July 2010 Update on Insurance Coverage for Chinese Drywall Claims

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July 2010 Update on Insurance Coverage for Chinese Drywall Claims Powered By Docstoc
					July 2010 Update on Insurance Coverage for Chinese
Drywall Claims
Recent Developments In Chinese Drywall Litigation
Since our April 2010 update, activity in Chinese drywall litigation has intensified, culminating with the
first jury trial verdict in the country. On June 18, 2010, a Florida jury awarded a Miami couple $2.5
million in damages against Banner Supply Co. The verdict includes remediation costs as well as $1.7
million for loss of enjoyment of the home and diminished value in the home. The plaintiffs sought
over $4 million in damages for negligence and loss of value of their home while Banner Supply Co.
sought to pay only actual expenses incurred. The Banner Supply Co. verdict is seen as a bellweather
case in Chinese drywall litigation because it is the first jury verdict; the previous rulings have been
issued by the federal court in the multi-district litigation (MDL) in New Orleans (In re: Chinese-
Manufactured Drywall Products Liability Litigation, MDL No. 2047 (E.D. La.)). More than 2,100 plaintiffs
have filed lawsuits in federal court alleging similar damages.

Some defendants are settling rather than litigating Chinese drywall claims. On the same day that the
Miami jury handed down the $2.5 million award in the Banner Supply Co. case, Knauf Plasterboard
Tianjin settled two cases scheduled for trial on June 21st in the Louisiana MDL (In re: Chinese—
Manufactured Drywall Products Liability Litigation (Clement v. Knauf Plasterboard (Tianjin) Co. Ltd., Case
No. 09-7628, and Campbell v. Knauf Plasterboard (Tianjin) Co. Ltd., Case No. 09-7628))). Terms of the
settlements are confidential. These settlements follow an April 27, 2010 ruling in which the MDL
court required Knauf to pay a Louisiana couple $164,000 in damages plus reasonable attorneys’ fees
and costs (In re: Chinese-Manufactured Drywall Prods. Liab. Litig. (Hernandez v. Knauf Gips KG, No. 09-
6050), MDL No. 2047 (E.D. La., decided April 27, 2010)). In a tentative class action settlement in
Florida, two companies have offered to pay a total of $6.6 million to homeowners in the Homestead,
Florida neighborhood (Jason Harrell v. South Kendall Construction Corp., No. 09-08401 (Fla. Cir., 11th
Judicial Cir., Miami-Dade Co.)). The two companies, South Kendall Construction and Keys Gate
Realty, have submitted the proposed settlement to the court for approval. South Kendall Construction
has also filed for bankruptcy.

In another development, the Chinese manufacturer, Taishan Gypsum Co., Ltd., has appeared in the
MDL to appeal the April 8, 2010 $2.6 million ruling against it reported in our April update. The
$2.6 million award included remediation costs, damages to personal property, alternative living costs,
costs associated with foreclosures and/or bankruptcy, costs due to mortgage deferral or the inability
to refinance and loss of income, and loss of use and enjoyment of the property. Taishan’s appearance
is a positive development for plaintiffs and domestic defendants because the company had previously
refused to participate in the U.S. litigation.

Recent Developments In Chinese Drywall Insurance Coverage Litigation
While plaintiffs are beginning to prevail in lawsuits against manufacturers and distributors of Chinese
drywall, insurers are enjoying modest success fending off responsibility for coverage for these liabilities.

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Banner Supply Co.’s coverage litigation illustrates the situation that many insureds face. While
Banner Supply Co. sustained a $2.5 million verdict as a defendant in the underlying Chinese drywall
litigation, its insurers sued the company in Florida to obtain a ruling that they have no duty to defend
or indemnify Banner Supply Co. for those very liabilities (Chartis Speciality Ins. Co. et al. v. Banner Supply
Co., No. 8:10-cv-00339-JSM-EAJ (M.D. Fla.)). Motions are pending in that case but have not yet been

Most recently, a Virginia court has once again ruled against coverage for Chinese drywall. In Travco
Insurance Co. v. Ward, Civ. No. 2:10cv14 (E.D. Va., Norfolk Division, June 3, 2010), a Virginia federal
court partially granted Travco’s motion for summary judgment and held that the insurer had no duty
to insure the homeowner for damages arising out of defective Chinese drywall. The court initially
found coverage by ruling that loss of use constituted direct physical loss insured by the policy and
that physical damage to the property is not a necessary condition for coverage. The court rejected
Travco’s argument of no direct physical loss because the drywall was “physically intact, functional and
has no visible damage.” Because, in the court’s words, the home “has been rendered uninhabitable
by the toxic gases rendered by the Chinese Drywall,” the home had sustained a direct physical loss.
Nevertheless, the court held that the loss was excluded by the policy’s latent defect, faulty materials,
corrosion, and pollution exclusions. The court also refused to find coverage under the policy’s ensuing
loss provisions for any of the claimed damages but left open the door for other losses that might fall
under the ensuing loss provisions. The Norfolk court expressly refused to follow Finger v. Audubon Ins.
Co., No. 09-8071, 2010 WL 1222273 (La. Civ. Dist. Ct. Mar. 22, 2010), which rejected many of the
same insurer arguments asserted in Travco.

From a policyholder perspective, both the Banner Supply Co. and Travco cases are disturbing because
the insurers filed the lawsuits against policyholders to obtain a declaration of no coverage. These
cases illustrate the perils created by insurance companies’ proactive approach to Chinese drywall
coverage litigation. Both cases were filed in jurisdictions arguably more favorable to insurers; the
insurers filed their case against Banner Supply Co. in Florida, which has some favorable law on issues
relevant to coverage for Chinese drywall. Travco filed its case in the very court that previously found
for an insurer in another drywall case – also filed by an insurer against a policyholder – which we
discussed in our last update. In Builders Mutual Insurance Co. v. Dragas Management Corp., Civ. Action
No. 2:09cv185 (E.D. Va.), another federal judge in Norfolk ruled against the insured homebuilder,
Dragas Management Corporation (Dragas), and granted an insurer’s motion to dismiss Dragas’ breach
of contract claim. The court gave Dragas 14 days to amend its claim to allege facts sufficient to show
a legal obligation to pay. Dragas has since amended its complaint and the insurer again has moved
to dismiss on the ground that the policy does not cover the homebuilder’s voluntary remediation
of property containing Chinese drywall. Dragas argues that it has received dozens of demands and
threats of suit sufficient to trigger coverage under its policies. Not surprisingly, the homeowner in
Travco attempted to transfer that case from Virginia to the Eastern District of Louisiana to avoid
Builders Mutual, but the Travco court denied that motion.

(continued on page 3)
These cases demonstrate that insurers will take a proactive approach to evading their coverage
obligations by filing actions against their insureds in insurer-friendly jurisdictions. Their strategy will
be to obtain pro-insurer rulings in favorable jurisdictions and then rely on those pro-insurer rulings
in litigation around the country with their insureds. Insureds should adopt an aggressive approach
to prevent the insurance industry from controlling Chinese drywall coverage litigation. Insureds
with sizeable exposures should carefully analyze their legal positions and, if feasible, file declaratory
actions against their insurers in appropriate jurisdictions of their choice. If insureds do not take
affirmative steps, insurers will take control of the coverage issue with outcomes potentially unfavorable
to policyholders. Defendants in suits filed by homeowners, such as manufacturers, distributors, and
homebuilders, could find themselves whipsawed between plaintiffs seeking damages and insurers
refusing to honor their obligations to pay those damages. A strategic approach is essential to protect the
interests of insureds facing Chinese drywall liabilities.

Our Chinese Drywall Team
As these cases show, a thoughtful insurance recovery strategy is critical for any company facing Chinese
drywall liability. Our multi-disciplinary Chinese Drywall Team includes attorneys experienced in
policyholder insurance coverage, construction, real estate practice, and litigation. Please contact any
of the team leaders mentioned below for more information or assistance with Chinese drywall-related

Katherine J. Henry

Katherine J. Henry represents policyholders seeking insurance coverage for all types of liabilities,
including mass torts (such as asbestos, environmental, and welding), D&O and E&O, financial
liabilities, and first-party property damage. Her past and present policyholder clients include the
world’s largest automaker, the world’s largest home improvement specialty retailer, a major utility
company, a major lender, numerous health care-related entities, a private-equity investment firm, several
distributors of welding products, and a national trade association for the gases and welding industry.
She successfully defeated an insurer’s argument that the pollution exclusion barred coverage for welding
liability claims; insurers are raising that same exclusion in Chinese drywall litigation. Katherine also
provides clients with strategic advice and solutions for complex legal disputes. Her experience includes
formulating a litigation and negotiation strategy that led to the industry-wide settlement of claims
brought by the entire payphone industry as well as crafting a nationwide insurance coverage strategy for
welding distributors. She is an effective appellate advocate and has appeared before numerous federal
and state appellate courts, including en banc panels, on a wide variety of matters.

David Pharr

David Pharr represents commercial policyholders in insurance coverage matters and manufacturers
and contractors in defense of their products and work. David represented an EIFS manufacturer in a
complex dispute with multiple insurers arising from hundreds of homeowner claims involving business

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risk exclusions like those asserted in Chinese drywall matters. He also represented a steel processing
company in coverage litigation focused on whether various pollution exclusions barred coverage for
mass tort environmental liability claims. David also has experience with litigation and negotiation of
hurricane damage claims involving property and builder’s risk insurance. David regularly counsels
businesses and organizations in matters related to insurance coverage. He is Vice-Chair of an American
Bar Association committee on insurance coverage litigation and Immediate Past Chair of the Jackson
Chamber of Commerce.

Keith Covington

Keith Covington practices construction and labor and employment law. He advises contractors and
others in the construction industry on contracts, contract administration, and claims. Keith also
counsels employers in virtually all aspects of employment law, including discrimination issues, workers’
compensation, labor relations, worksite immigration enforcement, OSHA compliance, and union
avoidance. Keith has broad experience litigating employment, construction, and construction defect
cases. He was a member of Bradley Arant’s EIFS team and represented Dryvit Systems during the recent
spate of EIFS litigation. Keith is an active member of the Associated Builders and Contractors and a
frequent writer and speaker on issues of interest to the construction industry. He is also a member of
the Defense Research Institute and the American Immigration Lawyers Association. Keith holds a B.S.
degree in Mechanical Engineering from Auburn University and a J.D. degree from the University of
Alabama School of Law.

Mike Brown

Mike Brown leads the firm’s Real Estate Litigation Team and is a member of the firm’s Environmental
and Toxic Tort Practice Group and the General Litigation Practice Group. His practice focuses on
real property and land use matters, including construction and construction defects litigation. Since
1997, Mike has been one of the lead counsel for Dryvit Systems, Inc. in its litigation in Alabama and
Mississippi. Mike also assisted the company in resolution of a nationwide class action on EIFS issues.
He served as one of the lead lawyers in Keck v. Dryvit Systems, Inc., 830 So.2d 1 (Ala. 2002), in which
the Alabama Supreme Court established groundbreaking precedent on real property and construction
matters. Mike serves as an adjunct Professor at the University of Alabama School of Law, where he
teaches Land Use Planning and Real Estate Finance & Development.
Chinese Drywall Team

      Katherine J. Henry
      Washington DC Office
      Phone: 202.719.8244
      Fax: 205.719.8344

      David K. Pharr
      Jackson Office
      Phone: 601.592.9924
      Fax: 601.592.1424

      F. Keith Covington
      Birmingham Office
      Phone: 205.521.8389
      Fax: 205.488.6389

      T. Michael Brown
      Birmingham Office
      Phone: 205.521.8462
      Fax: 205.488.6462


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