The
Insurance
Coverage Law Bulletin®
Volume 10, Number 4 • May 2011
Up Against a
Chinese Drywall
Coverage Issues Stemming from Dry Cleaner
Contamination Suits
Developments in the
Ongoing Investigation
And Coverage Litigation
By Chet A. Kronenberg
Homeowners from 42 states,
the District of Columbia, American Samoa, and Puerto Rico have
reported concerns about drywall imported from China and
installed in their homes. These
homeowners believe that health
symptoms and the corrosion of
metal components in their homes
are related to Chinese drywall.
The reports began to arrive in
force in 2009 and have triggered
the largest consumer product investigation in the history of the
federal Consumer Product Safety
Commission (“CPSC”).
Drywall, also known as wallboard or plasterboard, is an essential element in residential
construction. Home builders
in the United States historically
used domestically produced drywall, composed primarily from
gypsum, a mineral. However,
the housing boom of 2004-2006,
and the scramble for materials
that followed the 2004-2005 hurricanes, led suppliers to import
vast amounts of drywall from
China to keep up with demand.
According to the CPSC, more
than 550 million pounds of drywall and associated building materials were imported from China to the United States between
2006-2007. According to the
investigations, use of Chinese
drywall was widespread, but
the vast majority of the product
continued on page 5
I
In This Issue
Dry Cleaner
Contamination.......... 1
Chinese Drywall....... 1
PERIODICALS
By John David Dickenson
n recent years, there has been a growing number of dry cleaners claiming to
be “organic,” “green,” or “eco-friendly.” While that may be true with respect
to some, many dry cleaners continue to use a cleaning method involving the
use of a solvent called perchloroethylene, commonly known as perc. And, there
seems to be an increasing number of lawsuits stemming from environmental
problems associated with historic dry cleaning operations utilizing this chemical.
As a result of past disposal practices and spills of perc, many current and former
dry cleaning sites are contaminated. By some estimates, 75% of dry cleaner facilities operated in past decades have caused environmental contamination. Cleanup
costs range from tens of thousands of dollars to several million dollars.
Forest Park National Bank & Trust v. Ditchfield, 10 CV 3166 (N.D. Ill. May 21,
2010), presents a typical “dry cleaner contamination” fact pattern. In that case, a
bank foreclosed on an Illinois residence, and then filed a lawsuit in federal court
against the owners and operators of an adjacent strip mall and its dry cleaning tenant. The bank contends that after acquiring the residence, it learned that
perc from the dry cleaner had leached into the soil and groundwater under the
residence. Even though the residence is located on a block targeted by the city
for a big redevelopment project, the bank claims that it has not been able to sell
the property because of the perc contamination. The bank sought compensatory
damages in excess of $100,000. Certain defendants filed a third-party complaint
against their insurer alleging that it failed to provide defense and indemnity
against the underlying suit.
Similarly, in Neal v. Cure, 937 N.E.2d 1227 (Ind. Ct. App. 2010), neighboring
property owners brought a lawsuit against a landlord that leased commercial
property to a dry cleaning tenant. The plaintiffs, who owned commercial property near the landlord’s building, alleged that they were having health problems,
and that the value of their property had decreased because of perc in the soil and
the air inside their building. The plaintiffs settled with the dry cleaning tenant,
continued on page 2
Dry Cleaner
continued from page 1
and then continued to pursue statutory and common law claims against
the landlord. The appellate court affirmed the trial court’s grant of summary judgment in favor of the landlord because of the landlord’s lack
of involvement in or knowledge of
the dry cleaner’s actions.
In a recent high-profile suit, the
Suffolk County Water Authority,
which bears responsibility for providing potable drinking water to
more than one million residents
in Suffolk County, New York, sued
various companies involved in the
creation of perc and the dry cleaning equipment that used the chemical. The Water Authority claims to
have detected perc contamination in
more than 150 of its wells, requiring
expensive remediation and prevention measures. The Water Authority
alleges that the defendants were
aware that dry cleaners customarily
dumped perc wastewater into public sewer systems or dry wells, and
that equipment companies even directed dry cleaners to do it. See Suffolk Co. Water Auth. v. Dow Chem.
Co., 30 Misc. 3d 1202(A) (Sup. Ct.
Suffolk Co. Dec. 17, 2010).
To date, there are surprisingly
few reported coverage decisions
concerning whether and to what
extent dry cleaner contamination
may be covered under a comprehensive general liability policy. But
the handful of decisions that do exist provide a good framework for
discussing key issues that often
arise when coverage is sought for
dry cleaner contamination.
Lost Policies
Because the release of perc often
took place decades ago, many policyholders no longer have their policies from that time frame. For example, in the Forest Park and Neal
cases, the contamination purportedly began in the 1970s and 1980s,
respectively. If the dry cleaner defendants in those lawsuits had kept
their insurance policies, they might
Chet A. Kronenberg is a litigation
partner in the Los Angeles office of
Simpson Thacher & Bartlett LLP.
2
now be entitled to defense and indemnity. However, if the dry cleaners did not maintain copies of their
old policies, the dry cleaners could
find themselves uninsured.
Kleenit, Inc. v. Sentry Insurance
Company, 486 F. Supp. 2d 121 (D.
Mass. 2007), is illustrative. Kleenit
was the owner and operator of a dry
cleaning chain. Kleenit sought insurance coverage from Travelers for the
environmental remediation of two
sites in Massachusetts. Kleenit believed that Travelers provided comprehensive general liability insurance to Kleenit during the period of
1964-1970. However, both the original owner and accountant of the insured business were deceased, the
insurance agency that handled most
of the insured’s policies during the
relevant time frame was defunct, and
neither Kleenit nor Travelers could
locate copies of the policies at issue. Against this backdrop, Travelers
moved for summary judgment.
The court held that, under Massachusetts law, Kleenit was required to
show by a preponderance of evidence
both the existence and contents of the
policies. With respect to the policy
period of 1964-1967, Kleenit submitted ledger entries reflecting payments
to its insurance agent. In addition,
an employee who began working at
Kleenit in 1967 testified that when
he began working at Kleenit, “everything was Travelers.” The court stated
that, at best, the ledger entries merely
established that Kleenit made payments to its insurance agent for some
sort of insurance. The court further
noted that even assuming that “the
payments were indeed payments of
premium to Travelers, the entries say
nothing about the type of insurance
involved, nor do they establish in any
way the terms of the missing policy.”
Accordingly, the court granted summary judgment in Travelers’ favor for
the years 1964-1967.
With respect to the years
1967-1970, Travelers admitted that
continued on page 3
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The
Insurance
®
Coverage Law Bulletin
EDITOR-IN-CHIEF . . . . . . . . . . . . . . Thomas O. Mulvihill
Pringle, Quinn, Anzano, P.C.
Morristown, NJ
EDITORIAL DIRECTOR . . . . . . . . . . Wendy Kaplan Stavinoha
SENIOR MANAGING EDITOR . . . . . Julie Gromer
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BOARD OF EDITORS
ROBERTA ANDERSON . . . . . . K&L Gates LLP
Pittsburgh, PA
Dennis brown . . . . . . . . . . . . Edwards Angell Palmer & Dodge
Hartford, CT
TIMOTHY W. BURNS . . . . . . . Perkins Coie LLP
Madison, WI
JOHN N. ELLISON . . . . . . . . . Reed Smith LLP
Philadelphia
LAURA A. FOGGAN . . . . . . . . Wiley Rein LLP
Washington, DC
MARIALUISA GALLOZZI . . . . Covington & Burling LLP
Washington, DC
STEVEN R. GILFORD . . . . . . . Proskauer Rose LLP
Chicago
ROBERT D. GOODMAN . . . . . Debevoise & Plimpton LLP
New York
LEWIS E. HASSETT . . . . . . . . . Morris, Manning & Martin, LLP
Atlanta
RALPH S. HUBBARD, III . . . . Lugenbuhl, Wheaton,
Peck, Rankin & Hubbard
New Orleans
PAUL KALISH . . . . . . . . . . . . . Crowell & Moring, LLP
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Ferris, Glovsky & Popeo, P.C.
Boston
DONALD R. mcminn . . . . . . Hollingsworth LLP
Washington, DC
DAREN S. McNALLY . . . . . . . . Clyde & Co US LLP
Florham Park, NJ
CATHERINE A. MONDELL
Ropes & Gray
Boston
JOHN M. NONNA . . . . . . . . . . Dewey & LeBoeuf LLP
New York
SHERILYN PASTOR . . . . . . . . . McCarter & English, LLP
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May 2011
Dry Cleaner
continued from page 2
it found a reference to a comprehensive general liability policy issued to Kleenit during the time
period in question. In addition,
Kleenit produced ledger sheets reflecting payments to Travelers, and
Kleenit’s annual reports for 1967
and 1968 contained a summary of
Kleenit’s insurance coverage, including the limits of coverage. Finally, Kleenit asserted that the terms
of the 1967-1970 policy could be
inferred from the 1970-1973 policy.
The court held that: 1) it could not
consider the annual reports because
they had not been properly authenticated; 2) while the ledgers reflected payments to Travelers and referenced the same policy number that
Travelers had conceded it identified
in its own records, the ledger sheets
said nothing about the specific material terms of the policies; and 3)
there was no evidence in the record
to suggest that the 1970-1973 policy
was a renewal of the previous policy. In light of the above, the court
concluded that Travelers also was
entitled to summary judgment with
respect to policy years 1967-1970.
As Kleenit demonstrates, if old
policies have been discarded, it can
be very difficult for a dry cleaner
or other insured to prove the terms
and conditions of coverage.
Known Loss
As a general rule, liability insurance coverage does not exist for
property damage that the insured
knows about when the policy is
issued. This issue was litigated in
Crawfordsville Square, LLC v. Monroe Guaranty Insurance Company,
906 N.E.2d 934 (Ind. Ct. App. 2009).
In Crawfordsville, a shopping mall
operator purchased a parcel of land
adjacent to the mall that contained
several businesses, including a dry
cleaner. During the due diligence
process, the shopping mall operator
learned that the soil and water under the parcel were contaminated.
The shopping mall operator agreed
to proceed to buy the parcel so long
as the seller established an escrow
account of $44,000 on account of
such contamination.
May 2011 Upon the closing of the transaction, the shopping mall operator
added the parcel to its existing general commercial liability insurance
policy. Subsequently, the Indiana
Department of Environmental Management demanded that the shopping mall operator remediate the
site. The shopping mall operator
sought coverage from its insurer,
which the insurer denied. The court
held that under the known loss
doctrine, losses which exist at the
time of the insuring agreement, or
which are so probable or imminent
that there is insufficient risk being
transferred between the insured and
insurer, are not properly subjects of
insurance. The court stated that the
record in that case clearly indicated
that the shopping mall operator had
knowledge of actionable contamination. As such, summary judgment
was properly granted in favor of the
insurer.
Pollution Exclusion
Prior to the early 1970s, commercial general liability policies did
not exclude coverage for pollution
claims. Between the early 1970s
and 1985, however, insurers started
adding qualified pollution exclusion clauses in their policies. The
qualified pollution exclusion barred
pollution claims except where the
polluting discharge or release was
sudden and accidental. In 1985,
most commercial general liability
policies began including absolute
pollution exclusions barring coverage for even sudden and accidental
discharges and releases of contaminants. The effect of pollution exclusion clauses has been litigated in
the context of dry cleaner environmental contamination.
In Morrow Corporation v. Harleysville Mutual Insurance Co.,
101 F. Supp. 2d 422 (E.D. Va. 2000)
(“Morrow I”), a dry cleaner sought
defense and indemnity with respect
to a lawsuit brought against it by
a shopping center operator stemming from the presence of perc.
Certain policies contained absolute
pollution exclusions, and others
contained qualified pollution exclusions excepting sudden and accidental discharges of pollutants. The
court easily found that the policies
with an absolute pollution exclusion barred coverage. The more difficult question was whether the dry
cleaner’s discharge of perc was sudden and accidental.
The court in Morrow I held that
the phrase “sudden and accidental”
means “both unexpected and unintended and quick or abrupt.” The
court found that the shopping mall
operator’s allegations against the dry
cleaner were of sufficient breadth to
encompass releases that were both
sudden and accidental for purposes
of assessing whether a duty to defend is owed:
[T]he underlying complaint alleged that “during the operation
of the Facility, [the dry cleaner
and its employees] spilled or
released [perc] and discharged
[perc] … into the environment.” … [A]llegations employing these terms were sufficient
to trigger [the insurer’s] duty to
defend [the dry cleaner] against
the [shopping mall operator’s]
lawsuit, because “the obligation
to defend … arises whenever
the complaint alleges facts and
circumstances, some of which, if
proved, fall within the risk covered by the policy.”
The court stated that the insurer
may ultimately succeed in proving
that the contamination arose from
“a continuous pattern” of pollution during the coverage period, in
which event the insurer would have
no duty to indemnify the dry cleaner.
However, with respect to the duty to
defend, the inquiry is not whether
the releases were in fact sudden and
accidental, but simply whether the
underlying complaint’s allegations
reasonably encompassed sudden
and accidental releases of perc.
Employers Insurance of Wausau v.
California Water Service Company,
2008 WL 3916096 (N.D. Cal. 2008),
also interpreted a qualified pollution
exclusion. The complaints in the
underlying suits, which were filed by
the California Department of Toxic
Substance Control (“DTSC”), alleged
that several dry cleaning businesses
and property owners released perc
into the soil and groundwater beneath the central business district
continued on page 4
The Insurance Coverage Law Bulletin ❖ www.ljnonline.com/alm?ins
3
Dry Cleaner
continued from page 3
of Chico, CA. The California Water
Service Company (“Cal Water”) was
named as a defendant in each of
the underlying actions. The DTSC
alleged that Cal Water’s activities of
pumping water and operating, monitoring and shutting down of certain
wells affecting the Chico city water
supply all purportedly contributed
to the dispersal of the contamination in the groundwater.
Cal Water sought defense and indemnity from its insurer, which had
issued general liability insurance
policies to Cal Water. The policies
issued between 1972 and 1986 contained a qualified pollution exclusion, which barred coverage arising
from the discharge of pollutants except when such discharge is sudden
and accidental. The court held that
the relevant discharge for coverage
purposes was that of third-party dry
cleaners and not the subsequent activities of Cal Water which spread
the environmental contamination.
Cal Water contended that there were
sudden and accidental discharges
by the dry cleaners, and as such, the
exception to the pollution exclusion
applied. The court denied the insurer’s motion for summary judgment
on the duty to defend, holding as
follows:
Cal Water appears to acknowledge that many of the discharges by the dry cleaner facilities
were made as part of their
routine operations. Nevertheless, it points to a number of
discharges by two of the dry
cleaners … that may qualify as
sudden and accidental. These
alleged sudden and accidental releases include five or six
spills of [perc] of 3 to 4 gallons
each from April 1986 through
September 1976 by [one dry
cleaner] and 1 to 5 gallon spills
once every 5 or so years by [another dry cleaner]. … Although
Cal Water makes no attempt to
demonstrate how much, if any,
of the environmental damage
would have been caused by
these spills over and above the
routine disposal of [perc] into
the water by the dry cleaners,
4
the evidence is enough to defeat summary judgment on the
duty to defend.
Finally, in State Farm Fire and Casualty Company v. Walnut Avenue
Partners, LLC, 675 S.E.2d 534 (Ga.
Ct. App. 2009), a shopping center
operator sued a former dry cleaning
tenant seeking damages connected
with remediating the property. The
dry cleaner’s insurer sought a declaratory judgment that it was not
obligated to provide a defense due
to the pollution exclusion in the dry
cleaner’s umbrella policy. The body
of the policy excluded certain specified instances of property damage
arising out of the discharge or release of pollutants. One endorsement to the policy narrowed the
scope of the pollution exclusion in
the body of the policy by exempting
from it discharges that are “quick,
abrupt and accidental.” Another endorsement broadened the scope of
the pollution exclusion in the body
of the policy by eliminating any pollution coverage which would have
otherwise existed under the policy.
The court held that the conflicting
endorsements created an ambiguity
in the policy, and that, as a result,
the trial court did not err in construing the policy to provide coverage
for quick, abrupt and accidental discharges of pollutants.
Timing
of
Accident
With respect to dry cleaner contamination alleged to have taken
place decades earlier, the insurance
policies that potentially might provide coverage typically are older,
occurrence-based policies. Under
occurrence policies, so long as the
insured can plead and prove that
an “accident” occurred during the
policy period, coverage may be
available. In assessing whether an
accident occurred during the policy
period, issues often arise, as they
did in the cases discussed below, as
to whether the contamination at issue was the result of an accident,
and if so, whether the accident took
place during the policy period.
In Hinkle v. Crum & Forster Holding, Inc., __ F. Supp. 2d __, 2010 WL
3023174 (D. Ala. 2010), the current
property owners brought a contribution action against the former
property owners due to groundwater contamination on and emanating from the property. The current
and former owners operated a dry
cleaning business on the property.
The current property owners settled
with the former property owners for
more than $2 million, an assignment
of rights against the former property owners’ insurers, and a covenant not to collect on the judgment
against the former owners. The current property owners then sued the
former owners’ insurers. The court
dismissed the suit on summary
judgment, holding that the current
property owners “failed to prove or
establish sufficient evidence of an
‘occurrence,’ i.e., an accident during the policy period impacting the
ground water.” For example, the
court held that “the deliberate dispersal of contaminants from a barrel
in order to find a wedding ring” was
not an accident and, in any event,
such incident occurred three years
before any of the insurance policies
at issue were purchased.
In Pilgrim Enterprises, Inc. v.
Maryland Casualty Company, 24
S.W.3d 488 (Tex. App. 2000), a dry
cleaner alleged that its insurer had
a duty to provide it with a defense
with respect to certain environmental lawsuits filed against the dry
cleaner by the dry cleaner’s landlord and adjacent property owners
for personal injuries and property
damage. Each applicable policy defined the term “occurrence” as “an
accident, including continuous or
repeated exposure to conditions,
which results in bodily injury or
property damage neither expected
nor intended from the standpoint of
the insured.” The insurer argued that
it was required to defend the dry
cleaner only if the alleged property
damage or bodily injury manifests
or becomes identifiable during the
policy period. By contrast, the dry
cleaner argued that the court should
find an “occurrence” under the policies if the injured parties were exposed to contaminants during the
policy period. The trial court ruled
in favor of the insurer, but the appellate court reversed, holding that,
under Texas law, “for CGL policies
continued on page 5
The Insurance Coverage Law Bulletin ❖ www.ljnonline.com/alm?ins
May 2011
Dry Cleaner
continued from page 4
covering continuous or repeated
exposure to conditions, injury can
occur as the exposure takes place.”
The appellate court concluded: “Because the pleadings potentially allege exposure during the policy
periods and damages for this exposure, we conclude that [the insurer]
owes [the dry cleaner] a duty of defense, even if it should later become
apparent that the contamination of
which the plaintiffs complain occurred at a later point.”
In Morrow Corporation v. Harleysville Mutual Insurance Co.,
110 F. Supp. 2d 441 (E.D. Va. 2000)
(“Morrow II ”), the policies at issue
defined the term “occurrence” as
“the date on which bodily injury
or property damage first manifests
itself.” The court held that, under
Virginia law, the term “manifests”
means “discoverable or subject to
being discovered by reasonable
means, not actually discovered or
perceived.” Although the perc contamination at issue was not actually
known or discovered by the shopping center that had sued its dry
cleaner tenant until after the expiration of the policies at issue, the
court held that such contamination
“may have manifested itself years
earlier, at the point at which the
[perc] contamination from each iter-
Chinese Drywall
continued from page 1
was used in Florida, Louisiana and
Virginia.
Now, it is estimated that more than
60,000 residential units in the southeastern United States alone contain
Chinese drywall. Complaints about
it have been numerous. Chinese drywall allegedly corrodes copper coils
and electric wires, emits fumes that
John David “J.D.” Dickenson is a senior associate in the West Palm Beach,
FL, offices of Edward Angell Palmer
& Dodge LLP. He represents insurers
and reinsurers in complex coverage,
claims handling and bad faith litigation, and also provides coverage and
excess exposure opinions.
May 2011 ative discharge was detectable and
discoverable in the soil and groundwater by virtue of reasonable testing.” As a result, the insurer was required to provide a defense to the
dry cleaner.
Damages
Comprehensive general liability
policies typically limit coverage to
claims against the insured for damages. A question that has arisen in
dry cleaner environmental coverage
actions is whether a lawsuit seeking
reimbursement for the cost of environmental remediation constitutes a
suit seeking “damages.”
This precise issue came up in
Morrow I. The insurer argued that
the lawsuit by the shopping center
operator against the dry cleaner for
reimbursement for the cost of environmental remediation was not
a damages action. The court disagreed, holding that, under Virginia
law, “environmental remediation
costs constitute damages within the
meaning of a comprehensive general liability insurance policy,” particularly when “the suit is brought by
a private party seeking to recover
the clean-up costs it incurred, as opposed to one brought by a governmental agency seeking to compel a
polluter to pay to remediate pollution damage.”
Similarly, in Spic and Span, Inc. v.
Continental Casualty Company, 552
N.W.2d 435 (Wis. Ct. App. 1996), the
smell like rotten eggs, and allegedly
causes respiratory health problems.
As a result, state and federal lawmakers have taken action, and thousands of lawsuits have been filed.
This article provides an update on
the Chinese drywall investigation as
well as a summary of significant insurance coverage decisions to date.
Federal
Date
and
State Action
to
With the majority of the affected
homes, Florida is at the center of the
Chinese drywall controversy. Threehundred million pounds — more
than half of the total amount of imported Chinese drywall — was imported to Florida, enough to build
approximately 36,000 homes. With
the concurrence of the U.S. Centers
for Disease Control and Prevention
(“CDC”), the Florida Department of
court held that a lawsuit brought by
the developer of a shopping center
against a dry cleaner that formerly
operated at the site was a suit for
“damages.” The insurers argued
that the developer was not seeking
“damages” because it merely sought
indemnification from the dry cleaner for government-mandated response costs. The court disagreed,
holding that, under Wisconsin law, a
suit seeking to recover remediation
costs and other damages with respect to contamination that extended beyond the premises formerly
occupied by the dry cleaner fell
within the meaning of “damages.”
Finally, in Employers Insurance,
Cal Water sought to recover from its
insurer the estimated costs to comply with certain consent decrees it
had entered into with the DTSC. The
court held that, under California law,
costs incurred pursuant to a consent
decree in a water contamination case
constitute “damages” under a comprehensive general liability policy.
Conclusion
To date, there have been only a
handful of reported decisions addressing coverage issues arising
from dry cleaner contamination.
Whether coverage exists has depended on the policy language, the
governing law, and the nature and
cause of the contamination at issue.
—❖—
Health (“FDOH”) conducted the first
testing of Chinese drywall in 2009;
two Chinese manufactured drywall
samples from Florida houses were
selected for analysis. Additionally,
four samples of U.S. manufactured
drywall were tested. The FDOH
found a corrosive sulfide-based
compound in the Chinese drywall
samples.
Ultimately, an Interagency Drywall Task Force, spearheaded by
the CPSC, was established to study
homes with Chinese drywall and to
investigate claims of property damage and bodily injury associated with
the product. The Interagency Drywall Task Force includes the CPSC as
the lead agency, along with the CDC,
the U.S. Environmental Protection
Agency (“EPA”), the U.S. Department
continued on page 6
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5
Chinese Drywall
continued from page 5
of Housing and Urban Development
(“HUD”), as well departments of
health from Florida, Louisiana and
Virginia, among others.
On Friday April 2, 2010, the CPSC
and HUD issued “interim remediation guidance” to homeowners
impacted by Chinese manufactured
drywall. The two federal agencies
advised homeowners that “problem
drywall” should be removed and
replaced along with other components that the drywall may have
corroded. The guidance relates that
completed studies show a clear connection between certain Chinese
manufactured drywall and corrosion in homes.
The CPSC also released a staff report on data from a study by Lawrence Berkeley National Laboratory
that measured chemical emissions
from samples of drywall obtained
for the CPSC as part of the federal
investigation. The study confirmed
the presence of hydrogen sulfide
in some Chinese drywall. Hydrogen
sulfide is a potentially corrosive gas
that was suspected of causing the
corrosion associated with Chinese
drywall. The hydrogen sulfide emission rates of certain Chinese drywall
samples were 100 times greater than
the rates of drywall samples not produced in China. According to the interim guidance, the patterns of reactive sulfur compounds emitted from
drywall samples show a clear distinction between the Chinese drywall
samples manufactured in 2005/2006
and non-Chinese drywall samples.
“Our investigations now show a
clear path forward,” said CPSC Chairman Inez Tenenbaum. “We have
shared with affected families that hydrogen sulfide is causing the corrosion. Based on the scientific work to
date, removing the problem drywall
is the best solution currently available to homeowners. Our scientific
investigation now provides a strong
foundation for Congress as they consider their policy options and explore
relief for affected homeowners.”
Who Is Going
to
Pay?
Once it became clear that remediation of Chinese drywall was nec6
essary, the focus turned to how to
pay for it. It has been estimated that
Chinese drywall remediation efforts could average approximately
$100,000 per home. The Internal
Revenue Service approved a rule in
late 2010 that would permit taxpayers with defective drywall in their
houses to deduct the cost of repairs
and replacement of damaged appliances. Under the new rule, taxpayers can deduct drywall related “casualty losses” in the year in which
the loss occurs, as long as those
losses are not compensated by insurance or other sources. This rule,
of course, primarily benefits homeowners who can afford to fund the
necessary remediation themselves.
Obviously, most homeowners are
not in a position to conduct such remediation. Thus, the core question
remains: Who is going to pay?
While there has been some discussion of potential federal relief,
the primary targets to date have
been: 1) the manufacturers, and 2)
insurers. These targets have been
pursued via thousands of state and
federal lawsuits. The federal products liability suits, along with some
insurance coverage suits, have
been rolled into the Chinese Manufactured Drywall Products Liability Multi District Litigation (“MDL”)
pending in the Eastern District of
Louisiana. Still other suits are pending in state courts across the United
States. So far, the results have been
mixed with respect to the manufacturers, with some progress being
made with a significant manufacturer. On the insurance coverage side,
some clarity has developed with respect to first-party claims. However,
questions abound, particularly with
respect to third-party coverages.
Knauf Remediation
Pilot Program
Although the numbers are not
yet precisely known, it is thought
that two primary manufacturers,
Knauf Tianjin and Taishan Gypsum,
produced the bulk of the problem
Chinese drywall used in the United
States between 2004-2007. Knauf is
a German company that manufactured drywall in China through a
Chinese subsidiary (Knauf Tianjin)
and then imported it to the United
States. Taishan Gypsum is reportedly a Chinese “state sponsored”
drywall manufacturer with operations in China. Until recently, no
manufacturer had formally stepped
forward to discuss problems with
its product or to negotiate potential
remediation efforts.
In a significant development, it
was announced in October 2010
that Knauf has agreed to pay to repair 300 homes in four states in a
remediation pilot program. Owners
of homes in Florida, Louisiana, Alabama and Mississippi with drywall
manufactured by Knauf are eligible
to participate in the program. Reportedly, a Louisiana-based supplier
and several home builders and insurers are contributing to the cost
of the repairs.
According to reports, more than
3,000 claims are pending against
Knauf. The pilot remediation program might provide the framework for a larger settlement of
these claims. It remains to be seen
whether Knauf will expand its remediation program to include more
homes, and perhaps condominium
developments.
CPSC Chairman Tenenbaum described Knauf’s decision to participate in the remediation pilot program as a “major breakthrough.”
Tenenbaum also said that she believes one particular governmentsponsored Chinese company is resistant to cooperating and currently
represents an impediment to international collaboration on the issue.
She did not name the company, but
is likely referencing Taishan Gypsum. Tenenbaum said in January
2011 that the United States has not
been able to persuade Chinese officials to agree to compensate U.S.
homeowners for losses associated
with Chinese drywall. At a media briefing during a trip to China,
Tenenbaum said:
We have not been able to get
any of the Chinese manufacturers to come to the table to discuss our scientific findings and
what, if any, they think their responsibility is to the American
homeowner … We are still very
hopeful that the Chinese companies can come to the table
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The Insurance Coverage Law Bulletin ❖ www.ljnonline.com/alm?ins
May 2011
Chinese Drywall
continued from page 5
and let us explain what our findings are and see if they can participate in helping us make our
homeowners get a remedy in
getting the Chinese drywall out.
Thus, while there continues to be
progress with respect to the resolution of claims involving Knaufmanufactured drywall, considerable
roadblocks still exist regarding Chinese participation in the necessary
remediation. The situation continues to evolve.
Insurance Coverage Decisions
The landscape of Chinese drywall
related insurance coverage decisions is also continually evolving.
There have been a few important
decisions to date in both the firstparty (primarily homeowners) and
third-party (primarily CGL) claims
contexts. The focus of the coverage
decisions has been in a few key areas. Specifically, decisions to date
have principally discussed: trigger
of coverage issues, definition of “occurrence,” number of “occurrences,”
pollution exclusions, and “business
risk” exclusions. This section discusses a few key Chinese drywall
coverage decisions issued to date.
First-Party Claims
In one of the first drywall coverage
decisions, the U.S. District Court for
the Eastern District of Virginia found
on June 3, 2010 that a homeowner’s
policy did not cover damages associated with Chinese manufactured
drywall. In Travco Insurance Company v. Larry Ward, 715 F. Supp. 2d
699 (E.D. Vir. June 3, 2010), Larry
Ward alleged that the drywall in his
Virginia Beach home released sulfuric gases into his home, damaging
his air conditioning, garage door
and flat-screen televisions. When
Ward made a claim under his homeowner’s insurance policy, his insurer sought declaratory relief as to
whether there was coverage.
On the insurer’s motion for summary judgment, the court found that
the damages alleged did constitute
a “direct physical loss” within the
meaning of the policy. However, the
court found that the policy’s latent
defects, faulty materials, corrosion
and pollution exclusion clauses exMay 2011 cluded coverage for Ward’s damages. The court also found that none
of the losses qualified for coverage
under the policy’s ensuing loss provisions. Thus, the court ruled that
the policy did not cover the costs
associated with removing or replacing the drywall, or any damages
stemming from the drywall. However, the court would not “categorically rule out” that other, as-yet unclaimed, losses might be covered.
Critically, and in reliance in part
upon Travco, the presiding judge
in the Chinese drywall MDL granted 10 homeowners’ insurers’ motions to dismiss. In In re Chinese
Manufactured Drywall Prods. Liab.
Litigation, 2010 U.S. Dist. LEXIS
133497 (E.D. La. Dec. 16, 2010),
the court applied Louisiana substantive law, as the policies were
all issued to Louisiana homeowners on Louisiana properties. Presiding MDL Judge Eldon Fallon found
that, based upon Travco, the damages alleged did constitute a “direct
physical loss,” but that the loss was
excluded under the policies’ faulty
materials and corrosion exclusions.
The judge concurrently found that
latent defect, pollution, contamination, dampness and temperature exclusions in some or all of the policies did not preclude coverage for
the Chinese drywall claims. Importantly, the court’s refusal to apply
the pollution exclusion was based
upon the prevailing Louisiana interpretation of the pollution exclusion,
which limits its application to the
industrial environmental pollution
context.
Most of the existing first-party decisions have been decided in favor
of the insurers, and the landscape
regarding such claims has begun to
be charted. These decisions, particularly the MDL decision regarding
the application of the pollution exclusion, may provide clues regarding how third-party coverage claims
may be decided going forward.
Third-Party Claims
In the first significant Florida coverage decision, Amerisure Mutual
Insurance Co. v. Albanese Popkin
The Oaks Development Group L.P.,
2010 U.S. Dist. LEXIS 125918 (Nov.
30, 2010), the U.S. District Court for
the Southern District of Florida held
that the developer’s insurer had no
duty to provide coverage or a defense for claims related to Chinese
drywall made against a developer.
The court ruled that the commercial general liability policies issued
to the developer did not cover the
claimed losses because the damages
at issue “manifested” before the developer’s policies were issued.
The coverage dispute arose from
the lawsuit that Alan and Annette
Goddard filed against the developer, Albanese Popkin. According
to court documents, Albanese Popkin completed construction on the
Goddards’ Florida home in October 2006. The Goddards discovered
damage to the air conditioning coils
in one of their seven air handling
units and a periodic sulfur odor in
December 2006. Based upon the
allegations made in the Goddards’
complaint, the court found that the
damages related to Chinese drywall
“manifested” before the applicable
policies’ January 2008 effective date.
Reaffirming Florida’s adherence to
the “manifestation” trigger doctrine,
the court wrote:
Manifestation of the damage is
relevant in this context because
it establishes that the Goddards
sustained actual damage before
the policy in question became
effective. Therefore, there was
no “bodily injury” or “property
damage” during the policy period.
In an unreported decision involving third-party coverage, Scottsdale
Ins. Co. v. American Safety Indemnity Co., Case No. 10-0445-WS-N
(S.D. Ala. Nov. 10, 2010), the U.S.
District Court for the Southern District of Alabama considered whether an insurer had an obligation to
defend a complaint based upon Chinese drywall damages. The insured
builder was issued commercial general liability policies by it insurers,
Scottsdale and American Safety.
The builder sought coverage from
its insurers for allegations brought
against it in two underlying lawsuits
pending in Alabama state court that
allegedly arose from property damage caused by defective Chinese
drywall. Scottsdale agreed to defend
the builder against the allegations
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The Insurance Coverage Law Bulletin ❖ www.ljnonline.com/alm?ins
7
Chinese Drywall
continued from page 7
in the underlying lawsuits, however,
American Safety declined to participate in the defense on the basis that
the pollution exclusion applied to
preclude coverage. Scottsdale filed
suit, and American Safety filed a
12(b)(6) motion to dismiss on the
basis that it had no duty to defend
or indemnify the builder in the underlying lawsuits.
Specifically, American Safety asserted that the absolute pollution
exclusion in its policy precluded
coverage for the drywall-related
claims, and thus American Safety
had no duty to participate in the defense with Scottsdale. The court, applying Georgia law, but focusing on
the language of the pollution exclusion in the American Safety policy,
first opined that the fumes and off
gassing from the allegedly defective
drywall constituted a “pollutant” as
defined by the policy.
The court then, pointing to the
language in the exclusion that
stated that it only applies to losses
arising from the discharge of pollutants from a site where builder or its
agents “are performing operations,”
opined that the pollution exclusion
did not unambiguously preclude
coverage. The court ultimately concluded that the allegations against
the builder in the underlying litigation appeared to relate, in part,
to a discharge of a pollutant from
the allegedly defective drywall that
occurred and continued to occur
long after the builder had ceased
operations at the construction site.
As such, the court was not satisfied
that American Safety had shown
that all claims in the underlying action were clearly excludable, and
thus, American Safety had a duty to
defend and the court denied its motion to dismiss.
In a more recent decision, U.S. District Court Judge K. Michael Moore
of the Southern District of Florida
has ruled that a pollution exclusion
bars coverage for personal injuries
and property damages associated
8
with Chinese drywall. In General
Fidelity Insurance Co. v. Katherine
L. Foster et al., Case No. 09-80743,
(S.D. Fla. Mar. 24, 2011), the court
found that the compounds released
by the Chinese drywall were “pollutants” within the meaning of the
policy. The court further found that,
under prevailing Florida law, the application of the pollution exclusion
is not limited to injury or damage
caused by environmental or industrial pollution. The court granted
summary judgment to the insurer,
ruling that it has no duty to defend
or indemnify.
The construction of the pollution
exclusion will continue to be a critical
issue in ongoing third-party Chinese
drywall coverage cases. Different jurisdictions have vastly different approaches to such exclusions. As the
In re Chinese Manufactured Drywall
Prods. Liab. Litigation first-party decision demonstrates, insurers subject
to Louisiana law will have to contend
with a more restrictive view of the
pollution exclusion. In contrast, so
far it appears that Florida will continue to take a broader view of the
pollution exclusion, applying it outside of the industrial environmental
pollution context, and specifically to
indoor air claims. Accordingly, the
law applicable to a particular Chinese drywall coverage case, along
with the forum of that dispute, can
have a potentially dispositive impact
on the interpretation of the pollution
exclusion.
The Bodily Injury Question
Based upon the investigations to
date, it is clear that at least some Chinese manufactured drywall causes
property damage. Corrosion to metal
components, particularly copper, has
been confirmed, and the emission of
corrosive hydrogen sulfide fumes
has been established.
There is less certainty with respect
to allegations of bodily injuries associated with Chinese drywall. The
CPSC has stated that hydrogen sulfide gases are acidic and, in instances of significant exposure, have been
known to irritate the eyes and respiratory tract. Further, the CPSC has
For even FASTER service, call:
877-256-2472
stated that it is “possible that the additive or synergistic effects of these
and other compounds in the subject
homes could cause irritant effects.”
The CDC, in its role as a member of
the Interagency Drywall Task Force,
recently released a study targeting
11 deaths that took place in Florida,
Louisiana and Virginia about which
family members had expressed a
concern regarding a potential connection with Chinese drywall. The
CPSC studies, released in February
2011, found that exposure to Chinese drywall was not believed to be
a factor in the 11 deaths. Rather, in
all 11 cases, the decedents had significant pre-existing chronic health
conditions before their deaths, including cancer, diabetes, and chronic heart disease. While the CPSC
concluded that none of the deaths
were associated with exposure to
Chinese drywall, the CDC recommended that the CPSC continue to
monitor health reports and involve
the CDC when appropriate.
Thus, the bodily injury investigations are ongoing and no conclusive
determinations have yet been made
regarding the alleged human health
impacts of defective Chinese drywall. Now that the property damage
aspect of Chinese drywall has been
largely confirmed, and as the recent
CPSC reports have demonstrated,
increased attention will be paid to
this component of Chinese drywall
claims going forward.
One reality is clear: The Chinese
drywall issue continues to develop
at a rapid pace on numerous fronts.
Future announcements from the Interagency Drywall Task Force will
continue to shed light on the viability and potential scope of alleged
bodily injury claims. Interested parties can also expect that pressure on
the manufacturers will continue and
that the pace of coverage decisions
will accelerate. Developments in
these areas will further clarify how
Chinese drywall remediation efforts
will be funded going forward.
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The Insurance Coverage Law Bulletin ❖ www.ljnonline.com/alm?ins
May 2011