Did The Alleged Bodily Injury Or Property Damage Occur During The Policy Period?
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Once it is determined that there is "bodily injury" or "property damage" caused by an "occurrence," it must be determined which potentially applicable policies are "triggered." Generally, coverage is triggered under a CGL policy on the date when the bodily injury or property damage actually occurs. Florida and Louisiana courts follow the general rule that the event that triggers potential coverage under an occurrence policy is the sustaining of actual damage. See Assurance Co. of Am. v. Lucas Waterproofing Co., 581 F.Supp.2d 1201 (S.D. Fla 2008); St. Paul Fire & Marine Ins. Co. v. Valentine, 665 So.2d 43 (La. Ct. App. 1995).
When an injury or property damage occurs at a precise point in time, such as the result of a fire, explosion, water pipe burst, or weather event, determining whether the injury or damage occurred during a particular policy period can usually be made with little difficulty. However, the date of trigger of coverage is not so easily ascertained when the injury or damage is progressive or latent in nature. In the context of the Chinese drywall claims, the alleged bodily injuries and property damage do not appear to be attributable to one isolated or identifiable event. Rather, although the specific processes are still unknown and continue to be studied, the bodily injuries and property damage appear to result from continued or repeated exposure to off-gassing sulfur compounds occurring over a period of time. As a result, trigger of coverage will likely be an important issue in the Chinese drywall third party claims, and is an issue which will be dependent on the specific jurisdiction (and often the facts of each individual case).
Although Florida case law is not completely settled with respect to which trigger theory would be applied in the context of progressive bodily injury or property damage cases, it appears that a Florida court would most likely apply either the "injury-in-fact" or "continuous trigger" theory. See Trizec Properties, Inc. v. Biltmore Constr. Co., 767 F.2d 810 (11th Cir. 1985)(The Eleventh Circuit, applying Florida law, appeared to apply an "injury-in-fact" theory, finding that the potential for coverage is triggered when the damage itself occurs (injury-in-fact) during the policy period, and that it is not required that the damages manifest themselves during the policy period.); but compare CSX Transp., Inc. v. Admiral Ins. Co., 1996 U.S. Dist. LEXIS 17125 (M.D. Fla., Nov. 6, 1996) (the court noted the existence of substantial authority suggesting that a continuous trigger theory would be applied in most jurisdictions under similar circumstances, but due to an agreement amongst the parties and the fact that the two theories appeared to be functionally equivalent under the circumstances, the court adopted the injury-in-fact trigger of coverage).
Under either the "injury-in-fact" or "continuous trigger" theory, Chinese drywall claims would trigger those insurance policies in effect when actual damage or bodily injury occurred. If, as is now largely assumed, the defective drywall began to emit sulfur gas shortly after installation into a home, and progressed until the drywall was replaced or removed, multiple policy periods will be triggered. However, if there are allegations contained in the underlying complaint that humid conditions at a particular time triggered the sulfur emissions, the occurrence date(s) may be limited to that time period.
Louisiana courts have generally applied an exposure trigger to progressive bodily injury claims and long-term contamination cases. See Norfolk S. Corp. v. California Union Inc., 859 So. 2d 201 (La. Ct. App. 2003) (applying exposure trigger to long-term environmental damage as a result of discharges from a wood treatment facility); Cole v. Celotex Corp., 599 So.2d 1058 (La. 1992) (applying exposure theory to bodily injury claims from progressive disease, asbestosis); Liberty Mut. Fire Ins. Co. v. Ravannack, No. Civ.A. 00-1209, 2004 WL 722440 (E.D. La. Mar. 31, 2004) (applying exposure trigger of coverage to a claim for bodily injury due to continuous exposure to mold); but compare James Pest Control v. Scottsdale Ins. Co., 765 So.2d 485 (La. Ct. App. 2000) (finding that effects of the termite infestation in condominiums did not become "damage" until the homeowners discovered it). As a result, in determining which policies are triggered, courts applying Louisiana law will look to when injured persons and damaged property were allegedly exposed to the drywall's sulfur off-gassing.
Montrose Endorsement
CGL policies commonly include an endorsement known as a "Montrose endorsement."7 Under such an endorsement, coverage will cease for all subsequent policies once the insured learns of the continuing injury or damage. In the case of the Chinese drywall claims, it remains unclear specifically when the manufacturers, suppliers, or builders first became aware of the alleged damages. However, as these facts are developed, it may be possible to demonstrate that some policies provide no coverage based on the "Montrose" or "Known Injury or Damage" endorsement. Certainly, now that various complaints have been filed, those named defendants possess knowledge of the continuing injury and damage.
Is Coverage Barred By The Pollution Exclusion?
The majority of general liability policies that will triggered by Chinese drywall claims will likely include an "absolute" or "total" pollution exclusion. The absolute pollution exclusion, in general, excludes coverage in cases of bodily injury or property damage which would not have occurred but for the discharge of pollutants at any time. Florida and Louisiana courts have interpreted absolute pollution exclusions, with very different results. In short, although Florida law would afford a strong argument that Chinese drywall claims are barred by the pollution exclusion, Louisiana law would not. The applicability of the pollution exclusion will of course ultimately depend on the language of the exclusion, the scientific processes behind the damages, and jurisdiction.
Florida courts have analyzed and applied pollution exclusions in contexts analogous to those presented by the defective Chinese drywall lawsuits. For example, in Deni Assocs. of Fla., Inc. v. State Farm Fire & Cas. Ins. Co., 711 So.2d 1135 (Fla. 1998), the Florida Supreme Court found that the absolute pollution exclusions contained in CGL policies (pursuant to a certified question in two cases) were unambiguous and precluded coverage with respect to bodily injury claims arising out of: (1) alleged indoor air contamination due to an accidental ammonia spill that occurred in a commercial office building; and (2) alleged accidental spraying of insecticide on bystanders standing on property adjacent to a citrus grove being aerially sprayed. Courts applying Florida law have followed the principles enunciated in Deni in the context of applying pollution exclusions. See Auto Owners Ins. Co. v. City of Tampa Hous. Auth., 231 F.3d 1298 (11th Cir. 2000)(CGL insurer was not obligated to defend nor indemnify an insured with respect to an underlying lawsuit for injuries sustained by ingesting and inhaling lead); Nova Cas. Co. v. Waserstein, 424 F.Supp.2d 1325 (S.D. Fla. 2006)(the plain meaning of the definition of the word "pollutant," contained in an absolute pollution exclusion, included "living organisms," "microbial populations," "microbial contaminants," and "indoor allergens").
Based upon the Deni case decided by the Florida Supreme Court, and its progeny, a persuasive argument exists that the absolute pollution exclusion would operate to exclude coverage for the underlying Chinese drywall claims under Florida law.
In Doerr v. Mobil Oil Corp., 774 So.2d 119 (La. 2000), clarified, 782 So.2d 573 (La. 2001), the Louisiana Supreme Court provided an in depth analysis of the history of the interpretation of pollution exclusions by Louisiana courts, and held that the absolute pollution exclusion excludes coverage for environmental pollution, and will not be applied to all contact with substances that may be classified as pollutants. Doerr, 774 So.2d at 134-35. In adopting this approach, the Doerr court stated that the "applicability of a total pollution exclusion in any given case must necessarily turn on several considerations," which the court outlined as follows: 1) Is the insured a "polluter?"; 2) Is the injury-causing substance a "pollutant?"; 3) Was there a "discharge, dispersal, seepage, migration, release or escape" of a pollutant by the insured?" The principles announced in Doerr places a burden on insurers to provide a sufficient factual basis to support the insurer's burden of establishing the applicability of a pollution exclusion. See, e.g., State Farm Fire & Cas. Co. v. M.L.T. Constr. Co., 849 So.2d 762 (La.Ct.App.), writ denied, 857 So.2d 483 (La. 2003)(total pollution exclusion did not preclude coverage under a CGL policy for claims by an office worker alleging personal injuries due to exposure to rainwater, mold, mildew and other allergens in a building as a result of water intrusions due to a leaking roof); Gaylord Container Corp. v. CNA Ins. Co., 807 So.2d 864 (La.Ct.App.), writ denied, 803 So.2d 31 (La. 2001), reconsideration denied, 806 So.2d 664 (La. 2002)(pollution exclusions did not preclude coverage for a chemical company in connection with an explosion of a railcar that contained chemicals; the exclusion was designed to exclude coverage for environmental pollution, not to exclude coverage for routine accidents that incidentally involved a chemical agent).
Under Louisiana law, insurers will likely encounter difficulty in relying on the absolute pollution exclusion to exclude coverage for the underlying Chinese drywall claims. The most significant hurdle concerns Louisiana's approach (in applying such an exclusion), which would not bar coverage for insureds who are not traditional, heavy environmental polluters. For example, many of the target defendants in the Chinese drywall cases are contractors, builders, and suppliers whose business operations do not involve handling or supplying traditional pollutants. While unlikely, it is possible, depending upon the particular circumstances at issue, that a drywall manufacturer could be deemed a polluter under the Doerr test – and as a result, the allegations of any underlying complaint filed in Louisiana should be carefully reviewed with the Doerr factors in mind.
The Business Risk Exclusions
The notion that CGL policies are intended to insure bodily injury and property damage caused by the insured's activities, but not the fitness of the insured's work, is embodied in the provisions commonly referred to as the "business risk" exclusions. Here, because much of the alleged damage and injury is ancillary to the insured's own work, these exclusions will likely have only limited benefit to an insurer.
Exclusions j.(5) and j.(6)
Besides being limited to the particular work that was incorrectly performed, the operation of exclusions j.(5) and j.(6)only apply in instances in which property is damaged while the insured is actually performing the work at issue. See, e.g., American Equity Ins. Co. v. Van Ginhoven, 788 So.2d 388 (Fla. Dist. Ct. App. 2001)(finding exclusions j.(5) and j.(6) to be clear and unambiguous, the court held that the claim was excluded because it concerned what the insured was working on when the damage occurred); McMath Constr. Co. v. Dupuy, 897 So.2d 677 (La. Ct. App. 2004)(exclusions j.(5) and j.(6) did not apply because the property damage occurred when the subcontractor's work was complete).
Here, the alleged damage to the property within the homes (such as damage to air conditioner and refrigerator coils, copper tubing, faucets, electrical wiring, etc.) does not appear to have occurred while work was being performed. Moreover, the claimed damages are not limited to the drywall work itself. As a result, exclusions j.(5) and j.(6) are not likely to have any impact on coverage for the claims at issue in the underlying Chinese drywall litigation.
Exclusion k. – "Your Product" Exclusion
The "product" exclusion unambiguously excludes coverage for damage to an insured's product itself or for repair or replacement of the insured's defective product. McMath Constr. Co. v. Dupuy, 897 So.2d 677, 682 (La. Ct. App. 2004) (finding that because there was no physical damage to other property, only the subcontractor's work or product, the "product" exclusion unambiguously precluded coverage). Additionally, many policies contain an exception to this exclusion for "real property." Significantly, the real property exception to this exclusion has been found to include buildings. See, e.g., Dublin Bldg. Sys. v. Selective Ins. Co., 874 N.E.2d 788 (Ohio Ct. App. 2007) ("the term 'real property' is generally recognized as including both land and the structures affixed thereto").
As a result, the "product" exclusion will likely have a minimal impact on coverage for the Chinese drywall claims. Although it may apply to preclude coverage for the repair or replacement of the defective drywall as applied to the defendant manufacturers and suppliers, it will likely not apply to preclude coverage for any claims against builder defendants -- because their product is "real property." Perhaps most importantly, the "product" exclusion will not eliminate coverage for the claims involving bodily injury or damage sustained to property other than the Chinese drywall, i.e., the corrosion to the structural and mechanical systems, and other items in the homes.
Exclusion l. – "Your Work" Exclusion
The primary purpose of the "your work" exclusion is to preclude liability coverage for an insured's own faulty workmanship and materials. See North Am. Treatment Sys., Inc. v. Scottsdale Ins. Co., 943 So.2d 429 (La. Ct. App. 2006); Auto-Owners Ins. Co. v. Pozzi Window Co., 984 So.2d 1241 (Fla. 2008). Importantly, the "your work" exclusion generally contains an exception for work performed by a subcontractor. As a result, the exclusion does not apply if the damaged work, or the work out of which the damage arises, was performed by a subcontractor.
This exclusion is unlikely to have a significant effect on coverage for the Chinese drywall claims. The exclusion will not apply to the defendant suppliers or manufacturers because the focus of the exclusion is on the installation of the drywall. Moreover, because of the subcontractor exception, the exclusion will usually be inapplicable to the defendant builders. Finally, because of the limited operations performed by insured drywall contractors, this exclusion will most likely only exclude the repair work related to the defective drywall itself.
Exclusion m. – "Impaired Property" Exclusion
The "impaired property" exclusion only excludes damage to property that has not been physically injured or for which the claimed damages are only for loss of use of that property. Gaylord Chemical Corp. v. Propump, Inc., 753 So.2d 349 (La. Ct. App. 2000). Furthermore, the exclusion only bars coverage when the claimants' property can be restored to use by repair or replacement of the policyholder's product or work and does not eliminate coverage for those situations in which a third party's property is damaged because of the existence of the insured's product or work. See North Am. Treatment Sys., Inc. v. Scottsdale Ins. Co., 943 So.2d 429 (La. Ct. App. 2006); Transcontinental Ins. Co. v. Ice Sys. of Am., Inc., 847 F.Supp. 947 (M.D. Fla. 1994).
The underlying drywall claims allege the loss of use of the claimants' homes. However, physical damage occurring to the homes resulting from the defective drywall is also alleged. Moreover, the mere removal of the defective drywall will not restore the homes. As a result, this exclusion is not likely to apply to limit coverage as to any of the defendants.
Exclusion n. – Sistership Exclusion
Known as the "sistership" or "product recall" exclusion, this exclusion eliminates coverage for those damages incurred for the replacement or removal of the insured's product or work if the product is withdrawn or recalled "from the market" because of a known or suspected defect in the product. See Stoute v. Long, 722 So.2d 102 (La. Ct. App. 1998); Champion v. Panel Era Mfg. Co., 410 So.2d 1230 (La. Ct. App. 1982). The sistership exclusion only applies in cases where, because of the actual failure of the insured's product, similar products are withdrawn from use to prevent the failure of these other products that have not yet failed but are suspected of containing the same defect. Harris Specialty Chems, Inc. v. U.S. Fire Ins. Co., 2000 U.S. Dist. Lexis 22596 (M.D. Fla. July 7, 2000) (holding that a sistership exclusion did not apply when there was no recall or remedial measures taken with respect to buildings that had not yet sustained discoloration of their exterior as a result of the defective product). It does not exclude from coverage damage already caused to the property of a third party.
At present, the "sistership" exclusion appears to have no effect relating to coverage for the Chinese drywall claims. Although there has been a push by legislators from Florida and Louisiana for recall legislation, to date, there has been no withdrawal or recall of the drywall from the market by any defendant manufacturer, supplier, or builder. Therefore, no damages have been incurred associated with the withdrawal or recall of the drywall. Moreover, in the event that a recall does eventually happen, the damages already caused by the defective drywall will remain covered.
The Contractual Liability Exclusion
Another aspect of coverage related to defective Chinese drywall claims under a standard CGL policy concerns the concept of liability coverage for an insured's contractual liability. Business entities, such as subcontractors, contractors, and/or developers, often times will assume certain liabilities of another business organization through the terms of a written contract, or an indemnity or hold harmless agreement. Typically, CGL policies exclude coverage for claims involving situations in which an insured assumes the liability of another under a contract or an agreement.
Bodily injury and property damage claims arising out of the alleged problems associated with defective Chinese drywall may impact the contractual liability coverage afforded under general liability policies. Both Florida and Louisiana courts recognize that contractual liability exclusions do not always operate to preclude coverage for all underlying claims. See, e.g., Florida Mun. Power Agency v. Ohio Cas. Ins. Co., 714 So. 2d 660 (Fla. Dist. Ct. App. 1990); Alwell v. Meadowcrest Hosp., Inc., 971 So. 2d 411 (La. Ct. App. 2007); Broadmoor Anderson v. National Union Fire Ins. Co. of La., 912 So. 2d 400 (La. Ct. App. 2005), writ denied, 925 So. 2d 1239 (La. 2006).
Determining whether, and to what extent, contractual indemnity coverage exists will require a thorough review of the terms of contractor agreements and a critical analysis of the terms of the particular policy at issue.
CONCLUSION
Based on what is known to date, it is clear that the Chinese drywall problem will have a significant impact on both the liability and property insurance industries and warrants close monitoring.
The foregoing discussion and analysis is intended to provide an outline for prospective insurance claims and coverage litigation associated with Chinese drywall. Specific decisions as to coverage issues will require review of each claim on the basis of its own facts and circumstances.
Footnotes
7. This ISO endorsement is commonly referred to as a "Montrose" or "anti-Montrose" endorsement because it was developed in response to a California Supreme Court decision -- Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal.4th 645 (1995).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
