Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Pollution or Contamination

We do not cover any loss, directly or indirectly, regardless of any cause or event contributing concurrently or in any sequence to the loss, caused by the discharge, dispersal, seepage, migration or release or escape of pollutants. Nor do we cover the cost to extract pollutants from land or water, or the cost to remove, restore, or replace polluted or contaminated land or water. A "pollutant" is any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and "waste." A "contaminant" is an impurity resulting from the mixture of or contact with a foreign substance. "Waste" includes materials to be disposed of, recycled, reconditioned or reclaimed.”

Gradual or Sudden Loss

We do not cover any loss caused by gradual deterioration, wet or dry rot, warping, smog, rust or other corrosion. In addition, we do not cover any loss caused by inherent vice, wear and tear, mechanical breakdown or latent defect. However, we do insure ensuing covered loss unless another exclusion applies.

Faulty, Inadequate or Defective Planning

We do not cover any loss caused by faulty, inadequate or defective:

a. Planning, zoning, development, surveying, siting;
b. Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
c. Materials used in repair, construction, renovation or remodeling, grading or compaction; or
d. Maintenance; of part or all of any property whether on or off the residence. However, we do insure ensuing covered loss unless another exclusion applies.

These are the provisions many insurers are relying upon to deny Chinese drywall claims under property insurance policies. So, the decision is very important and will have to be followed closely. Everybody can expect more claims to be filed citing this decision. The reasoning was interesting and relied, in part, upon the deposition of the insurance company’s corporate representative. The Court noted the following deposition testimony in its Judgment:

Q: I said, given your experience in working with insureds and how they might interpret or understand the policy, do you think that a person would read this and think that they would need to buy additional coverage to cover Chinese drywall?

A: It would depend on the person. If I read it, I would know it. I'm a person. There's other persons that may not.
…

Q: Do you agree that the burden is on the insurer to show that a damage is excluded?

MR. FRANK: Was that the end of it?

MR. CASEY: Yes.

MR. FRANK: Objection to the extent it calls for a legal conclusion. If you know, you can go ahead and answer.

A: I am pretty sure that that's the way - I mean that we usually, if we feel something is not covered, we document why and explain it. That would be what we would do.

…

Q: Were the damages to the Fingers’ drywall itself direct or indirect?

A: We found no damages to the drywall.

Q: And were the damages to the Fingers' metallic components direct or indirect?

A: We found those are a direct result of the gases emitted or given off by the drywall.

…

Q: Did Audubon investigate as to whether the drywall was installed correctly or incorrectly?

A: No.

Q: Is there a reason why they didn't investigate?

A: It wasn't germane to the issue.

Q: Why not?

A: The question was whether the drywall was causing the problem itself, not whether it was hung correctly.

In a footnote, the Court explained the basic premise  of coverage under an all-risk policy:

"Generally, an 'all risk' insurance policy creates a special type of coverage extending to risks not usually covered under other insurance, and recovery under an "all risk" policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage."

Louisiana law differs from other jurisdictions regarding the pollution exclusion cited above. The Court easily found that it did not apply (even the insurer agreed, but because it found it failed to include the endorsement in that policy) as, under Louisiana law, the pollution exclusion could not apply to defective building materials in a home:

The [pollution] exclusion does not, and was never intended, to apply to residential homeowners claims for damages caused by substandard building materials. Doerr v. Mobil Oil Corporation, 2000-0947 (La. 12/19/00), 774 So.2d 119, 134; State Farm Fire Ins. Co. v. MLT Construction Co., 2002-1811 (La. App. 4th Cir. 6/4/03), 849 So.2d 762, 770. The Louisiana Department of Insurance determined that a "pollution incident" under a pollution exclusion in homeowners' policies only refers to an incident which causes "environmental damage," or "injurious [to the environment, not the claimant] presence in an upon the land, the atmosphere, or any watercourse or body of water of solid, liquid, gaseous or thermal contaminants, irritants or pollutants." (See Advisory Letter No. 97-01 Commissioner of Insurance, State of Louisiana (June 4, 1997)).

…The fact that Chinese drywall releases various gases into the home is not sufficient to qualify as a "pollutant" under the pollution exclusion, which this Court interprets consistent with Doerr v. Mobil Oil…Audubon acknowledged in its response to Plaintiffs' Motion for Partial Summary Judgment that its pollution exclusion was inapplicable and Audubon amended its Answer accordingly.

Turning to the Gradual or Sudden Loss exclusionary language, the Court relied upon testimony as well as case law generally indicating that the clause does not apply in the homeowner's Chinese drywall claim. Some may find the Court's reasoning is strained and applicable only to Louisiana cases, as many insurers and experts claim that the drywall destroys itself:

The GSL Exclusion is designed to exclude expected losses. Wilson, Bill, ed. Forms & Substance-Coverage Concerns, Quirks and Solutions, Independent Agent, May 2004 at p. 12. Coverage is required here because "the purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen." Boudreaux v. Verret, 422 So.2d 1167, 1172 (La. App. 3rd Cir. 1982); Gulf Transp. Co. v. Fireman's Fund Ins. Co., 83 So. 730, 733 (Miss. 1920).

…The Fingers' losses relate to the drywall off-gasing, not by wear, tear and/or gradual deterioration…. Both Audubon's expert, Dr. Zdenek Hejzlar, and the Fingers' inspector, AI Mallet, agree that the Fingers' damages are caused by the sulphurous gases emitting from the Chinese drywall…

…Audubon suggests that the phrase "rust or other corrosion" bars coverage. This position is rejected because the plain language of the GSL exclusion refers to: "any loss caused by....rust or other corrosion."… The exclusion is intended to apply where corrosion, rust or the like is the cause of the property damage; it is not designed to preclude coverage when the rust or corrosion is the damage itself. Trus Joint MacMillan v. Neeb Kearey, 2000 WL 306654 (E.D. La. 2000). Here, the corrosion caused to the metals in the Fingers' home by the sulphurous gases released by the Chinese drywall is the loss, not the cause of the loss, indicating the corrosion language of the Gradual or Sudden Loss exclusion does not bar coverage….

..The GSL exclusion also refers to losses caused by an "inherent vice" or "latent defect." Audubon's insurance policy does not define these terms. Black's Law dictionary defines a latent, inherent, or hidden defect as: "a product imperfection that is not discoverable by reasonable inspection." See Black's Law Dictionary, 481 (9th ed. 2009). Again, the Louisiana jurisprudence, which is rooted in Maritime law, focuses on inevitable losses due deterioration of the thing. See ARNOLD COUCH ON MARITIME INSURANCE (11th ed) § 778. The inherent vice or latent defect exclusion applies to "a loss due to any quality in the property that causes property to damage or destroy itself that results from something within the property itself as opposed to some outside force." FC&S Online, Processors Coverage Form, Insurance Services Office Non filed 1M Coverage, December 2005, http://www.nationalunderwriterpc.com. First party policies typically exclude damages due to an inherent vice or latent defect in order to prevent the insurer from having to compensate the insured for property that "has its own shelf life and will eventually wear out or break down because of intrinsic quality or nature." Eugene Wollan, Risks Not Taken, John Liner Review 86, (Fall 2006). Here, there is no evidence that the Chinese drywall is damaging or destroying itself, indicating the "inherent vice" or "latent defect" language from the GSL exclusion does not apply. Audubon's expert report likewise does not evidence any damage to the drywall itself.

Remember the noted testimony that the insurer did not investigate to see if the drywall was installed properly and that other people could interpret the policy differently? The Court apparently thought this was important and noted that the insurer’s own expert did not consider the drywall defective when considering the Faulty, Inadequate or Defective Planning exclusion:

Chinese drywall is not defective within the meaning of the FIDP exclusion…Again, Audubon did not provide a useful definition of this exclusion in its contract. Interpreting the plain language of the Audubon policy, the Chinese drywall "defect" is not one that renders the drywall unable to perform the purpose of drywall. …Indeed, it has not been alleged that the subject drywall would be defective in all geographies. The Chinese drywall here can still act as an aesthetic or "finishing" material for a home. Rather, the damage that the Chinese drywall causes is based upon a quality distinct from these roles. Audubon agrees.

I previously posted in FC&S Says Ensuing Loss Coverage Applies to Chinese Drywall Claims that:

“The insurance industry is probably calling and writing the editors of the FC&S Bulletin because the June 2009 edition correctly notes that Ensuing Loss Damage is covered under the ISO form policies for typical Chinese Drywall losses. I recently noted various coverage issues related to Chinese Drywall. A number of these cases are coming to our office because insurers are not affording first party coverage.

This trial court never had to reach the issue of the ensuing loss provisions because the insurer had no more defenses. It was a moot point.

As certain as the sun will rise in the East tomorrow morning, there will be an appeal of this decision. Whether it will be affirmed is about as questionable as whether I will rise and get in my five mile run or just stay in bed and enjoy the Easter weekend.

This week, Miller testified before the National Association of Insurance Commissioners that damages caused by Chinese drywall are covered under first party property insurance policies. Dan Luby of the Florida Insurance News forwarded an article, Lawyer Sees Insurer Vulnerability To Drywall Claims, that indicated:

Charles Miller, of the Insurance Law Center in Berkeley, Calif., made his remarks here at a hearing on drywall issues by the National Association of Insurance Commissioners Catastrophe Insurance Working Group at the NAIC’s Winter National Meeting.

Mr. Miller drew upon language contained within Fire, Casualty & Surety (FC&S) bulletins, a publication within National Underwriters parent Summit Business Media, to raise questions about whether exclusions apply.

If you want to read the FC&S Bulletin Miller is referring to, I wrote about it in a prior post, Chinese Drywall Losses Covered Under First Party Property Insurance Policy.

The article also noted:

Mr. Miller said FC&S - resource for insurers for interpretation of both commercial and personal lines coverages - notes that many courts have found the pollution exclusion in homeowners policies only applies to “traditional environmental damage.”

Mr. Miller said, “The release of gases inside of a residence is not normally considered to be traditional environmental damage.

Regarding latent defect and inherent vice exclusions some insurers have cited, Mr. Miller noted the FC&S bulletin states the exclusion applies to “a loss due to any quality in the property that causes the property to damage or destroy itself that results from something in the property itself.”

The drywall, he noted, is not destroying itself, but rather causing ensuing damage to its surroundings, which should be covered.

Mr. Miller said regulators should look to protect consumers by conducting multistate market conduct exams to ensure proper investigations into Chinese drywall are being conducted. Mr. Miller said there is a “critically important relationship between a timely and thorough investigation and a proper evaluation of the coverages.”

Amy Bach of United Policyholders was at the same lecture concerning Chinese drywall coverage issues that I wrote about earlier this week in Ensuing or Resulting Loss, and the Burden of Proving Causation Explained Simply. I talked briefly with Amy about my concerns over the coverage analysis and whether courts would misconstrue "ensuing loss" language.

Amy Bach also testified and was quoted with a rather unique suggestion for helping out policyholders with coverage issues:

"Ms. Bach indicated that insurers should assist policyholders and cover their claims now, and if they are found not liable later, they could then subrogate against those entities."

I personally do not know any first party insurer that has afforded any coverage for Chinese drywall losses. I seriously doubt they would do so because insurance companies love to hold money. Further, if there truly is no coverage, they may lose their subrogation rights as a volunteer rather than a party obligated to pay a debt.

One trend seems to be more coverage gurus stating that coverage exists to some extent for first party Chinese drywall claims. As a result, more claims are going to be made. We will see how they play out after denial and litigation ensues.

First, I am merely paraphrasing the lecture. Order the video from NAPIA to fully appreciate the concepts.

Second, I will be discussing some case law regarding these issues over the next several weeks. Judges, not lecturers, decide what is and is not covered. Real life results and case examples are important.

Still, Eshoo made the following notation in his lecture regarding how the all risk policies work when faced with structural losses allegedly caused by a defective product, such as Chinese drywall:

A resulting loss is covered even if a defective product is a "but for" cause of the loss. The intent of the exclusion and exception is to exclude only that portion of the loss attributable to the defective product. In other words, losses that are defective products are not covered, while those losses that result from the defective product are covered.

The exclusion and exception, read together, operate to eliminate the conduct or defect from consideration in analyzing the cause of resulting damage; only the actual risk causing the resulting physical damage is subject to the coverage analysis.

To the extent that cause is neither excluded nor excepted in the applicable policy, coverage exists for the damage which resulted from the defective product.

This is an excellent phrasing of how the "ensuing loss" provision works. I suggest that others seeking coverage adopt it rather than some of the convoluted discussions by courts.

The factual and legal burden of proof to demonstrate that a loss occurs within the language of an all risk policy was properly described as follows:

An insured seeking to recover under an "all risks" insurance policy merely has the burden of proving only that direct physical loss or damage occurred to covered property while the policy was in force.

Once the insured establishes a loss apparently within the terms of an "all risks" policy, the burden shifts to the insurer to prove that the loss arose from a cause which is excluded.

The insured is not required to disprove any excluded cause of loss.

...

Exclusion clauses are generally considered contrary to the fundamental protective purpose of insurance. Thus, the courts give a strict interpretation to exclusion clauses, as opposed to the liberal interpretation afforded coverage protections.

I will analyze these principals in greater detail later as they relate to Chinese drywall and how other defective building materials contribute to losses covered under all risk policies. But, the phraseology of the concepts is excellent and should be adopted by all consumer advocates.

I felt his discussion of the commercial and homeowners policy forms was excellent. The points he made regarding the science of drywall, covered risks, ensuing or resulting damage, causation, and exclusions were clear and simple and should be replicated by other attorneys.

The one problem and question raised by those in attendance was the conclusion:

"Is there really coverage--what is the covered cause of loss that is not excluded or is an exception to an exclusion?"

I remind everyone that the FC&S Bulletin has concluded that there is coverage for Chinese drywall under the first party policy, as I noted in FC&S Says Ensuing Loss Coverage Applies to Chinese Drywall Claims. I will post more on Ed's lecture and this topic later tonight. Regardless of the conclusion, the analysis up to that point was an excellent lecture. It made the cost of the conference worth the investment.

The PowerPoint presentation from the lecture is available here.

At page Q&A-1521, the editors had the following coverage discussion:

"What ISO policy exclusion under an HO3, if any, applies to a product defect? We have seen a couple of instances in Louisiana where the insureds are sustaining damage as a result of defective drywall made in China. This was used following Katrina to replenish shortages of drywall supplies."

The answer is very telling and provides hope to policyholders with these problems:

"The ISO HO 03 excludes loss to coverages A & B caused by faulty materials used in repair, construction renovation or remodeling. (See page 12 of the 10 00 policy.) Any ensuing loss as a result of the faulty drywall would be covered, for example if the drywall caused corrosion damage to wires or pipes."

This analysis is helpful, but each policy has to be examined carefully. As recently indicated in my post, “Is the State Farm Policy Worth Anything?” and my reply to Sandy Burnette's comment, “The Dirty Secret of Exclusions Some Major Insurance Companies Like State Farem, Allstate, Nationwide and Even USAA, Do Not Want You to Think About,” every policy has a little different language that can be significant.

I suggest that those with Chinese drywall problems read "Solving the Chinese Puzzle of Contaminated Drywall: Owners and Builders Seek Redress for Defective Drywall Installed in Homes" as a basic reference for the expected coverage issues.

Tens of thousands of residential structures are affected, as well as  condominiums, apartments and commercial structures. Homeowner’s and commercial "all-risk" policies may have a number of triggers for damage, but the primary exclusions which may affect coverage are noted in this article:

"There are a number of exclusions, however, that can make the coverage for defective drywall claims problematic. For example, losses caused by the following perils are typically excluded:
• Wear and tear, marring, deterioration
• Inherent vice, latent defect, mechanical breakdown
• Smog, rust, mold, wet or dry rot
• Release, discharge or dispersal of contaminants or pollutants
• Settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls floors, roofs or ceilings."

The discussion of the exclusions suggests that the authors believe homeowners all-risk policies will face significant coverage issues:

"Deterioration’ is a gradual decline or reduction in a property’s value resulting from a decline in physical condition. It can be caused by action of the elements or by ordinary wear and tear. A ‘latent defect’ is customarily one that cannot be discerned by a normal inspection of the property by its owner and must be identified by an expert’s investigation. It could be argued that this type of exclusion is applicable to the defective drywall claims, since the material appears normal to the layperson but can be identified as defective by a consultant’s investigation or by analysis of its composition. ‘Inherent vice’ is a condition in an insured property that has the potential to cause damage to portions of the property other than the part containing to portions of the property other than the part containing the inherent vice.

The Chinese drywall, it may be argued, exhibits this property since gases emitted from the drywall have been alleged to cause corrosion of metals, including the wiring, plumbing and air conditioning coils in homes where it has been installed. In some cases, the pollution exclusion in a homeowners policy may arguably apply to the release of harmful gases from the drywall that are damaging plumbing, wiring, heating and air conditioning systems, appliances, computers and electronic equipment. Even the odor may be regarded as a release of a pollutant or contaminant, although it is not clear that the incorporation of pollution exclusions in property damage policies was intended to apply to releases that are contained within the insured structure and involve non-industrial materials. Counterarguments can be made that the pollution exclusion should apply only to releases of hazardous materials that impact the environment, but not to damage to the structure, building materials or furnishings within a structure.

Some homeowners policies also contain exclusions for construction defects. This exclusion is included with the thought that an alternative course of action is available to the homeowner: an action for breach of warranty against the contractor and subcontractors that built the home. Even where this exclusion is not included in the policy, some courts have denied coverage for defective construction or materials claims, since damage to the drywall did not occur during the policy period – it was already defective when it was installed and is in the same condition when the problem is discovered. Other courts have concluded that there is no occurrence or event giving rise to the alleged loss where the defective material is unchanged from when it was installed. The damage to the plumbing, wiring, air conditioning, appliances and computers may be excluded as deterioration (e.g., gradual damage), or as rust or corrosion. There are, however, jurisdictions that regard the installation of the defective drywall as an ‘occurrence’ and consider the damage to be ongoing during the term of the policy even though the defective material itself may not be altered after its installation.

In summary, homeowners policies are not likely to respond to the costs of tearing out and replacing the defective drywall. And although they might pay for the ensuing loss to the wiring, plumbing, air conditioning and appliances, there is no guarantee, however, as these losses may also be impacted by exclusions for mechanical breakdown."

The last sentence is discouraging. Many insurance defense attorneys have confided some concern regarding the "ensuing loss" provisions of some policies. "Ensuing loss" provisions are the Lazarus clauses in property insurance policies. I strongly suggest you read Water Loss Denied? Ensuing Loss Provisions May Provide Coverage and consider how the various Chinese drywall fact patterns may impact possible coverage. I also strongly suggest you determine what local building and safety codes apply, and then carefully read the Ordinance and Law coverage and endorsements of the policy at issue.

So, what is the answer? While I like to be certain rather than give wimpy answers, it depends on the policy, the law that applies, and the facts of the loss. Some Chinese drywall is not as bad as other Chinese drywall. The particular facts of each case and causation issues first determine what exclusions, limitations and exceptions may apply.

I suggest you ask these questions when making the analysis:

• What is the problem with the drywall?
• How will it be fixed and what non-drywall areas will be impacted?
• What problems from the drywall are causing damage to other areas of the structure and what are those damages to the non-drywall areas?
• What exclusions and ensuing loss provisions may apply?
• What laws or ordinances regulate the need to replace or affect the method of repair?
• What state law applies?

I do not want to give away too much of my analysis to the bright defense attorneys reading this post. However, for those who opine there is no coverage, we all know some attorneys who give opinions like that and then later blame judges when it turns out they were wrong.

One thing is certain--there are a lot of these cases and the insurance industry is not advertising for cliams to be turned in. There will be litigation on these issues.