Great minds are dedicating tremendous attention currently to finding coverage for the financial impacts of COVID-19. Without citing to them all here, this blog has tracked and commented on many of the early efforts, including the recent comments of President Trump giving his opinion that if insurance carriers have issued policies providing business interruption coverage, they should honor that coverage. Doubtless, we can all come together on that rhetoric, though it doesn’t take the place of analysis and will not help much in the inevitable litigation.
This first installment of several blogs on this investigation covers the development of the claim theory. The remaining installments will chronicle the journey to obtain available first-party property insurance benefits.1
Beginning in about 2009, there was a similar focus on finding first-party coverage for the damage resulting from Reactive Chinese Drywall (“CDW”), largely failing to find a pathway to coverage. But as is usually the case, once scientific investigation identified the reaction that occurred with this type of drywall, returning to the fundamental concepts of “physical loss or damage” underlying “all risk” coverage grants eventually disclosed a coverage theory. We were asked to represent clients whose homes had suffered damages associated with the presence of Chinese Drywall, and worked with several experts to understand what was occurring inside these homes, with an eye toward identifying some viable pathway to coverage.
The most productive expert we engaged was engineer Ron Bailey of Bailey Engineering Corporation, located in Jupiter, Florida. One of his reports explained the etiology of the reaction that appeared to be occurring in these homes:
Reactive Chinese Drywall (“CDW”) was manufactured and brought into the United States from China between the years 2001 to 2007 and was distributed throughout several states in the United States of America.2 Drywall is an interior construction material usually consisting of processed gypsum pressed between two sheets of paper. The reactive CDW manufactured in China used naturally occurring mined gypsum ore. Several countries mine and produce drywall using natural gypsum ore (Calcium Sulfate), however the mined natural material from China had a higher level of a pure form of elemental sulfur referred to as cyclooctasulfur (“S8”) that was not present in gypsum mines in other countries. Under certain environmental conditions, the reactive CDW emits gaseous sulfides including hydrogen sulfide and other organosulfides which result in noxious odors and damage to other materials.
Possible etiological mechanisms for the production of reduced sulfur gasses have been proffered, but the precise mechanism has not been confirmed.3 It has been hypothesized that the source is gypsum from the Chinese mine containing S8 was mixed with organic materials which in the presence of heat and humidity – in other words water in gaseous form in the atmosphere reacted to produce sulfide gases.4 One investigator indicated the presence of carbon monoxide at normal background concentrations contributes to this reaction.5 Scientific studies commissioned by the Federal Government’s Consumer Products Safety Commission were conducted by Lawrence Berkley Laboratories. The study shows conclusively that the interaction of the CDW when subjected to increased heat and humidity increased the off-gassing of the CDW.6 The studies also show minimum conditions required to initiate emissions and off-gassing duration.
This information started to reveal potential coverage – most all-risk homeowners and commercial policies cover damage caused by water. One of my colleagues, Ed Eshoo, took the laboring oar to piece together the sources of cover in most all-risk policies. Recovery under an all-risks policy generally extends to all losses not resulting from misconduct or fraud unless the policy contains a specific provision expressly excluding the loss from coverage.7 The general rule of evidence in Florida is that an insured seeking to recover under an all-risks policy has the burden of proving only that a loss 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 clauses.”8
At the time we undertook this research to evaluate these claims, the “concurrent cause” doctrine was the prevailing standard in Florida. As explained in the Third DCA’s decision in Wallach v. Rosenberg,9 absent a provision which specifically excludes all coverage where a covered and an excluded cause combine to produce a loss, the concurrent cause doctrine mandates that coverage shall be provided when a loss would not have occurred but for the joinder of independent covered and excluded clauses. Wallach, 527 So. 2d at 1389. Under Florida law, “parties can contract around the concurrent cause doctrine through an express anti-concurrent cause provision.”10
Most of the denials of coverage received on claims based on damages resulting from the reaction of the elemental sulfur in the Reactive CDW with humidity were based on policy language similar to the following:
We insure against risk of direct loss to property described in Coverages A and B
only if that loss is a physical loss to properly. We do not insure, however, for loss:
2. Caused by:
c. Inherent vice, latent defect, mechanical breakdown;
e. Any of the following:
(3) Smog, rust or other corrosion, mold, wet or dry rot;
* * *
(5) Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril
Insured Against under Coverage C of this policy.
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed[.]
SECTION I – EXCLUSIONS
2. We do not insure for loss to property described in Coverages A and B
caused by any of the following. However, any ensuing loss to property
described in Coverages A and B not excluded or excepted in this policy is
c. Faulty, inadequate or defective
(1) Planning, zoning, development, surveying, siting;
(2) Design, specifications, workmanship, repair, construction, renovation,
remodeling, grading, compaction;
(3) Materials used in repair, construction, renovation or remodeling; or
(4) Maintenance; of part or all of any property whether on or off the “residence
Carriers consistently relied on one or all of the following excluded causes: (1) inherent vice, latent defect; (2) corrosion; (3) discharge, dispersal, seepage, migration, release or escape of pollutants; and (4) faulty, inadequate or defective… Materials used in repair, construction…. But none of these exclusions were contained in provisions incorporating “anti-concurrent cause” language. We argued that because the damage to the property occurred from the combination of the constituents of the Reactive CDW when subjected to increased heat and humidity, and even if one or more of the excluded causes operated concurrently with the high humidity in South Florida, humidity was a covered concurrent cause of the damage.
This theory of causation comported with Wallach v. Rosenberg, and we moved forward in a number of state courts in Florida. We settled a number of these claims based on this approach until the Second DCA issued its opinion in American Home Assurance Co. v. Sebo (“Sebo I”).12 The Second District Court of Appeal issued a decision directly in conflict with Wallach v. Rosenberg, adopting the efficient proximate cause theory guiding interpretation of policy exclusions. In Sebo I, the insured’s home was 4-years old when purchased in 2005 and apparently suffered from serious construction defects allowing water to intrude inside the building envelope. Later that year, it was damaged by wind and rain from Hurricane Wilma, and a claim was made two months after the Hurricane. American Home acknowledged liability for the limited mold coverage on the home and denied all other claims for damages. The house could not be repaired and was eventually demolished. Sebo sued various parties for the construction defects and later added American Home seeking coverage under a manuscript property insurance policy.
The other defendants settled and the case proceeded against the carrier, alleging that the damages had not been caused solely by the construction defects and coverage was available due to the concurrent causes of loss, some of which were covered. After Sebo prevailed in the trial court, the Second DCA reversed and required application by the trier of fact of the efficient proximate cause rule: if the efficient proximate cause of the loss is a covered peril, the losses are covered; if it is an excluded peril, the losses are not covered.
This decision resulted in a prolonged appeal to the Florida Supreme Court to resolve the conflict. When Sebo I was announced, we represented Keith Willett related to damage to his newly-constructed home in Tampa resulting from the reaction of CDW with the high summer humidity. The claim was made under a policy issued by Universal Property & Casualty Insurance Company, which had denied the claim perfunctorily based on the four exclusion theories. The claim was in suit in the Hillsborough County Circuit court.
The Willetts had purchased their newly constructed home from the builder and eventually came to realize the home had been built using CDW. Since buying the home had used most of their available assets, Mr. Willett, who was a professional in the financial services industry, also happened to have considerable construction skills and took on the project of deconstructing the house himself, while the family sheltered with relatives and eventually rented another home. Mr. Willett literally took all the interior finishes out of the home by hand, getting help from a drywall demolition crew to get the CDW out of the house and otherwise doing all of the work to deconstruct and reconstruct the interior of the home himself, evenings and weekends into the wee hours over the course of nine months. He literally had to unscrew every drywall screw in the studs, replace wiring, plumbing and most other metals in the home since the reaction of the sulfur in the drywall and high humidity had pitted metals and metal finishes. He rebuilt the home while his tort suit against the builder, drywall supplier, and importer of the drywall went forward. The lawsuit we had initiated against Universal for coverage under his property insurance policy was stayed pending the decision of the Supreme Court reviewing Sebo I.
We decided to stay the suit since it was clear that the holding in the Sebo case would control the outcome of the lawsuit in that District. And it was clear there would be no settlement since no reported trial of a first-party property insurance claim favorable to a policyholder existed anywhere in the country. The next segment of this chronicle will pick up after the Supreme Court reversed Sebo I and the Willett v. Universal case moves to trial. The pathway to coverage was clear, but far from its destination.
1 This recovery approach is distinct from those based in tort or alleging manufacturing defects, breaches of warranties, or product liabilities. See, e.g., In re: Chinese-Manufactured Drywall Products Liability Litigation, MDL No. 2047 (E.D. La. 2009).
3 American Industrial Hygiene Association. Corrosive Drywall. October 10, 2010, white paper.
4 Demont, R, T. Gauthier, and J. Poole. Abiotic production of sulfide gas from elemental sulfur in gypsum wallboard from certain Chinese sources. Presented at AIHce Podium Session 111, Denver, Colorado, May 22 – 27, 2010.
5 Burdack-Freitag, A., F. Mayer, and K. Breuer. Identification of odor-active organic sulfur compounds in Gypsum products. Clean 37:459-465 (2009).
6 Demont, R, T. Gauthier, and J. Poole. Abiotic production of sulfide gas from elemental sulfur in gypsum wallboard from certain Chinese sources. Presented at AIHce Podium Session 111, Denver Colorado, May 22-27, 2010.
7 Phoenix Ins. Co. v. Branch, 234 So. 2d 396, 398 (Fla. 4th DCA 1970).
8 Castillo v. State Farm Florida Ins. Co., 971 So. 2d 820, 824 (Fla. 3rd DCA 2007); Hudson v. Prudential Property and Cas. Co., 450 So. 2d 565, 568 (Fla. 2nd DCA 1984).
9 527 So. 2d 1386, 1389 (Fla. 3rd DCA 1988).
10 Paulucci v. Liberty Mutual Fire Ins. Co., 190 F.Supp.2d 1312, 1320 (M.D. Fla. 2002).
11 Excerpted from form HO 00 03 04 91 contained in a policy issued for the period 2009-2010 by Universal Property & Casualty Insurance Company.
12 141 So.3d 195 (Fla. 2d DCA 2013) rev’d 208 So.3d 694 (Fla. 2016).