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.
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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 and negotiation strategy that led to the industry-wide settlement of claims brought by the entire payphone industry as well as crafting a nationwide insurance coverage strategy for welding distributors. She is an effective appellate advocate and has appeared before numerous federal and state appellate courts, including en banc panels, on a wide variety of matters.
David Pharr
David Pharr represents commercial policyholders in insurance coverage matters and manufacturers and contractors in defense of their products and work. David represented an EIFS manufacturer in a complex dispute with multiple insurers arising from hundreds of homeowner claims involving business
(continued on page 4) risk exclusions like those asserted in Chinese drywall matters. He also represented a steel processing company in coverage litigation focused on whether various pollution exclusions barred coverage for mass tort environmental liability claims. David also has experience with litigation and negotiation of hurricane damage claims involving property and builder’s risk insurance. David regularly counsels businesses and organizations in matters related to insurance coverage. He is Vice-Chair of an American Bar Association committee on insurance coverage litigation and Immediate Past Chair of the Jackson Chamber of Commerce.
Keith Covington
Keith Covington practices construction and labor and employment law. He advises contractors and others in the construction industry on contracts, contract administration, and claims. Keith also counsels employers in virtually all aspects of employment law, including discrimination issues, workers’ compensation, labor relations, worksite immigration enforcement, OSHA compliance, and union avoidance. Keith has broad experience litigating employment, construction, and construction defect cases. He was a member of Bradley Arant’s EIFS team and represented Dryvit Systems during the recent spate of EIFS litigation. Keith is an active member of the Associated Builders and Contractors and a frequent writer and speaker on issues of interest to the construction industry. He is also a member of the Defense Research Institute and the American Immigration Lawyers Association. Keith holds a B.S. degree in Mechanical Engineering from Auburn University and a J.D. degree from the University of Alabama School of Law.
Mike Brown
Mike Brown leads the firm’s Real Estate Litigation Team and is a member of the firm’s Environmental and Toxic Tort Practice Group and the General Litigation Practice Group. His practice focuses on real property and land use matters, including construction and construction defects litigation. Since 1997, Mike has been one of the lead counsel for Dryvit Systems, Inc. in its litigation in Alabama and Mississippi. Mike also assisted the company in resolution of a nationwide class action on EIFS issues. He served as one of the lead lawyers in Keck v. Dryvit Systems, Inc., 830 So.2d 1 (Ala. 2002), in which the Alabama Supreme Court established groundbreaking precedent on real property and construction matters. Mike serves as an adjunct Professor at the University of Alabama School of Law, where he teaches Land Use Planning and Real Estate Finance & Development. Chinese Drywall Team
Katherine J. Henry Washington DC Office Phone: 202.719.8244 Fax: 205.719.8344 [email protected]
David K. Pharr Jackson Office Phone: 601.592.9924 Fax: 601.592.1424 [email protected]
F. Keith Covington Birmingham Office Phone: 205.521.8389 Fax: 205.488.6389 [email protected]
T. Michael Brown Birmingham Office Phone: 205.521.8462 Fax: 205.488.6462 [email protected]
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