MEALEY’S LITIGATION REPORT: Insurance
Vol. 23, #29 June 3, 2009
Commentary
Insurance Coverage For ‘Chinese Drywall’ Claims
By
John T. Waldron III
[Editor’s Note: John T. Waldron is a partner in the
Pittsburgh office of K&L Gates LLP, a law firm that
regularly represents policyholders in insurance coverage
disputes, including several policyholders in constructionrelated insurance coverage disputes. The views expressed
herein are those of the author and not necessarily those
of the law firm or its clients. This article is for informational purposes only and does not contain or convey
legal advice. The information herein should not be used
or relied upon in regard to any particular facts or circumstances without first consulting with a lawyer. This
article was adapted from John Waldron, Insurance Coverage for Chinese Drywall Claims, 45:1 TORT TRIAL &
INS. PRAC. L.J. (2009) (forthcoming). Reprinted with
permission of the American Bar Association.]
Recent news reports have publicized that numerous
houses — more than 100,000 homes, according to
some estimates1 — may contain drywall that was
designed, manufactured and processed in China and
that is alleged to be defective and causing property
damage to the houses and their contents. Of even
greater concern, certain homeowners are alleging
bodily injury as a result of the emission of gases from
the drywall.
For instance, on March 3, 2009, Jill M. Donaldson
and her husband, John “Jared” Oertling, filed a putative class action on behalf of Louisiana homeowners whose homes were built using so-called “Chinese
drywall.”2 Specifically, the plaintiffs alleged that
the drywall “is defective and emits levels of sulfur,
methane and/or other volatile organic chemical
compounds that cause corrosion of HVAC coils
and refrigerator units, certain electrical wiring and
plumbing components, and other household items,
as well as create noxious, ‘rotten egg-like’ odors.”3
In addition to these allegations of property damage,
the plaintiffs asserted that the drywall causes bodily
injury, including “allergic reactions, coughing, sinus and throat infection, eye irritation, respiratory
problems and other health concerns.”4 Other class
action suits have been filed in Florida, Ohio, Louisiana, Alabama, and Mississippi and make similar
allegations.5
These class actions have in turn led to litigation
between a homebuilder and the manufacturers and
distributors of the Chinese drywall.6 Additional
homebuilders presumably will seek to pass the costs
of the drywall claims further up the supply chain.
In response to the damage and injury allegedly arising from the Chinese drywall, insureds may begin
to seek coverage from their insurance carriers under
(depending on the insured) liability and property
insurance policies. In response to these requests for
coverage, insurers can be expected to raise a number of coverage defenses. Ultimately, a significant
amount of coverage litigation between policyholders
and insurers is likely to ensue.
For instance, on March 30, 2009, owners of a home
in Florida filed a complaint for breach of contract
against AIG under their homeowner’s policy, seeking
coverage for the property damage caused by the emitting of gases from their drywall.7 The homeowners
in particular seek a judgment that the “pollution or
contamination” exclusion, on which AIG based its
denial of the claim, does not apply.
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Vol. 23, #29 June 3, 2009
As discussed further below, insureds under liability
and property policies should examine their policies
closely to determine whether coverage may exist for
the losses and/or liabilities arising out of Chinese
drywall claims, including the cost of defending themselves against such claims.
I.
Liability Insurance In Response
To Drywall Claims
Depending on the facts and specific policy language
at issue, policyholders faced with liability from
drywall claims may be able to protect themselves
by accessing their insurance coverage under both
(i) bodily injury and property damage liability coverage, and (ii) personal injury liability coverage.
A.
‘Bodily Injury’ And ‘Property
Damage’ Liability Coverage
To determine whether insurance is available under
bodily injury and property damage liability coverage, there are several key questions that must be
addressed, including: (1) what is the appropriate
trigger of coverage? (2) were the damages at issue
expected or intended? (3) does the pollution exclusion apply? and (4) do the so-called “business risk”
exclusions apply?
1.
Trigger Of Coverage
The trigger-of-coverage issue involves the question of
which policy periods’ insurance policies are responsible for covering a particular claim. Depending on
the facts involved, there are several different theories
of the “trigger of coverage” that potentially may be
applicable to drywall-related claims. For instance,
because the drywall presumably was introduced into
the property at a specifically-identifiable point in
time, a party could contend that the policies on the
risk at that point of the “initial exposure” should be
triggered.8 If the claimants were exposed to gases
from the drywall over multiple policy periods, all of
the policies on the risk during those periods would be
triggered under an “exposure” theory.9 If the alleged
personal injuries of the claimants were diagnosed or
became reasonably capable of medical diagnosis at a
specific point in time (or an analogous analysis for any
alleged property damage), the policies on the risk at
that time would be triggered under a “manifestation”
trigger of coverage.10 Finally, if the house and its inhabitants were continuously exposed to gases emitted
from the drywall and, during and after that period of
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exposure, developed progressively worsening damage or injury as a result of that continuous exposure,
then all of the policies on the risk from the time of
the initial exposure through the manifestation of the
alleged damage or injury could be triggered under a
“continuous injury trigger” theory.11 Determining
which trigger-of-coverage theory applies may depend
on the specific policy language at issue, the intent
of the parties in using that language, the individual
facts of the case, and applicable state insurance law.
When determining which particular liability insurers
are potentially responsible for covering these types of
claims and thus which insurers should be placed on
notice of the claims, consideration should be given to
each of the foregoing trigger theories.
2.
The ‘Expected Or
Intended’ Exclusion
In an effort to avoid their coverage obligations, insurers may contend that the injuries allegedly suffered
by the claimants are excluded because the policyholders allegedly knew or should have known that
the drywall would deteriorate prematurely and lead
to the emission of certain chemicals. In response,
policyholders have two primary arguments that they
should assert in rebuttal.
First, policyholders may assert that the question is
not whether they knew about the alleged presence
of certain chemicals in the drywall, but whether they
knew that that condition would cause the specific
bodily injury and property damage allegedly suffered
by the claimants.12 Second, policyholders may argue
that a loss is covered even if a court were to find that
they reasonably should have known that the use of
Chinese drywall would cause damage, so long as they
did not actually know that damage would ensue.13
Obviously, whether a particular policyholder actually
knew that the use of such drywall would cause bodily
injury or property damage in a given instance is a
fact-specific inquiry that will vary from case to case.
Policyholders should be sensitive to the above arguments as the facts are developed in their defense of
specific cases so that they may maximize their ability
to withstand an insurer’s contention that the injuries
suffered by the claimants were expected or intended.
3.
The Pollution Exclusion
In addition to their assertion that the injuries at is-
MEALEY’S LITIGATION REPORT: Insurance
sue were expected or intended, insurers may raise the
so-called “pollution exclusion” as a defense to drywall
claims. Several decisions involving indoor air quality,
including cases involving exposure to carbon monoxide, carbon dioxide, and other gases, may provide
insight into how courts will handle denials by insurers of drywall-related claims based on the pollution
exclusion.
A typical pollution exclusion commonly provides
that coverage is excluded for bodily injury and property damage:
arising out of the discharge, dispersal, release
or escape of smoke, vapors, soot, fumes,
acids, alkalis, toxic chemicals, oil, or other
petroleum substances or derivatives (including any oil refuse or oil mixed with waste),
liquids or gases, waste materials or other
irritants, contaminants or pollutants into
or upon land, the atmosphere or any water
course or body of water.14
Policyholders can attack the application of this and
similar exclusions on four principal grounds. First,
an insured may assert that, as a threshold matter, such
“pollution” exclusions apply only, if ever, to cases of
industrial environmental pollution, and are clearly
inapplicable to cases involving indoor air quality.15
Second, an insured may contend that the inside of a
house or other building does not constitute the “atmosphere” or “land” for purposes of this exclusion.
Third, an insured may similarly argue that the emission of “gases” from drywall is not the kind of “gases”
or “other irritants, contaminants or pollutants”
intended to fall within the scope of the pollution
exclusion.16 Finally, an insured may contend that the
emission of gases from drywall does not constitute
“discharge, dispersal, release or escape” within the
meaning of the pollution exclusion.
a.
Vol. 23, #29 June 3, 2009
Fire Ins. Co., the United States Court of Appeals for
the Seventh Circuit examined the limits of the terms
“irritant” and “contaminant” in the pollution exclusion.17 The court explained:
The terms “irritant” and “contaminant,”
when viewed in isolation, are virtually
boundless, for “there is virtually no substance
or chemical in existence that would not irritate or damage some person or property.”
. . . Without some limiting principle, the
pollution exclusion clause would extend far
beyond its intended scope, and lead to some
absurd results. To take but two simple examples, reading the clause broadly would bar
coverage for bodily injuries suffered by one
who slips and falls on the spilled contents
of a bottle of Drano, and for bodily injuries
caused by an allergic reaction to chlorine in
a public pool. Although Drano and chlorine
are both irritants or contaminants that cause,
under certain conditions, bodily injury or
property damage, one would not ordinarily
characterize these events as pollution.18
Under Pipefitters, the determinative factor, the court
explained, is whether a reasonable policyholder
would characterize the hazard as “pollution.”19 If the
answer is no, then the court should find the policy
ambiguous and construe its language in favor of
coverage.20
The reasoning of the court in Pipefitters is frequently
cited in decisions that attempt to put reasonable
limits on the broad interpretation of pollution exclusions proffered by insurers. Under Pipefitters, courts
shift their focus to the reasonable expectations of the
insured. If a court concludes that a reasonable insured would expect coverage, then it should find the
policy language ambiguous and construe it reasonably in favor of coverage.
Insureds’ Reasonable
Expectations Of Coverage
b.
The Pollution Exclusion
For Claims Based On
As Limited To Instances
Indoor Air Quality
Of Industrial
In determining the applicability of the pollution
exclusion, many courts refer to the “common sense”
approach, which focuses on the reasonable expectations of the insured. For instance, in a frequently
cited case, Pipefitters Welfare Educ. Fund v. Westchester
Environmental Pollution
Courts frequently hold that the pollution exclusion
is intended to apply only, at most, to instances of
industrial environmental pollution. For instance,
relying in part on Pipefitters, the Maryland Court of
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Vol. 23, #29 June 3, 2009
Appeals, in Sullins v. Allstate Insurance Co., held that
the pollution exclusion did not apply to injuries resulting from exposure to lead paint.21 Examining the
historical development of the pollution exclusion,
the court concluded that the insurance industry’s
intention “was to exclude only environmental pollution damage from coverage.”22 This result was further
evidenced by the use of the words “discharge, “dispersal,” “release,” “escape,” “contaminant,” and “pollutant.” These terms, according to the court, “are terms
of art in environmental law,” further supporting its
conclusion that the pollution exclusion is limited to
instances of environmental pollution.23 Hence, the
exclusion was found inapplicable to injuries arising
from indoor lead paint exposure.24
Another series of decisions, discussing the applicability of the pollution exclusion to releases of carbon
monoxide and carbon dioxide, have similarly limited
the scope of the exclusion.
For example, in Donaldson v. Urban Land Interests,
Inc., the Wisconsin Supreme Court held that the pollution exclusion was ambiguous when applied to the
buildup of carbon dioxide in a “sick building” case
and, consequently, did not bar coverage.25 In reversing the lower court’s unanimous ruling that carbon
dioxide is a “pollutant,” the court relied on Pipefitters’
“reasonableness limitation” on the pollution exclusion.26 As Pipefitters explained, injuries resulting from
everyday activities “gone slightly, but not surprisingly
awry” necessitate a finding that the pollution exclusion clause is ambiguous “because [the insured] could
reasonably expect coverage” for injuries from carbon
dioxide buildup.27 The court focused on the fact that
“unlike the nonexhaustive list of pollutants contained
in the pollution exclusion clause, exhaled carbon dioxide is universally present and generally harmless in
all but the most unusual circumstances.”28
Similarly, the United States Court of Appeals for the
Second Circuit, in Stoney Run Co. v. Prudential-LMI
Commercial Ins. Co., held that the release of carbon
monoxide into an apartment was not the type of
environmental pollution contemplated by the pollution exclusion clause.29 This finding was based on the
court’s review of New York law, which interprets the
pollution exclusion to apply “only to environmental
pollution, and not to all contact with substances that
can be classified as pollutants.”30 This determination
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supported a finding of ambiguity resulting in coverage for the insured.31
In another case involving carbon monoxide, the Supreme Court of Illinois refused to apply the pollution
exclusion to injuries stemming from the accidental
release of carbon monoxide fumes emitted from a
faulty furnace.32 In that case, the insurer argued that
carbon monoxide is defined as “a colorless odorless
very toxic gas” and regulated by the federal government as a “pollutant” under the Clean Air Act,
and hence that the pollution exclusion should bar
coverage.33 The court though was chiefly concerned
with what it “perceive[d] to be an overbreadth in the
language of the exclusion as well as the manifestation
of an ambiguity which results when the exclusion
is applied to cases which have nothing to do with
‘pollution’ in the conventional, or ordinary, sense
of the word.”34 The court agreed with the insured’s
argument that, in the absence of a Pipefitters-type
limitation, the exclusion is so expansive that “the
terms ‘irritants’ and ‘contaminants’ could even be
applied to such everyday elements as water and air.”35
In finding coverage, the court agreed with those
cases restricting the exclusion’s “otherwise limitless
application” to only those “hazards traditionally associated with environmental problems.”36 This result
was premised on the court’s “review of the history of
the pollution exclusion” which demonstrated that
“the predominate [sic] motivation in drafting . . .
[the exclusion] was the avoidance of the ‘enormous
expense and exposure resulting from the explosion of
environmental litigation.’”37
The common thread in each of these cases is the
courts’ unwillingness to extend the pollution exclusion beyond its intended meaning, despite the broad
interpretation of the exclusion advanced by the
insurers.38
The applicability of indoor air quality cases to drywall
cases is unclear. However, some of these decisions
may be instructive. For instance, the emission of
gases from drywall may be analyzed under the Pipefitters and Donaldson approaches. Under Pipefitters, a
court must determine whether a reasonable insured
would consider the emission of gases from drywall to
fall within the meaning of the exclusion. Under Donaldson, a court would focus on the fact that certain of
the chemicals in question occur naturally and are not
MEALEY’S LITIGATION REPORT: Insurance
typically considered to be “pollutants” by reasonable
insureds. Under either analysis, a court should find
that the pollution exclusion does not apply to bodily
injury or property damage arising out of the use of
Chinese drywall.
c.
Vol. 23, #29 June 3, 2009
Relying on the testimony of the insurer’s expert that
the growth of mold bodies resulted in the dispersal of
reproductive spores into the air, the court concluded
that the exclusion applied to damage in an apartment complex caused by the airborne transmission
of spores.43
What Constitutes
‘Discharge,’ ‘Dispersal,’
Or ‘Release’ Under
The Pollution Exclusion
The question of whether the emission of gases from
drywall involves a “discharge,” “dispersal,” or “release” as those terms are used in the pollution exclusion represents another challenge facing the courts.
To date, in analyzing arguably analogous contexts,
the courts have not provided clear guidance as to how
this challenge will be resolved.
For instance, in Leverence v. United States Fid. &
Guar., the Court of Appeals of Wisconsin held that
the formation of mold over time in the walls of a residence did not constitute a release of contaminants.39
In Leverence, the plaintiffs were purchasers of numerous homes built by the policyholder who alleged that
the homes were defectively designed and constructed
by the policyholder. The plaintiffs alleged that these
defects resulted in the retention of excessive moisture within the homes’ exterior walls, causing mold,
mildew, fungus, spores and other toxins to form and
grow. The plaintiffs thus sued both the policyholder
and its liability insurers under Wisconsin’s direct action statute.
Certain insurers argued that coverage was excluded
under the pollution exclusion. According to these
insurers, the requirement of a “release” of contaminants was satisfied because the trapping of the water
vapor in the exterior walls would allegedly result in
the production of airborne contaminants through a
rotting process.40 Rejecting the insurers’ reliance on
the pollution exclusion, the Leverence court held that
“[n]o contaminants were released, but rather formed
over time as a result of environmental conditions.”41
In contrast to the decision in Leverence, the court
in Lexington Ins. Co. v. Unity/Waterford-Fair Oaks,
Ltd. recently rejected the policyholder’s argument
that mold damage did not result from a “release,
discharge, escape or dispersal” under a pollution
exclusion contained in a property insurance policy.42
In addition to the few cases that have addressed the
requirement of a “release, discharge, escape or dispersal” in the context of mold-related claims, several
courts have addressed this issue in the context of
indoor air quality claims and have held that these
policy terms should be narrowly construed and were
not intended to apply to such claims. These decisions
illustrate the courts’ focus on the history of the pollution exclusion in determining the intent of terms
“discharge,” “dispersal,” and “release.”
For example, in Island Assoc. v. Eric Group, Inc., the
court explained that the pollution exclusion does
not bar coverage for fumes confined to a small area
within a worksite because such fumes had not been
“discharged, dispersed, [or] released.”44 In doing so,
the court stated:
Without belaboring the obvious, we hold
that this exclusion is intended to shield the
insurer from the liabilities of the insured to
outsiders, either neighboring landowners or
governmental entities enforcing environmental laws, rather than injuries caused by
toxic substances that are still confined within
the area of their intended use.45
Lending further support to the court’s holding was
the fact that the operative terms “discharge,” “dispersal,” “release” and “escape” constitute “environmental
terms of art.” Hence, the pollution exclusion is limited, at most, to certain discharges of pollutants in
the industrial environmental context.46
Similarly, the United States Court of Appeals for the
Sixth Circuit has also refused to classify the presence
of fumes in a manufacturing plant as a discharge,
dispersal or release.47 In that case, the policy terms
at issue excluded coverage for damages arising out of
“the discharge, dispersal, release or escape” of pollutants “into or upon land, the atmosphere, or any
watercourse or body of water.”48 In construing the
meaning of these terms, the court noted:
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Vol. 23, #29 June 3, 2009
A “discharge” is defined as “a flowing or issuing out.” To “disperse” is defined as “to cause
to breakup and go in different ways”; “to
cause to become spread widely.” A “release”
is defined as “the act of liberating or freeing:
discharge from restraint.” An “escape” is
defined as an “evasion of or deliverance from
what confines, limits, or holds.”
The fumes and dust leading to the injuries at issue were confined to the inside of the plant, to the
area where the injuries occurred.49 Thus, based on
the intent of these terms, the court found that the
presence of the fumes and dust in the air inside the
plant did not fall within the scope of the pollution
exclusion:
It strains the plain meaning, and obvious
intent of the language to suggest that these
fumes, as they went from the container to
[the injured’s] lungs, had somehow been
“discharged, dispersed, released or escaped.”
Or considering that the fumes were confined
to [the injured’s] work area, that they had
been discharged into the “atmosphere,” as
that word is ordinarily understood.50
Given the limited case law applying the pollution
exclusion to indoor air quality claims, it is difficult to
predict with certainty how a court would respond to
an insurer’s reliance on that exclusion under differing
factual scenarios. Nevertheless, based on the favorable case law rejection the insurers’ assertion of the
pollution exclusion in the indoor air quality cases,
policyholders may succeed in defeating the insurers’
anticipated attempt to evade coverage for drywallrelated claims based on this exclusion.
4.
The So-Called ‘Business
Risk’ Exclusions
When faced with any coverage claims arising out of
their policyholders’ products or completed operations, insurers will often rely upon so-called “business risk” exclusions in their policies as a basis to
deny coverage. Indeed, insurers have advanced interpretations of these exclusions that are so broad that
they render the supposed coverage “nearly illusory.”51
Policyholders can protect themselves from unreasonable interpretations of these often-ambiguous exclusions by taking note of the various court decisions
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that have set forth the limits of these exclusions’
application.
a.
‘Own Product’ Exclusion
In cases involving products manufactured or supplied by the policyholder, insurers routinely assert
that coverage for property damage arising from the
products is barred by the “own product” exclusion. A
common version of this exclusion states that coverage
does not apply “to property damage to the named
insured’s products arising out of such products or any
part of such products.”52
The primary debate that arises as insurers attempt
to bar coverage through application of the “own
product” exclusion is whether and to what extent
the property damage that exists constitutes property damage to the named insured’s product. In the
context of drywall-related claims, the insurers will
contend that the own product exclusion precludes
coverage for the drywall itself. Policyholders and
insurers often engage in disputes over whether such
exclusion excludes simply the material cost of such
product or whether the costs of replacing or repairing
the product are also excluded.
Courts that have addressed the “own product” exclusion have generally agreed either that it did not
apply at all or that it applied only to the cost of the
material of the new product itself, and not to the
costs involved in replacing the product or the larger
system using the product. For instance, in Stonewall
Ins. Co. v. Asbestos Claims Mgmt. Corp.,53 the United
States Court of Appeals for the Second Circuit
ruled, in an asbestos property-damage case, that the
own-product exclusion did not apply because the
underlying claimants were seeking to recover for
damage to property other than the policyholder’s
asbestos products, such as the damage to the building structures in which the policyholder’s products
were installed.54
Similarly, in Pittway Corp. v. Am. Motorists Ins. Co.,55
the insured manufactured valves used in the assembly
of hair spray cans, which ultimately were shown to
be defective and to lead to leakage. The hair spray
cans were useless without the valves and were thus
scrapped. The insurer argued that the only property damaged was the policyholder’s valves, and thus
that the own-product exclusion precluded coverage.
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Vol. 23, #29 June 3, 2009
Rejecting the insurer’s position, the court held that,
“where a component part is so intertwined with the
entire mechanism that the defect necessarily results
in damage to the completed product the component
will be deemed to have caused property damage.”56
Having concluded that property damage occurred,
the court awarded damages for the costs of the lost
hair spray cans, less the costs of the defective valves
(which were precluded from coverage).
damages claimed for the withdrawal, inspection, repair, replacement, or loss of use
of the named insured’s products or work
completed by or for the named insured or
of any property of which such products or
work form a part, if such products, work or
property are withdrawn from the market or
from use because of any known or suspected
defect or deficiency therein.60
Depending on the court’s trigger-of-coverage theory,
a policyholder may succeed in arguing that there
simply is no property damage to its product at all.
For instance, under an installation-trigger theory, the
moment in time at which the policyholder’s product
was installed into the larger whole is chosen as the
trigger date because the larger whole is deemed to be
diminished in value or made useless as soon as the
product was physically linked with it.57 At the precise moment of installation though, according to this
view of “property damage,” the policyholder’s product itself has not yet incurred any property damage
because the product has incurred neither a physical
impairment nor a diminution in value as a result of
installation. Therefore, courts applying the installation trigger may conclude that the own-product
exclusion is inapplicable because there is no property
damage to the product to serve as a basis for application of the exclusion.
With the addition of the definition of “impaired
property”61 in the 1986 and subsequent versions of
the standard-form CGL policy, the “sistership” exclusion was rewritten to preclude coverage for:
In conclusion, the own-product exclusion seems
ill-suited to handle the complexities involved in
some of the drywall-related claims. Given the wellestablished rules that exclusions are to be interpreted
narrowly58 and that the burden of proof is on insurers to establish their applicability,59 courts should
continue to hold that the own-product exclusion
either does not apply at all to the damages sought by
the underlying claimant or, at most, is limited to the
property damage to the policyholder’s product itself
(narrowly defined) and does not bar coverage for the
costs associated with exchanging the failed drywall
at issue.
b.
‘Sistership’ Exclusion
In addition to the own-product exclusion, insurers
faced with claims for coverage of drywall-related
liabilities may assert that the “sistership” exclusion
precludes coverage. The standard 1973 version of the
“sistership” exclusion bars coverage for:
“Damages” claimed for any loss, cost or
expense incurred by the insured or others
for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment,
removal or disposal of:
(1) “Your product”;
(2) “Your work”; or
(3) “Impaired property”;
If such product, work or property is withdrawn or recalled from the market or from
use by any person or organization because
of a known or suspected defect, deficiency,
inadequacy or dangerous condition in it.62
The sistership exclusion is ambiguous when applied
to the typical facts surrounding drywall-related liabilities. For instance, in the class-action suits filed to
date, gases are alleged to be emitted from the drywall,
resulting in alleged property damage to the drywall
itself and to the building into which it was installed
(and the building’s contents). The drywall presumably will be exchanged for a different type of drywall
to prevent further property damage. Other buildings
in which Chinese drywall has been installed may be
similarly exchanged, even before property damage
has become apparent. In attempting to determine
whether the sistership exclusion applies in this context, several questions arise, including:
(1) whether the switch from Chinese to different drywall constitutes a “withdrawal,
inspection, repair, replacement, or loss of
use”;
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Vol. 23, #29 June 3, 2009
(2) whether the Chinese drywall was “withdrawn or recalled from the market or from
use”; and
(3) whether the Chinese drywall was so withdrawn because of any known or suspected
“defect or deficiency therein.”
Given all of these undefined terms with less than
clear meanings, it is difficult to apply the sistership
exclusion to the Chinese drywall claims.
Even assuming arguendo that these undefined terms
are not ambiguous, the possible application of the sistership exclusion should be limited to those cases in
which the drywall has not yet failed. The language of
the sistership exclusion provides that it applies only
“if such products, work or property are withdrawn
from the market or from use because of any known
or suspected defect or deficiency therein.” Based on
this language, the courts that have addressed this
exclusion have consistently held that the sistership
exclusion does not preclude coverage when property
damage has already been caused by the policyholder’s
product.
For instance, in Int’l Envt’l Corp. v. Nat’l Union Fire
Ins. Co.,63 the policyholder supplied fan coil units
that were installed in a larger heating, ventilation,
and air conditioning system in a building. The
system subsequently failed allegedly because of the
policyholder’s component part. Consequently, the
policyholder was potentially liable for the cost of
investigation, the cost of repairing water damage,
and the cost of repairing faulty pipes.64 The insurer
denied coverage based on the sistership exclusion.
Rejecting the insurer’s position, the court held that
the exclusion did not apply to the repair or replacement of products that had already failed, because
such costs were “simply a measure of the property
damage incurred.”65
In addition to requiring that no product failure have
occurred, the majority of courts that have addressed
the 1973 version of the sistership exclusion holds
that the exclusion applies only if the recall at issue
was commenced voluntarily by the policyholder,
not compelled by any third party. For instance,
in the leading case of Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co.,66 a soup manufacturer recalled
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its soup because the soup incorporated allegedly
contaminated noodles made by the policyholder.
The insurer denied coverage based on the sistership exclusion. However, given that the purpose
of insurance was to protect the policyholder from
third-party claims for damages caused by its product, it would render the coverage “nearly illusory”
to conclude that the sistership exclusion included
recalls instituted by third parties.67 Therefore, the
New York Court of Appeals held that the sistership
exclusion did not apply.68
c.
‘Failure To Perform’
Exclusion
The 1973 ISO standard-form CGL policy contains a
so-called “failure to perform” exclusion that provides
that the insurance does not apply:
to loss of use of tangible property which
has not been physically injured or destroyed
resulting from
(1) a delay in or lack of performance by or on
behalf of the named insured of any contract
or agreement, or
(2) the failure of the named insured’s product
or work performed by or on behalf of the
named insured to meet the level of performance, quality, fitness or durability warranted or represented by the named insured;
but this exclusion does not apply to loss of
use of other tangible property resulting from
the sudden and accidental physical injury
to or destruction of the named insured’s
products or work performed by or on behalf
of the named insured after such products or
work have been put to use by any person or
organization other than an insured.69
Faced with claims for coverage of drywall-related liabilities, insurers may attempt to deny coverage on
the basis of this failure-to-perform exclusion. However, the exclusion is generally inapplicable.
First, the failure-to-perform exclusion is generally
inapplicable to drywall that has not failed. Given
that they are successfully serving their purpose, drywall that has not failed should be considered to be
MEALEY’S LITIGATION REPORT: Insurance
“meet[ing] the level of performance, quality, fitness
or durability warranted or represented by the named
insured.”70 Second, the exclusion typically will not
apply to drywall that has in fact begun to emit gases,
because these emissions may cause physical injury to
the surrounding components of the wall and to the
contents of the building into which the drywall has
been installed. By its express language, the exclusion
does not apply to property that has been physically
injured.
Thus, in the absence of a “delay in or lack of performance by . . . the named insured of any contract,”
it is difficult to conceive of a loss of use of property
for which the failure-to-perform exclusion would
preclude coverage in the context of a drywall-related
claim. Nevertheless, even if the exclusion were to
apply to the loss of use of property, the exclusion
is subject to an exception where that loss of use
resulted from the sudden and accidental physical
injury to the policyholder’s products after such
products have been put to use by someone other
than the policyholder. This exception may preclude
applicability of the failure-to-perform exclusion to
drywall-related liabilities. First, with respect to liability insurance, the drywall has almost always been
put to use by someone other than the policyholder
at the time of the physical injury to the drywall.
Second, the emission of gases that cause the loss of
use of the other property may be considered to constitute “sudden and accidental physical injury” to the
drywall.71 For instance, many courts that have addressed the phrase “sudden and accidental” in other
contexts have concluded that the phrase refers to
damage that is unexpected and unintended, whether
the damage occurs abruptly or gradually over time.72
In these jurisdictions, assuming that damage to the
drywall is unexpected and unintended, the “sudden
and accidental” exception may prevent application
of the failure-to-perform exclusion. Even in those
jurisdictions in which the term “sudden” has been
given a temporal meaning,73 the abrupt nature of the
emission of gases at issue in drywall-related cases74
may similarly preclude insurers from relying on the
failure-to-perform exclusion to bar coverage.
Vol. 23, #29 June 3, 2009
d.
‘Impaired Property’
Exclusion
ISO took the failure-to-perform exclusion from its
1973 standard-form CGL policy, revised it, and
inserted the new exclusion, known as the “impaired
property” exclusion, in its 1986 and subsequent versions of its standard-form CGL policy.75
The impaired-property exclusion commonly provides
that coverage is excluded for:
“Property damage” to “impaired property”
or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in “your product” or
“your work”; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract
or agreement in accordance with its
terms.
This exclusion does not apply to the loss of
use of other property arising out of sudden
and accidental physical injury to “your product” or “your work” after it has been put to
its intended use.76
The term “impaired property” is defined in the 1986
and current ISO forms as:
tangible property, other than “your product”
or “your work,” that cannot be used or is less
useful because:
a. It incorporates “your product” or “your
work” that is known or thought to be
defective, deficient, inadequate or dangerous; or
b. You have failed to fulfill the terms of a
contract or agreement;
if such property can be restored to use by:
Accordingly, insurers should generally not succeed
in their attempts to apply the failure-to-perform
exclusion to exclude coverage for drywall-related
liabilities.
a. The repair, replacement, adjustment
or removal of “your product” or “your
work”; or
9
Vol. 23, #29 June 3, 2009
b. Your fulfilling the terms of the contract
or agreement.77
Despite the reworking by ISO of this exclusion, the
impaired-property exclusion appears hopelessly ambiguous in the context of drywall-related liabilities.
For instance, it is unclear whether the exclusion applies solely to loss of use of property that has not been
physically injured. If so, like the original failure-toperform exclusion, the effect of the impaired-property exclusion should be minimal. Similarly, like the
sistership exclusion, the undefined terms contained
in the impaired-property exclusion, including terms
in the definition of “impaired property,” make it exceedingly difficult to determine whether the drywallrelated claims fall within the scope of the exclusion.
Consequently, it is not surprising that courts have
found the impaired-property exclusion and similar
provisions to be ambiguous.78
Even if found unambiguous, the impaired property
exclusion, like the so-called “business risk” exclusions generally, should not apply, at a minimum,
to tort damages caused by the policyholder and its
drywall product. For instance, in Glens Falls Ins. Co.
v. Donmac Golf Shaping Co.,79 the policyholder was
sued for breach of contract and negligence by a land
developer when it erroneously built for that developer a project partly on federal wetlands without the
proper permits. The policyholder sought coverage
for the developer’s suit, which sought recovery for
the developer’s expenses in restoring and preserving the damaged wetlands, elimination of certain
encroaching areas of the project, and the resulting
diminution in the fair market value of the property.
The insurer denied coverage, contending, inter alia,
that the damages sought arose out of a deficiency in
the policyholder’s work and therefore were excluded
under the impaired property exclusion. Because
these damages constituted “‘an independent injury
over and above the mere disappointment of [the underlying] plaintiff’s hope to receive his contracted-for
benefit,’”80 the court rejected the insurer’s attempt to
apply the impaired property exclusion and held that
these tort damages were in fact covered.81
In addition, by its express terms, the term “impaired
property” includes only tangible property that “can
be restored to use by . . . [t]he repair, replacement,
adjustment or removal of ‘your product.’” In certain
10
MEALEY’S LITIGATION REPORT: Insurance
instances of drywall-related failures, the loss of use of
the property at issue may be the result of a combination of multiple causes, and the policyholder’s product
may be only one of those causes. In this situation, the
repair or replacement of the policyholder’s product
may not “restore[] to use” the tangible property at issue because, as a result of the other alleged defects and
negligence, the property may still be useless or less useful. Consequently, if the policyholder in this example
tendered the defense of the underlying complaint to
its liability insurer, the insurer should be precluded
from denying its duty to defend on the grounds of the
“impaired property” prong of the impaired property
exclusion because, even if the policyholder’s product
were repaired or replaced, the property at issue would
not be restored to use. Thus, where repair or replacement of the policyholder’s product alone does not
restore to use the property at issue, the “impaired
property” definition is not satisfied and the impaired
property exclusion may not apply.
Finally, as in the context of the failure-to-perform
exclusion, even if the impaired-property exclusion
were to apply to the loss of use of property in a given
case, the exclusion is subject to an exception where
that loss of use resulted from the sudden and accidental physical injury to the policyholder’s products
after such products had been put to their intended
use. This exception may preclude applicability of the
impaired-property exclusion to drywall-related liabilities because (i) the drywall has almost always been
put to its intended use by the time of the physical
injury to the drywall, and (ii) the emissions of gases
that cause the loss of use of the other property may
constitute “sudden and accidental physical injury” to
the drywall.82
Accordingly, insurers should not be successful in attempting to apply the impaired-property exclusion
to preclude or limit coverage for drywall-related liabilities of their policyholders.
B.
‘Personal Injury’ Liability Coverage
In addition to coverage for bodily injury and property damage liability, building owners, operators,
and contractors should look to their coverage, if any,
for personal injury liability to respond to drywallrelated claims. For example, personal injury coverage
often insures injury arising out of “wrongful entry
or eviction or other invasion of the right of private
MEALEY’S LITIGATION REPORT: Insurance
occupancy.”83 In Chinese drywall claims, the claimants’ allegations may often be interpreted to fall
within this covered offense. For instance, claimants
may allege that the presence of gases has interfered
with their use of the building or otherwise impaired
their ability to occupy the building. In such cases,
policyholders should analyze their personal injury
coverage to ensure that insurance assets are being
maximized.84
As an example, one of the most highly publicized
“sick building” cases involved construction defects
caused in part by mold in a Florida courthouse.85
Within a few years after the courthouse was completed, employees, occupants, and visitors were
evacuated from the buildings based on complaints of
health problems.86 Subsequent air tests indicated the
presence of two highly unusual toxic molds.87 After
incurring millions of dollars in remediation costs,
the county in which the courthouse was located sued
the construction manager and sureties for breach of
contract.88 At the conclusion of the trial, the jury
awarded over $11.5 million to the county, and this
award was affirmed by the appellate court.89
II.
Property Insurance To Cover
The Cost Of Repairing Damage
Caused By Chinese Drywall
Many policyholders have alleged that their property
has been damaged as a result of the emission of gases
from the use of Chinese drywall. These policyholders may be required to expend substantial amounts of
money repairing this damage.
Property insurance policies may provide insurance
protection for losses to insured property as a result
of the use of Chinese drywall. For instance, homeowner policies potentially provide coverage for damage caused in residential contexts. Similarly, owners
and operators of commercial buildings or multi-unit
residential complexes may possess all-risk property
insurance that provides coverage for the cost of repairing physical loss or damage caused by any risk
not specifically excluded.90
Insurers of these first-party property policies will
likely raise numerous defenses to claims for coverage for damage caused by Chinese drywall. As with
claims for coverage under liability policies, claims
for coverage under property policies will raise several
Vol. 23, #29 June 3, 2009
questions, including: (a) what is the appropriate
trigger of coverage? (b) were the damages at issue
fortuitous? and (c) does an exclusion apply?
A.
Trigger Of Coverage
Compared to cases involving liability insurance,
there are relatively few cases in the context of property insurance policies that address the issue of the
appropriate trigger of coverage for property damage
claims involving a damage process that takes place
over multiple policy periods before it is discovered.
In Aluminum Co. of Am. v. Accident & Cas. Ins. Co.,
the court adopted a version of the continuous-injury
trigger in a case involving environmental property
damage claims.91 Under this approach, the policies
on the risk from the beginning of the damage process through the discovery of the damage would be
triggered.
Courts in other contexts though have adopted a
“manifestation” trigger in which the only policies
that would be triggered would be those in effect
at the time that the damage was discovered. For
example, in Prudential-LMI Commercial Ins. Co. v.
Superior Court of San Diego County,92 building owners sought to recover under property policies for
damage to their building caused by cracking to the
foundation and floor slab. Addressing the trigger of
coverage, the California Supreme Court held that a
manifestation trigger applied and hence that only
the policy in effect at the time that the damage was
discovered was triggered.
B.
Fortuity
Property insurers may also contend that loss or damage caused by the use of Chinese drywall was not
fortuitous. For instance, if a building owner knew at
the time it purchased the insurance that the drywall
was deteriorating, the property insurer may attempt
to use this knowledge to allege that the building
owner should have known that property damage
would develop as a result.
Policyholders can attack these fortuity-related arguments on several grounds. First, it is well settled that
“all risk” policies are to be construed broadly in favor
of coverage.93 Second, the fortuity analysis turns on
the policyholder’s actual and subjective state of mind
at the inception of the policy period, not on what the
11
Vol. 23, #29 June 3, 2009
insurer contends the policyholder objectively “should
have known.”94 In this regard, it is important to
remember that losses that may seem, in hindsight,
to have been inevitable or certain may not have been
understood as such by the policyholder prior to the
loss.
C.
Exclusions
Property insurers may allege that coverage is precluded because of various policy exclusions contained
in their policies.
For instance, insurers may rely on exclusions commonly found in property insurance policies, such
as the faulty workmanship, inherent vice, wear and
tear, corrosion, or “contamination” exclusions. 95
For example, in cases in which wear and tear causes
drywall to deteriorate, and that deterioration leads to
the emission of gases, an insurer may contend that
the damage caused by the gases is excluded under the
“wear and tear” exclusion. However, the “wear and
tear” exclusion often does not apply to property damage that ensues as a result of defective construction or
other covered cause.96
Similarly, in cases in which a defect causes the drywall to break down prematurely when exposed to
moisture, an insurer may argue that the damage
caused by the use of drywall is excluded under an
exclusion for “faulty workmanship.” Depending on
the circumstances, an insured may contend that this
exclusion does not apply for at least two reasons.
First, the insured may assert that the defect does not
constitute “faulty workmanship” as those terms are
used in the exclusion.97 Second, the insured may
argue that the moisture (assuming it is a covered
peril) rather than any alleged faulty workmanship,
was the efficient proximate cause of the deterioration
of the drywall and resulting damage, and hence that
coverage exists.
III.
Conclusion
In sum, manufacturers, designers, suppliers, installers, building owners and other policyholders facing
drywall-related liabilities or losses may have significant opportunities for insurance coverage. In fact,
multiple insurers participating in multiple policy
periods in a policyholder’s insurance program potentially may have responsibility to cover all or part of
the liabilities or losses at issue.
12
MEALEY’S LITIGATION REPORT: Insurance
In response to a coverage claim, insurers can be expected to erect a number of roadblocks to coverage,
including the “intentionality” exclusion, the pollution exclusion, and the so-called “business risk” exclusions. Nevertheless, these exclusions may be more
limited in their applicability than they may seem at
first blush. Courts have frequently interpreted such
exclusions narrowly in the context of potentially
analogous liabilities and losses; indeed, such exclusions may not even be applicable in the first instance
to the extent a policyholder is seeking coverage under
the “personal injury” coverage of its liability policies.
Thus, policyholders should vigorously pursue their
rights to coverage notwithstanding the assertion of
such exclusions. In this regard, policyholders should
make use of the full panoply of affirmative weapons
in their arsenal to compel insurers to meet their coverage obligations, including the assertion of claims
for bad-faith and/or attorneys’ fees, if necessary.
Endnotes
1.
Brian Skoloff and Cain Burdeau, AP Impact: Chinese Drywall Poses Potential Risks, Apr. 11, 2009,
available at http://abcnews.go.com/Business/
wireStory?id=7313931.
2.
Donaldson v. Knauf Gips KG, No. 09-2981 (E.D.
La. filed Mar. 3, 2009).
3.
Id. (Class-Action Compl. ¶ 2).
4.
Id.
5.
See, e.g., Morlas v. Knauf Gips, No. 09-3265 (E.D.
La. filed Apr. 9, 2009); Chauffe v. Knauf Gips, No.
09-3215 (E.D. La. filed Apr. 2, 2009); Whitfield v.
Knauf Gips, No. 09-234 (S.D. Miss. Filed Mar. 27,
2009); Ledford v. Knauf Gips, No. 09-538 (N.D.
Ala. filed Mar. 18, 2009); Minafri v. M/I Homes,
Inc., No. 09-167 (S.D. Ohio filed Mar. 5, 2009);
Vickers v. Knauf Gips KG, No. 09-20510 (S.D.
Fla. filed Mar. 2, 2009); Allen v. Knauf Plasterboard
Tianjin Co., No. 09-54 (M.D. Fla. filed Jan. 30,
2009); Harrell v. South Kendall Construction, No.
09-8401 (Miami Dade County filed Feb. 3, 2009);
see also Barone v. Knauf Gips, No. 09-3243 (E.D.
MEALEY’S LITIGATION REPORT: Insurance
Vol. 23, #29 June 3, 2009
legal standard to determine whether the injury was
either expected or intended . . . is a purely subjective
standard.”).
La. filed Apr. 8, 2009) (suit filed by Louisiana
homeowner).
6.
7.
Lennar Homes v. Knauf Gips KG, No. 09-7901
(Miami Dade County filed Jan. 30, 2009).
14.
See, e.g., Park-Ohio Indus., Inc. v. Home Indem.
Co., 785 F. Supp. 670, 674 (N.D. Ohio 1991), aff’d,
975 F.2d 1215 (6th Cir. 1992).
15.
See, e.g., Stoney Run Co. v. Prudential-LMI Commercial Ins. Co., 47 F.3d 34, 37 (2d Cir. 1995) (“[A]
reasonable interpretation of the pollution exclusion
clause is that it applies only to environmental pollution, and not to all contact with substances that can
be classified as pollutants. We hold that the release
of carbon monoxide into an apartment is not the
type of environmental pollution contemplated by
the pollution exclusion clause.”); MacKinnon v.
Truck Ins. Exch., 73 P.3d 1205 (Cal. 2003) (pollution exclusion does not apply to claim for injuries
allegedly arising from spraying of chemicals at apartment building).
16.
See Cooper v. Am. Family Mut. Ins. Co., 184 F.
Supp. 2d 960, 965-66 (D. Ariz. 2002) (rejecting
coverage for mold-related loss under a supplementary coverage provision for “Pollutant Cleanup and
Removal” in a homeowner’s policy on the basis
that mold was not a “pollutant,” which was defined
under the policy as follows: “Pollutant means any
solid, liquid, gaseous or thermal irritant or contaminant, in any form, including, but not limited to
lead, asbestos, formaldehyde, radon, any controlled
chemical substance or any other substance listed as
a hazardous substance by any governmental agency.
It also includes smoke, vapor, soot, fumes, alkalis,
chemicals, garbage, refuse and waste.”).
Baker v. Am. Home Assurance Co., No. 09-188
(M.D. Fla. filed Mar. 30, 2009).
8.
See generally Eljer Mfg., Inc. v. Liberty Mut. Ins.
Co., 972 F.2d 805 (7th Cir. 1992) (holding that a
building incurred property damage at the time of
the installation of the defective product at issue).
9.
See, e.g., Liberty Mut. Fire Ins. Co. v. Ravannack,
No. 00-1209, 2002 WL 441334 (E.D. La. Mar. 19,
2002) (denying insurer’s motion for summary judgment on the grounds that, because complaint alleged
bodily injury based on exposure to mold during insurer’s policy period, insurer’s policy may be triggered
under exposure trigger of coverage) (citing Cole v.
Celotex Corp., 599 So. 2d 1058 (La. 1992) (adopting
exposure trigger theory in context of asbestos bodily
injury claims)); Porter v. Am. Optical Corp., 641
F.2d 1128, 1145 (5th Cir.) (exposure trigger), cert.
denied, 454 U.S. 1109 (1981); Ins. Co. of N. Am. v.
Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir.
1980) (same), reh’g granted, in part, clarified, 657 F.2d
814 (6th Cir.), cert. denied, 454 U.S. 1109 (1981).
10.
See generally Eagle-Picher Indus., Inc. v. Liberty
Mut. Ins. Co., 682 F.2d 12 (1st Cir. 1982) (holding
that coverage of an asbestos bodily injury claim was
triggered when the disease manifested or “became
reasonably capable of medical diagnosis”), cert. denied, 460 U.S. 1028 (1983).
11.
See generally Keene Corp. v. Ins. Co. of N. Am., 667
F.2d 1034 (D.C. Cir. 1981) (adopting continuous
trigger in asbestos bodily injury context), cert. denied,
455 U.S. 1007 (1982); J.H. France Refractories Co.
v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993) (same).
17.
976 F.2d 1037, 1043 (7th Cir. 1992).
18.
Id.
19.
Id.
See, e.g., Vt. Mut. Ins. Co. v. Singleton, 446 S.E.2d
417 (S.C. 1994) (intentional injury exclusion did
not bar coverage where insured had not intended the
injury resulting from his voluntary act).
20.
Id. at 1043-44.
21.
667 A.2d 617, 624 (Md. 1995).
22.
Id. at 622.
23.
Id. at 622-23.
12.
13.
See, e.g., United States Fid. & Guar. Co. v. Armstrong, 479 So. 2d 1164, 1167 (Ala. 1985) (“[T]he
13
Vol. 23, #29 June 3, 2009
24.
Id. at 624.
25.
564 N.W.2d 728, 732 (Wis. 1997).
26.
Id.
27.
Id.
28.
Id.
29.
47 F.3d 34 (2d Cir. 1995).
30.
Id. at 37.
31.
Id. at 39.
32.
MEALEY’S LITIGATION REPORT: Insurance
pressly listed “fungi” as an excluded “pollutant.”
44.
894 F. Supp. 200, 203 (W.D. Pa. 1995); but see
Peace, 596 N.W.2d at 440 (applying the pollution
exclusion to the release of paint in an insured’s
apartment).
45.
Island Assoc., 894 F. Supp. at 203.
46.
Id. at 204; see also Nautilus Ins. Co. v. Jabar, 188
F.3d 27, 30 (1st Cir. 1999) (terms “discharge,”
“dispersal,” “release” and “escape,” are terms of art
in environmental law and are generally used to refer
to damage or injury resulting from environmental
pollution).
Am. States Ins. Co. v. Koloms, 687 N.E.2d 72, 73
(Ill. 1997).
47.
Lumbermens Mut. Cas. Co. v. Sw. Indus., Inc., 39
F.3d 1324, 1336 (6th Cir. 1994).
33.
Id. at 76.
48.
Id.
34.
Id. at 79 (citations omitted).
49.
Id.
35.
Id. at 77-78.
50.
36.
Id. at 79.
37.
Id. at 81 (emphasis in original).
38.
But see Assicurazioni Generali S.PA. v. Neil, 160
F.3d 997, 1006 (4th Cir. 1998) (denying coverage
for injuries from carbon monoxide based on pollution exclusion); Peace v. Nw. Nat’l Ins. Co., 596
N.W.2d 429, 438-439 (Wis. 1999) (applying the
pollution exclusion to the release of lead paint).
Id.; see also Lititz Mut. Ins. Co. v. Steely, 785 A.2d
975 (Pa. 2001) (underlying lead paint bodily injury
tort claims were not barred by the absolute pollution exclusion, since the process by which lead paint
degraded and became available for ingestion/inhalation did not unambiguously involve a “discharge,
dispersal, release or escape” as required by the exclusion); but see Madison Constr. Co. v. Harleysville
Mut. Ins. Co., 735 A.2d 100, 108 (Pa. 1999) (discussing the pollution exclusion in the context of a
case involving concrete sealant).
51.
39.
462 N.W.2d 218, 232 (Wis. Ct. App. 1990).
40.
Id.
41.
Id. As an alternate basis for its holding, the court
found that the “sudden and accidental” exception
would apply because the growth of mold was unexpected and unintended. Id. (citing Just v. Land
Reclamation Ltd., 456 N.W.2d 570, 574 (1990)).
Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co.,
314 N.E.2d 37, 39 (N.Y. 1974) (“To say that the
categories of damage claimed here by [the underlying claimant] do not fall within such coverage would
appear to exclude what, as a practical matter, would
usually be some of the largest foreseeable elements
of such damage. Such an interpretation . . . would
render the coverage nearly illusory.”).
52.
See, e.g., 1 Commercial Liability Insurance,
IV.T.20 (reproducing the 1973 ISO specimen CGL
coverage part). ISO slightly revised this exclusion in
its 1986 standard-form policy to exclude coverage
for “‘[p]roperty damage’ to ‘your product’ arising
out of it or any part of it.” Id. at IV.T.36, IV.T.47
42.
No. 99-1623, 2002 WL 356756, at *3 (N.D. Tex.
Mar. 5, 2002).
43.
Id. The exclusion at issue in Unity/Waterford ex-
14
MEALEY’S LITIGATION REPORT: Insurance
Vol. 23, #29 June 3, 2009
Travelers court found that no “physical” injury had
occurred in Marathon, it held that Marathon had
incorrectly found “property damage” to exist, and
thus explicitly overruled that decision.
(containing the 1986 occurrence and claims-made
forms, respectively).
53.
73 F.3d 1178 (2d Cir. 1995).
54.
Id. at 1210; see also Hoechst Celanese Corp. v. Nat’l
Union Fire Ins. Co., No. 89C-SE-35, slip op. at 4
(Del. Super. Apr. 13, 1994) (finding that, because
the term “own product” could only reasonably
include the resin material manufactured by the
policyholder and did not include the fittings manufactured by others into which the resin was installed,
the “own product” exclusion did not apply because
the policyholder did not seek coverage for damages
done to the resin).
55.
370 N.E.2d 1271 (Ill. App. Ct. 1977).
56.
Id. at 1274; see also Int’l Envtl. Corp. v. Nat’l Union
Fire Ins. Co., 843 F. Supp. 1218, 1229 (N.D. Ill.
1993) (rejecting insurers’ argument that it had no
duty to defend because of “own product” exclusion
where underlying complaint sought recovery for
damages to property other than policyholder’s product); Dayton Indep. Sch. Dist. v. National Gypsum
Co., 682 F. Supp. 1403, 1412 (E.D. Tex. 1988)
(“Under both New York and Texas law, the ‘own
product’ exclusion does not apply to bar coverage
of third-party claims for damage to property into
which the policyholder’s property or product has
been incorporated.”), rev’d on jurisdictional grounds
sub nom. W.R. Grace & Co. v. Cont’l Cas. Co.,
896 F.2d 865 (5th Cir. 1990); Sturges Mfg. Co.
v. Utica Mut. Ins. Co., 332 N.E.2d 319, 321-22
(N.Y. 1975) (“When one product is integrated into
a larger entity, and the component product proves
defective, the harm is considered harm to the entity
to the extent that the market value of the entity is
reduced in excess of the defective component.”); but
see Travelers Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d
481, 499-500 (Ill. 2001). Travelers overruled a prior
Illinois decision (Marathon Plastics, Inc. v. Int’l Ins.
Co., 514 N.E.2d 479 (Ill. Ct. App. 1987), that had
held that the own-product exclusion largely did
not apply to a defect in PVC pipe, used as part of a
larger water system, that had led to the pipe being
replaced. The Supreme Court of Illinois found that
the policy definition of “property damage” at issue
in Marathon required that a “physical injury” occur, not just an “injury” as in Pittway. Because the
57.
See, e.g., Eljer Mfg., Inc. v. Liberty Mut. Ins. Co.,
972 F.2d 805 (7th Cir. 1992).
58.
See, e.g., 13 J. Appleman, Insurance Law and
Practice, § 7405 (rev. vol. 1976) (“The courts have
frequently stated that provisions limiting liability
of the insurer — such as exceptions from coverage,
exclusions, restrictions, and conditions — are particularly deserving of strict construction so as not to
cut down the coverage which the insured believed he
was purchasing.” (citing cases)).
59.
See, e.g., 21 J. Appleman, Insurance Law and
Practice, § 12097 (rev. vol. 1980) (citing cases).
60.
See, e.g., Susan J. Miller and Philip Lefebvre,
Miller’s Standard Insurance Policies Annotated, Vol. I, 451.5 (containing specimen 1973
form).
61.
See text accompanying note 77 infra for the definition of “impaired property.”
62.
See, e.g., 1 Commercial Liability Insurance, at
IV.T.37, IV.T.47 (containing the 1986 occurrence
and claims-made forms, respectively), and IV.T.114,
IV.T.128 (containing the 1996 occurrence and
claims-made forms, respectively).
63.
843 F. Supp. 1218 (N.D. Ill. 1993).
64.
Id. at 1221-22.
65.
Id. at 1229; see also Stonewall Ins. Co. v. Asbestos
Claims Mgmt. Corp., 73 F.3d 1178, 1211 (2d Cir.
1995); Action Auto Stores v. United Capitol Ins.
Co., 845 F. Supp. 428 (W.D. Mich. 1993); Md. Cas.
Co. v. W.R. Grace & Co., 794 F. Supp. 1206, 1227
(S.D.N.Y. 1991), rev’d on other grounds, 4 F.3d 155
(2d Cir. 1993); Bigelow-Liptak Corp. v. Cont’l Ins.
Co., 417 F. Supp. 1276, 1282 (E.D. Mich. 1976);
United States Fid. & Guar. Co. v. Wilkin Insulation
Co., 578 N.E.2d 926, 934 (Ill. 1991) (finding that
earlier version of sistership exclusion did not apply
to product that had already failed and hence did
15
Vol. 23, #29 June 3, 2009
not exclude claims for damages for the inspection of
buildings and removal and replacement of asbestos
products); Elco Indus., Inc. v. Liberty Mut. Ins. Co.,
414 N.E.2d 41, 45 (Ill. App. Ct. 1980) (“[A]s the
pins were inserted prior to discovery of the defect,
the property damage to [the underlying claimant]
thus may be said to have occurred prior to the discovery and subsequent recall.”).
66.
314 N.E.2d 37 (N.Y. 1974).
67.
Id. at 39.
68.
Id.; see also Aetna Cas. & Sur. Co. v. PPG Indus.,
Inc., 554 F. Supp. 290, 295 (D. Ariz. 1983); Elco
Indus., Inc. v. Liberty Mut. Ins. Co., 414 N.E.2d
41, 45 (Ill. App. Ct. 1980); Clarostat Mfg. Co. v.
Travelers Indem. Co., 495 N.Y.S.2d 671 (N.Y. App.
Div. 1985) (following Lipton); Int’l Hormones, Inc.
v. Safeco Ins. Co. of Am., 394 N.Y.S.2d 260 (N.Y.
App. Div. 1977); Olympic Steamship Co. v. Centennial Ins. Co., 811 P.2d 673 (Wash. 1991); but
see Hamilton Die Cast, Inc. v. United States Fid. &
Guar. Co., 508 F.2d 417 (7th Cir. 1975); Commercial Union Assurance Co. v. Glass Lined Pipe Co.,
372 So. 2d 1305 (Ala. 1979).
In an apparent attempt to avoid the effect of this case
law, ISO modified its 1986 version of the sistership
exclusion to include recalls “by any person or organization.” See, e.g., The Fire Casualty & Surety
Bulletins, Casualty & Surety Volume Aa-18-19; 1
Commercial Liability Insurance, V.D.44.
69.
See, e.g., Susan J. Miller and Philip Lefebvre,
Miller’s Standard Insurance Policies Annotated, Vol. I, 451.5.
70.
For purposes of this discussion, it is assumed that
there is not a “delay in or lack of performance by”
the named insured under any contract or agreement
that would bring the factual scenario within the
scope of subsection (1) of the failure-to-perform
exclusion.
71.
16
See, e.g., Todd Shipyards Corp. v. Turbine Serv., Inc.,
674 F.2d 401, 419 (5th Cir.) (policyholder’s work to
ship’s turbine suffered sudden and accidental injury,
causing loss of use of ship), cert. denied, 459 U.S.
1036 (1982); Am. Int’l Underwriters Corp. v. Zurn
MEALEY’S LITIGATION REPORT: Insurance
Indus., Inc., 771 F. Supp. 690, 700 (W.D. Pa. 1991)
(finding coverage for loss of use of plant that became
inoperable as a direct result of the accidental failure
of the policyholder’s underdrains through which
wastewater flowed).
72.
See, e.g., Al. Plating Co. v. United States Fid. &
Guar. Co., 690 So. 2d 331 (Ala. 1996); Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d 1083, 1091-92
(Colo. 1991); Claussen v. Aetna Cas. & Sur. Co.,
380 S.E.2d 686, 689-90 (Ga. 1989); Outboard
Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d
1204 (Ill. 1992); Am. States Ins. Co. v. Kiger, 662
N.E.2d 945 (Ind. 1996); Greenville County v. Ins.
Reserve Fund, 443 S.E.2d 552, 553 (S.C. 1994);
Joy Techs., Inc. v. Liberty Mut. Ins. Co., 421 S.E.2d
493 (W. Va. 1992); Just v. Land Reclamation, Ltd.,
456 N.W.2d 570 (Wis. 1990).
73.
See, e.g., Dimmitt Chevrolet, Inc. v. Se. Fid. Ins.
Corp. 636 So.2d 700 (Fla. 1993); Am. Motorists
Ins. Co. v. ARTRA Group, Inc. 659 A.2d 1295 (Md.
1995); Lumbermens Mut. Cas. Co. v. Belleville Indus., Inc. 555 N.E.2d 568 (Mass. 1990), cert denied,
502 U.S. 1073 (1992); Upjohn Co. v. N.H. Ins.
Co., 476 N.W.2d 392 (Mich. 1991); Waste Mgmt.
of Carolinas, Inc. v. Peerless Ins. Co., 340 S.E.2d
374 (N.C. 1986); Hybud Equip. Corp. v. Sphere
Drake Ins. Co., 597 N.E.2d 1096 (Ohio 1992), cert.
denied, 507 U.S. 987 (1993); Kerr-McGee Corp. v.
Admiral Ins. Co., 905 P.2d 760 (Okla. 1995).
74.
See generally United Steel Fabricators, Inc. v. Fid.
& Guar. Ins. Underwriters, Inc., No. 92 AP-1171,
1993 WL 69258 (Ohio Ct. App. Mar. 11, 1993)
(finding that the cracking of welds in modular expansion joints was abrupt and therefore “sudden,”
even if the stresses that caused the cracking and possibly the growth of the cracks took place gradually
over time).
75.
The Fire Casualty & Surety Bulletins, Casualty
& Surety Volume Aa-17 (Sept. 1993); 1 Commercial Liability Insurance, V.D.39.
76.
See, e.g., 1 Commercial Liability Insurance, at
IV.T.37, IV.T.47 (containing the 1986 occurrence
and claims-made forms, respectively), and IV.T.114,
IV.T.128 (containing the 1996 occurrence and
claims-made forms, respectively).
MEALEY’S LITIGATION REPORT: Insurance
77.
78.
See, e.g., 1 id., IV.T.42, IV.T.53 (containing the
1986 occurrence and claims-made forms, respectively), and IV.T.121, IV.T.137 (containing
the 1996 occurrence and claims-made forms,
respectively).
See St. Martin & Mahoney, APLC v. Eagle Aviation,
Inc., No. 94-1421, 1995 WL 766337 at *4-5 (E.D.
La. Dec. 28, 1995); Martinez v. Wildey, 612 So. 2d
155, 157-58 (La. App. Ct. 1992), writ denied, 613
So. 2d 994 (La. 1993); see also Transcont. Ins. Co. v.
Ice Sys. of Am., 847 F. Supp. 947, 950 (M.D. Fla.
1994).
79.
417 S.E.2d 197 (Ga. Ct. App. 1992).
80.
Id. at 201 (quoting Tate v. Aetna Cas. & Sur. Co.,
253 S.E.2d 775 (Ga. Ct. App. 1979)).
81.
Id. at 200-01; see also United States Fid. & Guar.
Co. v. Barron Indus., Inc., 809 F. Supp. 355, 361-62
(M.D. Pa. 1992) (rejecting insurer’s attempt to
exclude coverage apparently under the impaired
property exclusion for physical damage to larger
system into which policyholder’s failing product
was incorporated and for loss of use of facility into
which system was installed).
82.
See text accompanying notes 71-74 supra; see also
United Steel Fabricators, Inc. v. Fid. & Guar. Ins.
Underwriters, Inc., No. 92-1171, 1993 WL 69258
(Ohio App. Mar. 11, 1993) (holding that cracking
of policyholder’s welds on bridge’s expansion joints
was abrupt, even if the stresses that caused the
cracks occurred gradually over time, and therefore
the cracking constituted “sudden and accidental”
physical injury under the exception to the impaired
property exclusion).
83.
See 1 Commercial Liability Insurance, IV.T.23
to IV.T.28 (International Risk Management Institute 1996) (reprinting Broad Form Comprehensive
General Liability Endorsement GL 0404).
84.
Depending on the type of property damage alleged
by a claimant, building owners and operators will
also want to examine their first-party property insurance policies to determine whether the remediation
of such damage would be covered by those policies.
See Section II infra.
Vol. 23, #29 June 3, 2009
85.
Centex-Rooney Constr. Co. v. Martin County, 706
So. 2d 20 (Fla. Dist. Ct. App. 1997).
86.
Id. at 26.
87.
Id. at 24.
88.
Id.
89.
Id. at 26. Centex-Rooney is one of the few reported
decisions where the court allowed expert testimony
relating to the alleged health hazards stemming from
toxic molds.
90.
All-risk policies are typically given a broad and
comprehensive interpretation. See Ins. Co. of N.
Am. v. United States Gypsum Co., 870 F.2d 148
(4th Cir. 1989). In contrast to named peril policies,
which generally require that a loss event be covered by a specifically-identified peril, such as fire,
windstorm, or lightning, all-risk insurance policies
broadly cover physical loss or damage to insured
property arising out of any peril, unless specifically
excluded.
91.
No. 92-2-28065-5 (Wash. Super. Mar. 8, 1996).
92.
798 P.2d 1230 (Cal. 1990).
93.
See, e.g., Compagnie des Bauxites de Guinee v. Ins.
Co. of N. Am., 724 F.2d 369, 373 (3d Cir. 1983).
94.
Id. at 372; see also Peters Township Sch. Dist. v.
Hartford Accident & Indem. Co., 833 F.2d 32,
37 (3d Cir. 1987); Klockner Stadler Hurter Ltd. v.
Ins. Co. of the State of Pa., 780 F. Supp. 148, 157
(S.D.N.Y. 1991).
95.
See, e.g., Lexington Ins. Co. v. Unity/Waterford-Fair
Oaks, Ltd., No. 99-1623, 2002 WL 356756, at *3
(N.D. Tex. Mar. 5, 2002) (holding that “Pollution,
Contamination Debris Removal Exclusion Endorsement” applied to mold-related damage in apartment
complex caused by severe rainstorm and flooding
where exclusion expressly defined “contaminants”
and “pollutants” to include “fungi”).
96.
See, e.g., Sentinel Mgmt. Co. v. N.H. Ins. Co., 563
N.W.2d 296, 301-02 (Minn. Ct. App. 1997) (loss
caused by release of asbestos fibers in buildings fell
17
Vol. 23, #29 June 3, 2009
within “ensuing loss” exception to “wear and tear”
exclusion in all-risk property policy).
97.
18
See, e.g., M.A. Mortenson Co. v. Indem. Ins. Co.
of N. Am., No. 98-2319, 1999 WL 33911358 (D.
MEALEY’S LITIGATION REPORT: Insurance
Minn. Dec. 23, 1999) (rejecting insurer’s reliance
on, inter alia, faulty workmanship and inherent
vice exclusions and finding coverage under builder’s
risk policy for rain damage to construction subgrade). ■