Posts Tagged ‘Pollution Exclusion’

Analyzing Orleans Parish Decision Striking Homeowners Insurance Co.’s Affirmative Defenses

Last week, it was widely reported that Orleans Parish Judge Medley issued a ruling striking certain policy exclusions relied upon by a home insurer in denying a Chinese Drywall claim. We posted about the news on our blogs as well.

Since then, the plaintiff’s motion and the judge’s actual order has circulated through news agencies and the blogosphere, giving us attorneys some time to review the same. It’s a practical certainty these issues will get appealed to the Louisiana 4th Circuit, and so reviewing the decision’s reasoning is important as other plaintiffs’ cases prepare to build upon it.

First, there is no need to reinvent the wheel in our review of this decision, as Merlin Law Group’s Property Insurance Coverage Law Blog posted an excellent analysis of the decision: Chinese Drywall Claims May Be Covered Under Homeowners Policy – Favorable Developments in Louisiana. I highly recommend reading this blog post, as it goes into significant detail about Judge Medley’s reasoning.

I also recommend reading the judge’s actual order and reasons for judgment in Simon Finger v. Audubon Insurance Company (Judge Medley Order on Motion to Strike Exclusions).

General Analysis

Before getting into the court’s review of each policy exclusion, Judge Medley’s reasons provided the requisite overview of Louisiana’s jurisprudence in interpreting insurance policies. Namely, that interpretation of insurance contracts is a question of law (Brown v. Drillers, Inc., 630 So.2d 741,749-50, La. 1994), and that insurance policies should be interpreted to effect, not deny, coverage (Breland v. Shilling, 550 So.2d 609-11, La. 1989).

To aid in the court’s determination of whether the insurance provisions were or were not ambiguous, the court quoted the deposition of Audubon Insurance Company’s corporate representative, Kathleen Spinella, who testified as follows:

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.

When an insured has an “all risk” policy, like the one in question in the case, the insured has only a very light burden to show that damage to the property occurred. Thereafter, the insurance company must prove the applicability of its exclusions, and exclusions are strictly construed.

The Pollution Exclusion

Read the Chinese Drywall Blog’s previous discussions about the “Pollution Exclusion.”

The Audubon Insurance policy construed by the Orleans Court had a pollution exclusion as follows:

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.

Citing Doerr v. Mobile Oil Corporation, the court reminded Audubon Insurance that the pollution exclusion does not, and was never intended to apply to residential homeowners claims for damages caused by substandard building materials. Both the precedent in Doerr and the Louisiana Department of Insurance have isolated a pollution exclusion’s applicability to incidents that cause “environmental damage.”

“The fact that Chinese Drywall releases various gases into the home is not sufficient to qualify as a “pollutant” under the policy exclusion.”

Gradual or Sudden Loss Exclusion

Audubon Insurance also claimed the “gradual or sudden loss” exclusion applied, which provided:

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.

Judge Medley’s decision reminded Audubon that the Gradual or Sudden Loss exclusion is designed to exclude expected losses. In the case of Chinese Drywall, the losses relate to an off-gasing of the drywall and not by normal wear, tear and/or gradual deterioration of the material.

The fact that the exclusion uses the phrase “rust and corrosion,” and there may be rust and corrosion in the home, does not change the purpose and meaning of the exclusion. In the case of Chinese Drywall, the rust and corrosion is not the cause of the damage – the drywall is.

The more troubling component for the insured (plaintiffs) of the Gradual or Sudden Loss exclusion is the “latent defect” or “inherent vice” terms. Homeowner policies typically exclude damages caused by a product that has a latent defect or inherent vice, which, although not defined in the insurance policy is typically defined as “a product imperfection that is not discoverable by reasonable inspection.”

Chinese Drywall, the court points out, is not damaging or destroying itself. The drywall itself is working fine as drywall. This fact runs afoul to jurisprudence and secondary analysis of the “Gradual or Sudden Loss” exclusion, which typically excludes coverage for losses caused by defects in a material causing damage or destroying itself as material. Thus, justifying the exclusion because it is caused by a latent defect in the material causing expected damage.

Faulty, Inadequate of Defective Planning Exclusion

Finally, Audubon Insurance claimed the “FIDP” exclusion applied, which provided:

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.

Here again, Judge Medley observes that the Chinese Drywall itself is not defective, and has the benefit of relying upon the insurance company’s own expert report and own testimony that the drywall itself is not defective. It does not even address (d) of the exclusion, which it notes in a footnote, Louisiana courts have “permitted the ensuing loss provision to provide for coverage for damages resulting from a previous excluded loss.”

Conclusion

This is a really terrific decision for Louisiana homeowners who have filed insurance claims. For those who have not filed a homeowners insurance claim, time is running out!

The decision will be appealed to the 4th Circuit, and the 4th Circuit’s review of the decision will be de novo. So, this is not the end of the road. It does, however, demonstrate that there is a real argument against homeowner insurance carries available to homeowners who are looking desperately for a remedy to their Chinese Drywall problems.

While grounded in good argument, there may be some problems in store for this decision.

First, as discussed previously on this blog, Louisiana is unlike most other states in its interpretation of the pollution exclusion, and so while it may not apply in Louisiana, it may still have application in other states. Second, the insurance company in this suit (Aubudon) relied very heavily on the pollution exclusion, and was a bit unprepared for arguments concerning whether the drywall was or was not itself defective (see: Lawmakers seek Chinese Drywall Fire Hazard Declaration).

More to come…

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Orleans Parish Judge Says Insurance On The Hook for Chinese Drywall

In the past, we’ve discussed whether homeowner insurance policies will be liable for Chinese Drywall damages.   This week, Judge Medley in Orleans Parish Civil District Court gave Louisiana it’s first answer holding that the exclusions relied upon by the Defendant insurance companies didn’t make the cut.

Of course, the Defendant insurance company (Audubon Insurance Co) will appeal this ruling, but this is a really great first step for plaintiffs who are looking everywhere for a solution to Chinese Drywall woes.

So, which exact exclusions were adjudicated?

The pollution exclusion, which Judge Medley rejected based upon the Louisiana Supreme Court’s treatment of such clauses in cases like Doerr v. Mobil Oil Corp, which qualifies the pollution exclusion in insurance policies to only cover “environmental damage.”

The “latent defect” exclusion was also rejected, with Medley ruling that the clause didn’t apply because the drywall itself wasn’t a latent defect.    The drywall worked just fine as actual drywall, and therfore, wasn’t a latent defect in itself.

Homeowners Ought to Act Fact to Make Claims

In December 2009, we wrote that “Fast Action” was required for homeowners to make Chinese Drywall claims against their homeowners insurance policies.    Why?    Because policy-holders in Louisiana only have one year to bring claims (and file a lawsuit to enforce the claim) from when they knew or should have known of the loss.

Many homeowners are not making claims because they’re concerned about having their insurance policies cancelled.   Certainly, this is an issue as Louisiana insurance companies have already begun canceling policies on homes with contaminated drywall.    The danger cannot be explained away, but there are two important things to remember about this:  (1) policies are being cancelled regardless of whether claims are being made; and (2) homeowners insurance may be your best bet for fast recovery of drywall damages.

The particular case decided by Judge Medley isn’t part of the federal MDL (or class action).   Like many other homeowners with these problems, the plaintiffs in that case are seeking remedies against their builder and insurer through individual actions in state court.  As evidenced by the Medley decision, these actions are being adjudicated and are posting successful results.

This article was originally posted on Wolfe Law Group’s topic-specific Chinese Drywall Blog.

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Chinese Drywall? Make A Claim with Homeowners Insurance…And Do It Quickly.

Should Louisiana homeowners be filing homeowner insurance claims for their Chinese Drywall damages?   The answer is complicated, but ultimately, our answer is yes.

Will There Be Coverage?

Over the past few months, we’ve discussed whether insurance companies will cover losses related to Chinese Drywall (See Insurance Coverage category).

Our predication was that claims would be denied based on Pollution Exclusions, and from what we’ve seen so far, insurance companies across the country are beginning to churn out these types of denial letters.

While the talk amongst insurers and adjusters is that these damages are not covered, an insurance company declaring something to be true does not make it so.   The applicability of the “pollution exclusion” will ultimately depend on a number of factors, some known and others currently unknown: (1) the language of the exclusion; (2) The scientific explanation behind the damages; and (3) Your home’s jurisdiction.

What The Blogosphere Says

A quick read of our blog, and you’ll know what we’re saying about homeowners insurance claims:  that insurers may very well be liable for these losses.   But what are some others in the country saying?

An August 2009 article from Inside Counsel has a long discussion (and quotes us!) about suits against homeowner insurers, and notes that the “pollution exclusion” may not be as clear as the insurance companies would like to believe.    The debate is lively in Florida according to the Herald Tribune.  Merlin Law Group’s Property Insurance Coverage Law Blog has a great post about both sides of the argument.

We suggested in the past that Louisiana homeowners may have a better case than homeowners in other states, because of Louisiana’s narrow interpretation of the pollution exclusions applicability.

What To Do…What To Do

This much is clear:  If you don’t file your insurance claim now (or soon), the time available to you to file the claim will pass.   How depressing it would be for homeowners who sat on their hands for this debate to reach a judge 12 or 14 months from now, and the decision to favor homeowners!

This can happen.

Many of the claims available to homeowners, builders, suppliers, subcontractors and other parties to this Chinese Drywall mess are based on a lot of legal mysteries.   How will the New Home Warranty Act be interpreted?   Will insurance policies exclude or cover losses?   Are actions against the suppliers already prescribed?

Who knows – in 12 months, we may know that builders are absolutely not liable in Louisiana, but insurers are, or vice versa.   Homeowners should file insurance claims against their casualty policies, and should file suit against the insurer after the claim is denied, because there very well may be coverage.   And with insurers denying all Chiense Drywall claims, pursuit of the claim through litigation is the only way to get paid.

Will My Premiums Increase?

This is something homeowners should discuss with their insurance agent.   However, it is very possible that premiums may be increased if you assert a claim for insurance coverage.   If the claim is paid, the payment will likely be used in calculating any rate increases.

If the Chinese Drywall loss was just a small $5k or $10k claim, there might be good reason to not file the claim.  However, some Chinese Drywall claims have $50k-100k or more in damages.  Depending on your financial stability, the risk of losing this amount may be greater than the risk of a future premium increase.

We Sue Insurers

Wolfe Law Group has filed suits against homeowners insurance companies related to Chinese Drywall damages, and we’d be happy to discuss filing suit against your insurer, too.    Learn more about our firm by reviewing this promotional brochure.

This article was originally posted on Wolfe Law Group’s topic-specific Chinese Drywall Blog.

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Are Chinese Drywall Losses "Uninsured?"

Late in July, “ClaimsJournal.com” published an online article titled:  “Chinese Drywall:  Builders and Subs Face Huge Uninsured Losses.“   The article’s author takes its reader through a number of hot-button issues related to the insurance coverage available to homeowners and builders for Chinese Drywall damages.

Calling the per house damages “astronomical,” the article warns that many builder and homeowner polices may exclude damages based on the pollution exclusion or the “your work” exclusion.

In the past, we’ve discussed insurance coverage issues and the pollution exclusion here at the Chinese Drywall Blog.

From our experience in dealing with homeowner and builder claims, it seems the insurance industry is positioning itself to deny coverage for contaminated drywall exposure.   But more troubling than this is that many homeowners and builders are taking this position as a matter-of-fact.

While there are certainly legal challenges to recover against insurance companies for these losses, the insurance companies face legal challenges in excluding coverage.   Homeowners and builders have two things on their side:  (a) The insurance company has the burden of proving the applicability of its exclusion; and (b) Any ambiguities will be interpreted against the insurance company.

Homeowners and Builders should not consider the exclusion of coverage as a foregone conclusion, and should place their insurer on notice of the claim.   While litigation may result in coverage applying to this loss, without a timely claim and a lawsuit to enforce the same, builders and homeowners will lose their rights.

In Louisiana, with a one-year prescriptive period ticking very quickly against drywall claims, the insurance company’s best argument against coverage is soon-to-come.

This article was originally posted on Wolfe Law Group’s topic-specific Chinese Drywall Blog.

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Some Claim Insurance Will Not Cover Chinese Drywall Losses. Is it True?

The Controversy and Uncertainty

This much is clear:  it is not certain how the courts will interpret insurance policies and insurance policy exclusions, as they apply to Chinese Drywall claims.

Many predict that the insurance industry will rely on what is called a “pollution exclusion” to deny Chinese Drywall insurance claims.

A South Carolina Construction Insurer, Contractor-Insure.com, makes this claim in a recent press release:

Most contractor General Liability insurance policies contain the Total Pollution Exclusion.  All claims adjusters who have been interviewed will take the position that the sulfur dioxide fumes released by the defective Chinese drywall are ‘pollution’ and as a result all legal defense and damages under the General Liability policy will be denied.

While the press release largely discussed builder general liability policies, the same controversy exists for homeowners insurance policies.

Further, the controversy and predication are proving to be true, as across the country there are already suits on the issue.

As already reported on the Chinese Drywall Blog, in Baker v. American Home Insurance Company, a homeowner sued their insurance carrier claiming coverage for Chinese Drywall claims.   In Builders Mutual v. The Dragas Company, a builder’s general liability insurer brought a declaratory judgment action to have a judge declare that Chinese Drywall damage was not insured.

The claimed exclusion:  Pollution.

Both suits are very important to homeowners with Chinese Drywall claims.   But for Louisiana homeowners….how will the issue be resolved?

Why Louisiana Is Different

Unlike in South Carolina and most other states, Louisiana has very narrowly interpreted the pollution exclusion.   We reviewed the applicability of the pollution exclusion to Louisiana insurance claims in a previous blog post here:  Home Builders v. Insurance Pollution Exclusion.

There, we quoted the seminal case in Louisiana on this subject titled Doerr v. Mobil Oil Corp.  The long and short of things:  “Using the Doerr analysis, it seems that builders or suppliers would not be considered a “polluter” within the meaning of the exclusion” in Chinese Drywall claims.

For homeowners with Chinese Drywall, and builders with potential exposure, this is welcome news.    While the issue remains unresolved, the Doerr decision at least gives homeowners and homebuilders hope that Chinese Drywall losses may be insured, and therefore, within reach.

The problem now?   Getting homeowners and home builders to timely make claims and pursue recovery.

This article was originally posted on Wolfe Law Group’s topic-specific Chinese Drywall Blog.

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