A great deal has been written about Chinese, or imported, drywall, which was imported into the country and used in up to 100,000 homes between 2005 and 2007. The drywall was imported because of the shortages of building materials resulting from Hurricane Katrina re-building efforts going on at that time. There is a substantial debate right now over whether all of the imported drywall was installed in homes throughout the country, or whether much of it remains in warehouses. Some sources have estimated that it could have been installed in up to 100,000 homes, based only upon the number of board-feet imported and the average size of a new home being built at that time. Others estimate that only 16,000 homes contain imported drywall, a much smaller and more manageable exposure.
There are approximately 215 federal cases brought by homeowners as of November 1, 2009, alleging both property damage and bodily injury from exposure to Chinese drywall. As of that date, there were 197 state lawsuits involving Chinese drywall, the vast majority having been filed in Florida. The majority of the federal cases have been transferred, for pre-trial purposes, to the MDL court in New Orleans, in the Eastern District of Louisiana, presided over by Judge Eldon Fallon, where the proceeding is known as MDL 2047. Judge Fallon has taken charge of these cases, and has issued numerous pre-trial orders concerning the preservation of evidence, discovery protocols, and the submission of plaintiff profiles. He ordered that the plaintiffs serve a consolidated Master Complaint by December 9, 2009. Pre-trial Order Number 17 requires that the Master Complaint be served by that time because Knauf Tianjin has agreed to accept service of the Complaint, while preserving its ability to assert jurisdictional challenges.
Whether the Chinese drywall problem will be a “silent hurricane,” as some plaintiffs have dubbed it, or whether it will reflect a manageable exposure for the manufacturers, importers, distributors, subcontractors and home builders that were involved in the chain of home installation, insurance coverage will be one of the primary issues that a number of courts consider as allegedly responsible parties turn to their insurers to respond to these classic bodily injury and property damage claims, arising from an accident that no one could possibly have foreseen.
Currently, there are no reported cases on the availability of insurance coverage to respond to these claims – which also include claims for “personal injury” as defined in CGL policies. Several cases have been filed by insurers against policyholders seeking a declaration of no coverage for Chinese drywall claims. See, e.g., Builders Mut. Ins. Co. v. Dragas Mgt. Corp., et al., C.A. No. 2:09cv185 (E.D. Va. 2009); General Fidelity Ins. Co. v. Foster, et al., Case No. 09-80743 (S.D. Fla. 2009). None of these cases has resulted in any rulings on whether coverage is available – either for defense costs or indemnity. Among the issues that will determine the availability of coverage, the following seem to be the most likely to become the subject of motions practice in the near future, at least as reflected in reservation of rights letters sent to policyholders: (1) the “absolute” or “total” pollution exclusion, (2) the number of occurrences, (3) the “your work” exclusion, (4) the “your product” exclusion, (5) the “impaired property” exclusion, (6) the existence of an “accident,” and “occurrence,” as defined by the policies, and (7) the trigger of coverage. Insurers also may argue that remediating Chinese drywall homeowner claims before a suit is filed constitutes a “voluntary payment” or a payment made in the absence of a “legal obligation,” initiating coverage.
Despite the many exclusions and limitations insurers have asserted as a basis to avoid their coverage obligations (as to which they bear the burden of proof), insurers have overlooked that the underlying damage has arisen from a classic accident (or “occurrence”), and that most courts addressing these issues have found that the consequential property damage resulting from a defective product constitutes a covered “occurrence” sufficient to trigger the products/completed operations coverage in a general liability or umbrella policy. See Stanley Martin Cos. v. Ohio Cas. Group, 2009 WL 367589 (4th Cir. Feb. 12, 2009). Moreover, many courts addressing the possible applicability of the so-called absolute or total pollution exclusion have held that these exclusions were never intended to, and should not, bar coverage for losses arising from non-industrial sources of pollution. See, e.g., Pipefitters Welfare Educ. Fund v. Westchester Fire Ins. Co., 976 F.2d 1037, 1043 (7th Cir. 1992) (“Without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to some absurd results”); Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728, 732 (Wis. 1997); Sullins v. Allstate Ins. Co., 667 A.2d 617, 624 (Md. 1995). Granted, there are decisions contrary to these holdings, holding, for example, that bodily injury resulting from exposure to toxic floor sealant, after its application, is not covered due to the absolute pollution exclusion. Even those decisions, however, would not apply to bar coverage for property damage resulting from Chinese drywall, which is not toxic, is a common building product and was never considered to be harmful – in any form – before the recent homeowner reports of property damage and minor bodily injury (watery eyes, running noses and throat irritation). Insurers will have a hard time demonstrating that various forms of the pollution exclusion, adopted to address environmental, industrial pollution events, should be applied to bar coverage for damage resulting from the use of a common building product.
The battle lines now have been drawn in many federal and state courts, as well as the MDL. Insurers and policyholders will soon be engaged in discovery, motion practice, and trials over these pressing and undetermined issues.