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July 2010 Update on Insurance Coverage for Chinese Drywall Claims

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July 2010 Update on Insurance Coverage for Chinese Drywall Claims July 2010 Update on Insurance Coverage for Chinese Drywall Claims Recent Developments In Chinese Drywall Litigation Since our April 2010 update, activity in Chinese drywall litigation has intensified, culminating with the first jury trial verdict in the country. On June 18, 2010, a Florida jury awarded a Miami couple $2.5 million in damages against Banner Supply Co. The verdict includes remediation costs as well as $1.7 million for loss of enjoyment of the home and diminished value in the home. The plaintiffs sought over $4 million in damages for negligence and loss of value of their home while Banner Supply Co. sought to pay only actual expenses incurred. The Banner Supply Co. verdict is seen as a bellweather case in Chinese drywall litigation because it is the first jury verdict; the previous rulings have been issued by the federal court in the multi-district litigation (MDL) in New Orleans (In re: Chinese- Manufactured Drywall Products Liability Litigation, MDL No. 2047 (E.D. La.)). More than 2,100 plaintiffs have filed lawsuits in federal court alleging similar damages. Some defendants are settling rather than litigating Chinese drywall claims. On the same day that the Miami jury handed down the $2.5 million award in the Banner Supply Co. case, Knauf Plasterboard Tianjin settled two cases scheduled for trial on June 21st in the Louisiana MDL (In re: Chinese— Manufactured Drywall Products Liability Litigation (Clement v. Knauf Plasterboard (Tianjin) Co. Ltd., Case No. 09-7628, and Campbell v. Knauf Plasterboard (Tianjin) Co. Ltd., Case No. 09-7628))). Terms of the settlements are confidential. These settlements follow an April 27, 2010 ruling in which the MDL court required Knauf to pay a Louisiana couple $164,000 in damages plus reasonable attorneys’ fees and costs (In re: Chinese-Manufactured Drywall Prods. Liab. Litig. (Hernandez v. Knauf Gips KG, No. 09- 6050), MDL No. 2047 (E.D. La., decided April 27, 2010)). In a tentative class action settlement in Florida, two companies have offered to pay a total of $6.6 million to homeowners in the Homestead, Florida neighborhood (Jason Harrell v. South Kendall Construction Corp., No. 09-08401 (Fla. Cir., 11th Judicial Cir., Miami-Dade Co.)). The two companies, South Kendall Construction and Keys Gate Realty, have submitted the proposed settlement to the court for approval. South Kendall Construction has also filed for bankruptcy. In another development, the Chinese manufacturer, Taishan Gypsum Co., Ltd., has appeared in the MDL to appeal the April 8, 2010 $2.6 million ruling against it reported in our April update. The $2.6 million award included remediation costs, damages to personal property, alternative living costs, costs associated with foreclosures and/or bankruptcy, costs due to mortgage deferral or the inability to refinance and loss of income, and loss of use and enjoyment of the property. Taishan’s appearance is a positive development for plaintiffs and domestic defendants because the company had previously refused to participate in the U.S. litigation. Recent Developments In Chinese Drywall Insurance Coverage Litigation While plaintiffs are beginning to prevail in lawsuits against manufacturers and distributors of Chinese drywall, insurers are enjoying modest success fending off responsibility for coverage for these liabilities. (Continued on page 2) Banner Supply Co.’s coverage litigation illustrates the situation that many insureds face. While Banner Supply Co. sustained a $2.5 million verdict as a defendant in the underlying Chinese drywall litigation, its insurers sued the company in Florida to obtain a ruling that they have no duty to defend or indemnify Banner Supply Co. for those very liabilities (Chartis Speciality Ins. Co. et al. v. Banner Supply Co., No. 8:10-cv-00339-JSM-EAJ (M.D. Fla.)). Motions are pending in that case but have not yet been decided. Most recently, a Virginia court has once again ruled against coverage for Chinese drywall. In Travco Insurance Co. v. Ward, Civ. No. 2:10cv14 (E.D. Va., Norfolk Division, June 3, 2010), a Virginia federal court partially granted Travco’s motion for summary judgment and held that the insurer had no duty to insure the homeowner for damages arising out of defective Chinese drywall. The court initially found coverage by ruling that loss of use constituted direct physical loss insured by the policy and that physical damage to the property is not a necessary condition for coverage. The court rejected Travco’s argument of no direct physical loss because the drywall was “physically intact, functional and has no visible damage.” Because, in the court’s words, the home “has been rendered uninhabitable by the toxic gases rendered by the Chinese Drywall,” the home had sustained a direct physical loss. Nevertheless, the court held that the loss was excluded by the policy’s latent defect, faulty materials, corrosion, and pollution exclusions. The court also refused to find coverage under the policy’s ensuing loss provisions for any of the claimed damages but left open the door for other losses that might fall under the ensuing loss provisions. The Norfolk court expressly refused to follow Finger v. Audubon Ins. Co., No. 09-8071, 2010 WL 1222273 (La. Civ. Dist. Ct. Mar. 22, 2010), which rejected many of the same insurer arguments asserted in Travco. From a policyholder perspective, both the Banner Supply Co. and Travco cases are disturbing because the insurers filed the lawsuits against policyholders to obtain a declaration of no coverage. These cases illustrate the perils created by insurance companies’ proactive approach to Chinese drywall coverage litigation. Both cases were filed in jurisdictions arguably more favorable to insurers; the insurers filed their case against Banner Supply Co. in Florida, which has some favorable law on issues relevant to coverage for Chinese drywall. Travco filed its case in the very court that previously found for an insurer in another drywall case – also filed by an insurer against a policyholder – which we discussed in our last update. In Builders Mutual Insurance Co. v. Dragas Management Corp., Civ. Action No. 2:09cv185 (E.D. Va.), another federal judge in Norfolk ruled against the insured homebuilder, Dragas Management Corporation (Dragas), and granted an insurer’s motion to dismiss Dragas’ breach of contract claim. The court gave Dragas 14 days to amend its claim to allege facts sufficient to show a legal obligation to pay. Dragas has since amended its complaint and the insurer again has moved to dismiss on the ground that the policy does not cover the homebuilder’s voluntary remediation of property containing Chinese drywall. Dragas argues that it has received dozens of demands and threats of suit sufficient to trigger coverage under its policies. Not surprisingly, the homeowner in Travco attempted to transfer that case from Virginia to the Eastern District of Louisiana to avoid Builders Mutual, but the Travco court denied that motion. (continued on page 3) These cases demonstrate that insurers will take a proactive approach to evading their coverage obligations by filing actions against their insureds in insurer-friendly jurisdictions. Their strategy will be to obtain pro-insurer rulings in favorable jurisdictions and then rely on those pro-insurer rulings in litigation around the country with their insureds. Insureds should adopt an aggressive approach to prevent the insurance industry from controlling Chinese drywall coverage litigation. Insureds with sizeable exposures should carefully analyze their legal positions and, if feasible, file declaratory actions against their insurers in appropriate jurisdictions of their choice. If insureds do not take affirmative steps, insurers will take control of the coverage issue with outcomes potentially unfavorable to policyholders. Defendants in suits filed by homeowners, such as manufacturers, distributors, and homebuilders, could find themselves whipsawed between plaintiffs seeking damages and insurers refusing to honor their obligations to pay those damages. A strategic approach is essential to protect the interests of insureds facing Chinese drywall liabilities. Our Chinese Drywall Team As these cases show, a thoughtful insurance recovery strategy is critical for any company facing Chinese drywall liability. Our multi-disciplinary Chinese Drywall Team includes attorneys experienced in policyholder insurance coverage, construction, real estate practice, and litigation. Please contact any of the team leaders mentioned below for more information or assistance with Chinese drywall-related questions. Katherine J. Henry Katherine J. Henry represents policyholders seeking insurance coverage for all types of liabilities, including mass torts (such as asbestos, environmental, and welding), D&O and E&O, financial liabilities, and first-party property damage. Her past and present policyholder clients include the world’s largest automaker, the world’s largest home improvement specialty retailer, a major utility company, a major lender, numerous health care-related entities, a private-equity investment firm, several distributors of welding products, and a national trade association for the gases and welding industry. She successfully defeated an insurer’s argument that the pollution exclusion barred coverage for welding liability claims; insurers are raising that same exclusion in Chinese drywall litigation. Katherine also provides clients with strategic advice and solutions for complex legal disputes. Her experience includes formulating a litigation
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