Cutting Edge Insurance Litigation Issues: Chinese Drywall to Privacy Claims Nicholas E. Zito RAMEY, CHANDLER, MCKINLEY & ZITO, P.C. www.rameychandler.com South Texas College of Law 14 Annual Insurance Law Symposium January 21-22, 2010
Chinese DrywallDrywall Manufacturing • Mined with gypsum with additives (USA) • Synthetic gypsum (Chinese)
Chinese Synthetic Gypsum • Synthetic Gypsum is a by product of coal-fired power plants (fly ash), residue from coal combustion (sulfur dioxide) is scrubbed to create calcium sulfate (gypsum) • Synthetics made in the USA are gathered from smokestacks after scrubbing resulting in a cleaner product • Chinese synthetics contain impurities such as strontium sulfide – reacts with heat and moisture (humidity) to form hydrogen sulfide gas • LA Times reports Chinese drywall also contains phosphogypsum, a radioactive substance banned for use in construction in the U.S. since 1989 • Imports began as a result of shortages caused by construction boom earlier in decade and reconstruction of homes in Gulf Coast following hurricanes in 2004-2005
Chinese Drywall Related Complaints Problems began in 2008 with the following complaints most likely due to off-gassing of hydrogen sulfide: • Rotten egg smell; • Corrosion: copper wire, AC evaporators, appliances, fire & sprinkler systems and various electronic systems • Claimed illnesses and physical symptoms.
The back-side of this drywall (not normally visible to the resident) is labeled as "MADE IN CHINA."
The smaller sample (slightly gray in color) was taken from drywall which was removed from the home and replaced with new wallboard (white in color)
The ground wire connected to the green screw is blackened and corroded. This wire should be copper-colored
The copper coils on this air conditioner unit are blackened and corroded
Magnitude of Problem • Product shortages following several hurricanes resulted in 500 million pounds or 7 million sheets being imported • Installed in an estimated 100,000 homes per the Wall Street Journal • Estimated cost of remediation at $100,000 per 2400 sq. ft. home • Per CPSC as of December 22, 2009 2,360 incident reports from homeowners in 35 states
CPSC Investigation • Investigating adverse health affects (levels of formaldehyde from other building materials and hydrogen sulfide detected-synergistic affect?) • Methods of identifying presence of Chinese drywall • November and December interim reports • Contact with importers-companies have been ordered to contact CPSC before distributing any Chinese manufactured drywall from their inventory • Chinese drywall CPSC website
Congressional and Governmental Action • Several bills introduced into Senate by Florida and Louisiana Senators • Drywall Safety Act of 2009; • Mortgage Reform and Anti-Predatory Lending Act • Involves study of property insurance for allegedly contaminated homes • The Foreign Manufacturers Legal Accountability Act of 2009 • Easing joinder of foreign company in U.S. Courts; • Requiring foreign manufacturers to retain business representative in state where it does significant business for purpose of service of process • Foreign manufacturers to agree to be held accountable by U.S. courts when sued.
Congressional and Governmental Action • HUD Action • Community Development Bloc Grant Program; • FHA insured homes – lenders instructed on December 22, 2009 to operate under FHA Type 1 Special Forebearance rules.
Potential Parties • Builders • Sub-contractors • Real Estate Developers • US Distributors/or retailers • Importers • Manufacturer/related controlling entities • US Manufacturers using synthetics • Possibility U.S. manufacturers recycled Chinese drywall to make domestic drywall • Numerous Chinese manufacturers identified in MDL action – 36 different variations of Chinese drywall
Potential Legal Claims • Negligence • Strict Liability • Breach of Contract • Breach of Warranty • DTPA • Magnuson-Moss Warranty
Damages Alleged • Testing costs • Air • Tearing our of walls to identify Chinese product • Replacement of walls/ceilings • Replacement of wiring, corroded pipes, appliances, AC unites, fixtures, smoke detectors and sprinkler systems • Loss of use • Diminution of property value (stigma) • Bodily injury (irritant effects)
Legal Actions Pending • MDL-2047 Chinese Drywall Litigation pending in New Orleans • MDL website • Knauf Plasterboard (Tianjin) Co. (KPT) entered into a pre-trial order accepting service as to homeowner Plaintiffs named in Omnibus Class Action Complaint by 12/2/09. Complaint cannot be amended to add new plaintiffs – avoid Hague Convention service problems
Legal Actions Pending • Class action suit filed in Federal court in December in New Orleans, lead Plaintiff is Sean Payton, head coach of the New Orleans Saints • Lead Class counsel, Russ Herman, says additional 600 plaintiffs who did not join first class action will be joined in new class action to be filed overseas. • First bench trials on property damage involving Virginia Plaintiffs in MDL 2047 are to begin January 25, 2010 against Taishan Gypsum Co.
Legal Actions Pending • Default judgment entered September 25, 2009 against Taishan Gypsum Co. in MDL action. • LA Attorney General Buddy Caldwell filed suit in Orleans Parish on January 13, 2010 against multiple entities associated with Knauf Plasterboard (Tianjin), the primary manufacturer of Chinese drywall making its way into Louisiana. Other defendants are international and domestic manufacturers, distributors, importers and builders. Claims economic loss to state due to Chinese drywall. • WCI Chinese Drywall Trust sues 14 insurers in Eastern District, Louisiana in January, 2010 asserting a declaratory judgment action and breach of contract claims.
Legal Actions Pending • Pro-active suit filed by Lennar Homes in Florida • Common law indemnity • Negligence • Product liability theory • Implied warranty • Express warranty • Breach of contract • Lennar set aside 39.8 million to remediate at least 400 homes: homeowner out up to 6 months – sign waiver of liability except as to BI claims
Legal Actions Pending • Dec action on coverage; Builders Mutual Ins. Co. v. Dragas, et al in US Dist. Ct. in Virginia • Actions vs. US Manufacturers: Swindler v. Georgia Pacific Gypsum, LLC filed in Florida alleges Magnuson-Moss Warranty claim for synthetic gypsum. GP says it has used synthetic gypsum for years without complaint.
First Party Coverage Issues – HO Policies • When did the loss occur? (Trigger coverage test that will be applied) • Has there been direct physical loss to property? • Is the loss due to inherent vice or latent defect? • Is the loss due to corrosion? • Is the loss caused by a pollutant? • Is the loss due to faulty, negligent, inadequate or defective: • Design, specifications, workmanship, repair, construction, renovation or remodeling? • Materials used in repair, construction, renovation or remodeling?
Trigger of Coverage – HO Policies Liability claims – “injury – in fact” trigger applied Don’s Building Supply, Inc. v. One Beacon Insurance Co.,267 S.W.3d 20 (Tex. 2008) Pre – Don’s case law on trigger issue: Allstate Insurance Co. v. Hunter, 242 S.W.3d 137 (Tex. App. Ft. Worth, 2007) applied manifestation trigger Don’s probably trumps Hunter See: Injury-In –Fact Coverage-HO Policy View, IRMI.com October 2008 By R. Brent Cooper and Katie McClelland
Direct Physical Loss • “We insure against risk of direct physical loss to property” • “property damage means physical damage or destruction of tangible property” • Has the drywall sustained physical damage before manifestation of damage? • Property must sustain damage from an external source to qualify as “direct physical loss or damage” – builders risk policy, Trinity Industries, Inc. v. INA, 916 F. 2d 267 (5th Cir. 1990) • Has there been property damage to other property? • Damage from hydrogen sulfide to ac system evaporator or electrical systems
Inherent Vice or Latent Defect • ‘We do not insure loss: 3. caused by or consisting of a. wear and tear b. Inherent vice, latent defect or mechanical breakdown” Insuring agreement will most likely not cover the cost of removal or repair of “Chinese Drywall” due to the internal defect/sulfur impurities.
Corrosion Is there coverage for the corrosive effect of the hydrogen sulfide off-gassed by the Chinese Drywall? It is “property damage” But policy does not insure loss: 3. “caused by or consisting of: c. Smog, rust, or other corrosion”
Faulty or Defective Design or Materials “We do not insure against loss consisting of any of the following: • Faulty, negligent, inadequate or defective: 2. design, specification, workmanship, repair, construction, renovation, remodeling…… 3. materials used in repair, construction, renovation or remodeling;” No coverage for repair or replacement of Chinese Drywall. But….. “ensuing loss” coverage? How about the damage to other property: black soot, electrical systems; HVAC coils?
The Pollution Exclusion “We do not insure loss: • Caused by or consisting of: e. Discharge, dispersal, seepage, migration, release or escape of pollutants Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant, including, smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
Exclusion held not to be ambiguous: Noble Energy, Inc. v. Bituminous Cas. Co., 529 F. 3d 642 (5th cir. 2008). Under Texas law reasonable expectations of insured are not considered where policy exclusion is unambiguous Pollution exclusion applied to preclude coverage for liability claim arising out of carbon monoxide exposure claim by apartment dweller which was caused by a blocked furnace vent. See Nautilus Insurance Company v. County Oaks Apartments, Ltd., 566 F. 3d 452 (5th Cir. 2009). (Exclusion applied to contained pollutants as well, i.e. even if stayed within the apartment)
Did the loss occur because of alleged “discharge or release”? “To release-set free from confinement” Q. Is Carbon monoxide a pollutant? It can be since it can be an irritant and in certain exposures can be fatal. Hydrogen Sulfide can be an irritant; it can cause damage. How about Phosphogypsum?
GL Coverage Issues 1. Is there an occurrence? Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) Allegedly defectively built foundation resulted in sheet rock and stone veneer cracks. Held: Damage to contractors work can be an occurrence.
CGL Coverage Issues 2. Is there property damage? Lessons from Lennar Corp. Great Amer. Ins. Co., 200 S.W.3d 651 (Tex.App. [14th] 2006, Pet. Denied) - “EFIS already in an unsatisfactory state when applied to homes because it is inherently defective. Therefore defective EFIS does not constitute property damage.” No coverage for removal of EFIS by Lennar. Coverage could exist for water damage to other property.
CGL Coverage Issues • How many occurrences? Since Lennar was not a designer or manufacturer, each home it built and sold was a separate occurrence. ($250,000.00 SIR per occurrence equates with no insurance coverage)
CGL Coverage Issues • Will the pollution exclusion apply? Most likely, yes. Typical policy language is unambiguous. Absolute pollution exclusion is pretty much “absolute”.
CGL Coverage Issues • Your work exclusion/subcontractor exception. Most small builders policies now have modified insuring agreement exempts coverage for property damage arising out of subcontractors work.
CGL Coverage Issues • What about exclusion M, property damage to “impaired property” or property not physically injured? Lennar said this exclusion might apply to replacement of EFIS but not to the repair of the water damage to homes.
CGL Coverage Issues • What about the “sistership” exclusion? The recall or removal exclusion. Might apply to preventative measures – removal and replacement (there has been no formal government action yet, although it is expected) Exclusion would not apply to cost to repair other (water) damaged property per Lennar
Product Liability and DTPA Indemnity Claims • Section 82, TCRCP • Innocent seller/retailer can claim indemnity from manufacturer • Sheet rock will be deemed a product – see K-2, Inc. v. Fresh Coat, Inc., 253 S.W.3d 386 (Tex.App.Beaumont, 2008) EFIS applied by subcontractor was a product-they sold services and materials) • No indemnity for “independent liability” of seller • (If sub pays GC based upon contractual liability claim – Section 82 independent liability exemption applies, See K-2 • No indemnity where manufacturer cannot be joined (if you can’t get the Chinese manufacturer served)
Product Liability and DTPA Indemnity Claims • Section 17.555 Tex. Bus & Comm. Code • Statutory indemnity may be claimed by contractor or sub against distributor/manufacturer where homeowner brings action under the DTPA.
Recommended Reading on Chinese Drywall Claims • Christopher Beltner and Joseph Hanna, “The Gathering Storm of Chinese Drywall Defect Claims” For the Defense, (June 2009) p. 36 • Caryn L. Daum, “The Emergence of Chinese Drywall Claims: A Look at First Party Coverage Issues” DRI Covered Events, Vol. 1 Issue 25 • Brian S. Martin and Rodrigo Garcia, Jr., “The Coverage Conundrum in Chinese Drywall Claims” Insurance Journal, (September 29, 2009) • H. Lockwood Miller, III “Chinese Drywall: A Building Problem” DRI-The Voice, Vol. 8, Issue 43 • http://www.myfloridaeh.com/community/indoor-air/drywall.html
Nanotorts Nanotechnology: An Emerging Risk
Nanotorts • Nanotechnology: Things built on a molecular scale • Already appears in numerous products • Evidence of EHS (environmental health & safety risks) • EPA is conducting a study • Touted as the next “asbestos” tort as “nano tubes” are claimed to be similar to asbestos particles – airborne and skin exposure
Nanotorts • Major carriers issued CGL exclusions in 2008 • Continental Western • Firemen’s Insurance of Washington, D.C. • Union Insurance Company • Acadia Insurance Company
Nanotorts • This “endorsement excludes bodily injury, property damage, and personal and advertising injury related to the exposure of nanotubes and nanotechnology in any form. This includes the use of, contact with, existence of, presence of, proliferation of, discharge of, dispersal of, seepage of, migration of, release of, escape of, or exposure to nanotubes or nanotechnology.”
Nanotorts • There are already ads and website for “carbon nano tube attorneys” • For more see www.nanolawreport.com
BPA Suits Insureds Left Out in the Cold?
BPA Suits • Bisphenol A: MDL No. 1967 U.S. Dist. Court Kansas • No bodily injury alleged to avoid denial of class action • No coverage per Federal Court ruling in Chicago as no “bodily injury” alleged • Potential mass tort due to wide spread exposure
BPA Suits • Carriers adding BPA policy exclusions • Pending Congressional bills in both houses • Potential “BI” claims • See Dwyer, “Endocrine Disruption Injury Claims” For the Defense (January 2010) p. 62