Insurers’ Recent Success a Milestone in a Year of Chinese Drywall Litigation

December 23, 2010

A federal judge in Louisiana recently let 10 insurance companies being sued by Louisiana homeowners over property damage resulting from the installation of defective drywall from China off the hook for coverage from those claims. The early Christmas gift to the insurers was the latest development in one of the dominating story lines in Insurance Journal‘s South Central region in 2010.

Judge Eldon E. Fallon of the U.S. District Court for the Eastern District of Louisiana on Dec. 16 granted motions filed by the 10 insurers that variously asked for dismissal or for judgment on the pleadings in a class action lawsuit involving only insureds in Louisiana.

The decision was made in one of many class action lawsuits filed by homeowners in several southern and southeastern states as a result of damage to their homes caused by drywall that was imported from China during the last decade.

The federal Consumer Product Safety Commission estimates that 7 million sheets of Chinese drywall were imported between 2000 and 2009 — enough to have built tens of thousands of homes. Some consumer advocates have estimated that the cost of property damage could reach $3 billion.

The drywall is said to off-gas harmful chemicals that cause various health problems and corrode wiring and household appliances, among other things, and make the houses in which it is installed unlivable.

As of March 2010, around 2,100 claims had been filed in federal court over the drywall. Suits were brought against homebuilders, developers, installers, realtors, brokers, suppliers, importers, exporters, distributors, manufacturers from China, and insurance companies.

Because of the commonality of facts in the various cases, litigation concerning the faulty drywall was designated as multidistrict litigation (MDL). In June 2009 all federal cases were consolidated and assigned to the U.S. District Court, Eastern District of Louisiana.

In the most recent case, the plaintiffs sought to force the insurance companies — that had previously denied their claims — to cover damage to the insureds’ property that resulted from the faulty drywall.

The companies involved are: Allstate Insurance Co.; ASI Lloyds; Auto Club Family Insurance Co.; Federal Insurance Co.; Property & Casualty Insurance Co. of Hartford; Homesite Insurance Co.; Standard Fire Insurance Co.; State Farm Fire & Casualty Co.; USAA Casualty Insurance Co.; and USAA.

Judge Fallon found that coverage existed for property damage in the policies in question in the recent cases. However, he determined that two exclusions typically found in homeowners insurance policies and cited by the companies as grounds for denying the homeowners’ claims negated that coverage, namely the exclusions for loss relating to corrosion and faulty materials.

In examining the various exclusions brought forward by the insurers, Fallon determined that three of them did not apply, the exclusions for: latent defects; pollution and/or contamination; and dampness or temperature.

In March, a state district court also rebuffed an insurance company’s use of the pollution exclusion and two other exclusions in an “all risk” homeowners insurance policy to deny claims resulting from so-called Chinese drywall.

Specifically, the Civil District Court in New Orleans Parish, in Simon Finger and Rebecca Finger versus Audubon Insurance Company, No. 09-8071, said Audubon’s “Pollution or Contamination” (POL), Gradual or Sudden Loss” (GSL) and “Faulty, Inadequate or Defective Planning” (FIDP) exclusions could not be used as “affirmative defenses” to deny coverage for damage resulting from the drywall.

The Attorney General and the Legislature

Fallon’s mid-December ruling culminates a year in which Louisiana state officials worked hard to protect the state’s citizens from the aftereffects of Chinese drywall installations.

In January, Louisiana Attorney General Buddy Caldwell filed suit in Orleans Parish against multiple Knauf entities, other international and domestic manufacturers, distributors, importers of alleged toxic Chinese drywall. Several builders were also named in the lawsuit.

Caldwell’s lawsuit alleged the State of Louisiana has and will continue to suffer economic loss because of the defendants’ manufacture, distribution, sale and/or installation of defective and toxic Chinese drywall, according to an announcement released by the AG’s office.

The Louisiana AG’s lawsuit followed closely a private sector lawsuit against 14 insurance companies over claims related to Chinese drywall. On Jan. 6, the WCI Chinese Drywall Trust, an entity formed in bankruptcy proceedings of residential homebuilder WCI Communities Inc., announced it had filed suit against the insurers seeking indemnification for losses arising from claims related to the allegedly defective Chinese manufactured drywall.

In June, the state Legislature approved a bill that prohibits insurers from canceling or refusing to renew policies for homes because of Chinese-made drywall. The bill by Rep. Julie Quinn, R-Metairie, does not prohibit insurers from raising premiums or deductibles, however, as the original version of the bill would have required.

Insurance industry lobbyists argued the ban could raise insurance rates statewide and would violate existing contracts. They were successful in excluding commercial property policies in the bill as was originally proposed.

The measure only concerns drywall that was imported from or manufactured in China before Dec. 31, 2009. Insurers found to be in violation under the bill would face a penalty of up to $15,000, plus all court costs and attorney fees. The law would remain in effect until July 1, 2013.

Other Decisions

Earlier this year, Fallon presided over several settlements with a couple of manufacturers of Chinese drywall.

In April, Fallon awarded seven plaintiffs $2.6 million in a case involving Chinese drywall manufacturer, Taishan Gypsum Co. Ltd.

In June, plaintiffs Paul Clement and Celeste Schexnaydre Clement, and plaintiff John Campbell, compromised on a settlement in cases involving damage to their homes from drywall manufactured in a plant owned by Knauf Plasterboard Co. (Tianjin) Ltd. (KPT).

Knauf also agreed to participate in the remediation of up to 300 homes in Alabama, Mississippi, Louisiana and Florida that were contaminated by faulty drywall. The demonstration remediation program is funded by KPT and a number of builders, drywall suppliers and their insurers. The impacted homes contain drywall manufactured by KPT.

Among the participating builders, suppliers and insurers in the remediation settlement were Interior/Exterior Building Supply, the Louisiana Homebuilders Indemnity Trust, QBE Insurance Group and State Farm Insurance, according to an announcement by a group of plaintiffs’ attorneys involved in the litigation.

The Louisiana-based supplier Interior/Exterior Building Supply was an integral component in reaching this agreement and the company has agreed to help fund this pilot program. Other Knauf entities signed on and are participating in the agreement.

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