

Will My Premiums Increase?

This is something homeowners should discuss with their insurance agent.   However, it is very possible that premiums may be increased if you assert a claim for insurance coverage.   If the claim is paid, the payment will likely be used in calculating any rate increases.

If the Chinese Drywall loss was just a small $5k or $10k claim, there might be good reason to not file the claim.  However, some Chinese Drywall claims have $50k-100k or more in damages.  Depending on your financial stability, the risk of losing this amount may be greater than the risk of a future premium increase.

We Sue Insurers

Wolfe Law Group has filed suits against homeowners insurance companies related to Chinese Drywall damages, and we’d be happy to discuss filing suit against your insurer, too.    Learn more about our firm by reviewing this promotional brochure.

Late in July, “ClaimsJournal.com” published an online article titled:  “Chinese Drywall:  Builders and Subs Face Huge Uninsured Losses.“   The article’s author takes its reader through a number of hot-button issues related to the insurance coverage available to homeowners and builders for Chinese Drywall damages.

Calling the per house damages “astronomical,” the article warns that many builder and homeowner polices may exclude damages based on the pollution exclusion or the “your work” exclusion.

In the past, we’ve discussed insurance coverage issues and the pollution exclusion here at the Chinese Drywall Blog.

From our experience in dealing with homeowner and builder claims, it seems the insurance industry is positioning itself to deny coverage for contaminated drywall exposure.   But more troubling than this is that many homeowners and builders are taking this position as a matter-of-fact.

While there are certainly legal challenges to recover against insurance companies for these losses, the insurance companies face legal challenges in excluding coverage.   Homeowners and builders have two things on their side:  (a) The insurance company has the burden of proving the applicability of its exclusion; and (b) Any ambiguities will be interpreted against the insurance company.

Homeowners and Builders should not consider the exclusion of coverage as a foregone conclusion, and should place their insurer on notice of the claim.   While litigation may result in coverage applying to this loss, without a timely claim and a lawsuit to enforce the same, builders and homeowners will lose their rights.

In Louisiana, with a one-year prescriptive period ticking very quickly against drywall claims, the insurance company’s best argument against coverage is soon-to-come.

The Controversy and Uncertainty

This much is clear:  it is not certain how the courts will interpret insurance policies and insurance policy exclusions, as they apply to Chinese Drywall claims.

Many predict that the insurance industry will rely on what is called a “pollution exclusion” to deny Chinese Drywall insurance claims.

A South Carolina Construction Insurer, Contractor-Insure.com, makes this claim in a recent press release:

Most contractor General Liability insurance policies contain the Total Pollution Exclusion.  All claims adjusters who have been interviewed will take the position that the sulfur dioxide fumes released by the defective Chinese drywall are ‘pollution’ and as a result all legal defense and damages under the General Liability policy will be denied.

While the press release largely discussed builder general liability policies, the same controversy exists for homeowners insurance policies.

Further, the controversy and predication are proving to be true, as across the country there are already suits on the issue.

As already reported on the Chinese Drywall Blog, in Baker v. American Home Insurance Company, a homeowner sued their insurance carrier claiming coverage for Chinese Drywall claims.   In Builders Mutual v. The Dragas Company, a builder’s general liability insurer brought a declaratory judgment action to have a judge declare that Chinese Drywall damage was not insured.

The claimed exclusion:  Pollution.

Both suits are very important to homeowners with Chinese Drywall claims.   But for Louisiana homeowners….how will the issue be resolved?

Why Louisiana Is Different

Unlike in South Carolina and most other states, Louisiana has very narrowly interpreted the pollution exclusion.   We reviewed the applicability of the pollution exclusion to Louisiana insurance claims in a previous blog post here:  Home Builders v. Insurance Pollution Exclusion.

There, we quoted the seminal case in Louisiana on this subject titled Doerr v. Mobil Oil Corp.  The long and short of things:  “Using the Doerr analysis, it seems that builders or suppliers would not be considered a “polluter” within the meaning of the exclusion” in Chinese Drywall claims.

For homeowners with Chinese Drywall, and builders with potential exposure, this is welcome news.    While the issue remains unresolved, the Doerr decision at least gives homeowners and homebuilders hope that Chinese Drywall losses may be insured, and therefore, within reach.

The problem now?   Getting homeowners and home builders to timely make claims and pursue recovery.

On the Chinese Drywall Blog, we’ve talked about class action suits, individual suits against builders and suppliers, suits by builders against its suppliers, and other similar actions.

However, in Florida, one couple seeks to hold another party liable for their Chinese Drywall damages:  their own homeowners insurer.

The claim makes a great deal of sense, and it adds to the mystery of who will eventually be responsible for the Chinese Drywall damages.

The suit was brought in a Florida U.S. District Court, and is captioned Baker v. American Home Assurance Company, Inc., Middle District of Florida, No. 09-cv-188-FtM-99DNF.  (read here)

According to the complaint, the homeowners made a claim in December 2008 related to damages caused by Chinese Drywall.  The complaint describes the cause of the damage as coming from “drywall…emitting gases which have damaged the Subject Property and the contents therein.”

After inspection and testing, the insurer denied the claim for “contamination.”     The Baker complaint argues that the damages were not caused by “contaminants” as defined by the policy.

The policy at the center of the Baker action defines “contaminates” as follows:

An impurity resulting from the mixture of or contact with a foreign substance.

According to the complaint, there was not ‘mixture or contact with a foreign substantance,’ and therefore, the pollution exclusion would not apply.

The Baker exclusion is far less detailed then some of the other pollution exclusions found in Commercial General Liability policies…and therefore, may be interpreted differently.

If pollution exclusions in homeowners policies are generally less complex than GCL policies, it may be prudent for homeowners to make timely claims against their homeowner policies if they are faced with Chinese Drywall damages.

It’s too early to predict exactly who will be responsible for damages associated with Chinese Drywall, especially since so many parties are involved.   To rely simply on one remedy (i.e. a class action) is probably an irresponsible choice for homeowners faced with significant damages.

We’re likely to see a flood of suits in the coming months against builders, home insurers, suppliers and other responsible parties.   Home insurance policies will likely file subrogation claims against builders, suppliers and other parties as well.

We’ll monitor the Baker suit as it proceeds.  Stay tuned.

On April 22, 2009, the U.S. Fifth Circuit released an opinion in Nautilus Insurance Company v. Country Oaks Apartments, Ltd. that may bear some significant on the question of whether contractor GL insurance policies will cover Chinese Drywall claims.

Explaining The Suit

The suit required the appeals court to address the scope of the absolution pollution exclusion under Texas law.

The facts of the case are disturbing:  Suit was filed against a Commercial General Liability carrier for an apartment complex, where the Plaintiff lived.   During the policy period, works accidentally blocked the vent to the furnace in several apartments, exposing the plaintiff to carbon monoxide that would have otherwise been released outside.   The exposure affected the plaintiff’s pregnancy, and her child was born with difficulties.

The insurance company refused to pay the claim, contenting that the damage was caused by pollution and excluded under the policy’s absolute pollution exclusion.

That policy’s exclusion clause read as follows:

f. Pollution
(1) “Bodily injury” or “property damage” which would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of “pollutants” at any time.

The term “pollutant” was described as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes material to be recycled, reconditioned or reclaimed.”

Under Texas law, the US 5^th Circuit held that the pollution exclusion did apply to this loss, and that there was no insurance coverage under the policy for plaintiff’s claim.   The court summarized its holding as follows:

In sum, the emission of carbon monoxide from a furnace into an apartment unambiguously satisfies the pollution exclusion’s requirement of a “discharge, dispersal, seepage, migration, release, or escape.” It is irrelevant that a reasonable insured might not expect this result, or that, given sufficient imagination, we can think of ways – not presented here – in which enforcement of this exclusion would lead to absurd results. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994) (on rehearing, vacating its prior opinion) (“[N]either conflicting expectations nor disputation is sufficient to create an ambiguity.”

How Country Oaks Decision Applies to Chinese Drywall Claims

Many commentators (see here, here, and here) monitoring the Chinese Drywall situation predict that insurance claims related to the loss will be denied by insurers based on the absolute pollution exclusion.

From a review of the Country Oaks case just released by the 5^th Circuit, if property damage and bodily injury is caused by a “pollutant” from the Chinese Drywall…it seems likely that homeowners, builders and insurers will be in for a spicy legal argument over whether the exclusion does or does not apply.

However, how the Country Oak decision and reasoning applies to Chinese Drywall claims will depend largely on (a) Where the damage is incurred and claim is made; and (b) What exactly is causes the damages.

First, the Country Oak decision examines the absolute pollution exclusion under Texas law only (although it does comment on Mississippi law).   Under Texas interpretations of insurance contracts, the absolute pollution exclusion is given broad applicability, and therefore, the exclusion will more likely apply in Texas than in states with a stricter review of insurance exclusions and policies.

States, for example, like Louisiana.  As we reviewed just last week, Louisiana courts have taken a completely different approach from Texas to interpreting pollution exclusions.

According to Louisiana case law, since the pollution exclusion was drafted to apply to “environmental contaminants,” Louisiana courts have limited its applicability to such.   Read our in-depth analysis of Louisiana case law on pollution exclusions here.

The second factor that will determine the applicability of Country Oak is more scientific, relating to the actual cause of the damage.

Although most everyone involved with this crisis can recognize the symptoms of Chinese Drywall…we don’t yet have a definite cause.   Once science catches up in this area, the cause of the damages will be important in determining whether the pollution exclusion applies.     The more like a “pollutant” the cause – the more likely insurers will cite pollution exclusions.

As the Chinese Drywall crisis unfolded over the last few months, news reports were abound of class action litigation against large drywall manufacturers, but it appeared that builders were getting a “free pass” on liability.

Unfortunately, but inevitably, it appears the tide is changing.

Recently, the shoe dropped for Lennar Co., who was arguably the most predominate home building company facing Chinese Drywall claims.  While Lennar Co. made every attempt to thwart litigation, suit was formally filed against them just last week, and they are now preparing a defense and examining applicable exclusions in their insurance policies.

However, large building outfits like Lennar Co. or South Kendall Construction Corp. are no longer alone as builder-defendants in Chinese Drywall claims.

Here are some examples from across the affected areas.

Flannigan v. Stafford Custom Homes, Inc.

Last week, a news station in North Carolina reported that a couple with Chinese Drywall had filed suit against their local builder:  Stafford Custom Homes, Inc.

The plaintiff’s counsel in that case, Joel R. Rhine of Lea Rhine Rosbrugh & Chleborowicz was kind enough to share a copy of that complaint with the Chinese Drywall Blog, and its available to read here.

The complaint asserts the following claims against the homebuilder…and importantly, the homebuilder alone:

• Breach of Contract;
• Breach of Implied Warranties;
• Breach of Express Warranties;
• Negligence;
• Negligent Misrepresentation;
• Unfair and Deceptive Trade Practices

As mentioned, the suit against Stafford Custom Homes, Inc. is between the homeowner and the homebuilder only, and the plaintiffs did not bring suit against the subcontractor installer, the drywall supplier or the drywall manufacturer.

It will be interesting to watch this action progress, and especially to see how Stafford Custom Homes, Inc. defends itself in the case.   Likely, a claim will be made against Stafford’s General Liability insurance policy, and an argument will ensue about the applicability of the pollution exclusion clause.

Further, the builder will be well-served to take a page out of the Lennar Co. defense book, and file suit against its supplier, installer and the drywall manufacturer.

The case is in Wake Count, North Carolina, and is captioned Flannigan v. Stafford Custom Homes, Inc., General Court of Justice Superior Court Division, No. 09CV006759.

We’ll monitor this case as it moves forward.

Pronto v. Venture Supply, LLC, et al.

In Virginia, another couple has brought a claim against their contractor individually, as opposed to a class action, suit.  While the news report breaking the story doesn’t mention the contractors name, the couple also brought suit against Venture Supply, L.L.C., who is the purported supplier of the drywall.

Like Stafford Custom Homes, Venture Supply, L.L.C. is a self-proclaimed “locally owned” company.

The couple in this suit – Benjamin and Holly Pronto – are seeking more than $600,000 in damages associated with the Chinese Drywall contamination.

The estimate of damages by the Prontos is a haunting wake-up call to builders who have unknown exposure to Chinese Drywall claims.

Builders Mutual Insurance Company v. The Dragas Co.

This is another case out of Virgina, but unique in that here an insurance company has sued its insured.

The insured, The Dragas Co., is a Virginia builder who has installed Chinese Drywall in Virginia homes.

According to the report in The Virginian-Pilot, Dragas’ insurance company has denied coverage for Chinese Drywall damages, and has filed suit in federal court asking a federal judge to declare who is responsible for the drywall damages.  Download the Complaint here.

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…