Chinese Drywall News from CDC regarding health

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The centers for disease control have released some findings which are attached for your review.  The attorneys at Olson & Good make no representations and have formed no opinions regarding the health and safety issues that may or may not exist as we are not health professionals.  It is worthy of mention, however, as this is one of the issues we have focused significant attention to over the past 18 months.

May a homeowner recover for “stigma damage”? The wrecked car syndrome applied to South Carolina Construction Law

Over the past ten years, my construction defect practice has led me to believe that most lawsuits arise over some sort of condition which is perpetuated by public sentiment. EIFS and Mold cases served to create an entire niche of experts, or professional witnesses equipped with equipment of all kinds, some being more sophisticated than others (The individuals and their equipment). The increase in publicly condemned products has led entire neighborhoods to hire inspection teams who find defects or, deviations, perhaps from “industry standards”, architectural plans, and other standards of care.

When these deviations cause physical damage to the tangible, or physical property, a construction case can be actionable for monetary damages. The issue I would like to ponder today, however, involves those situations when there is truly minimal, or no physical damage resulting from a ridiculed product or deviation from the industry norm. Some owners file suit claiming that there is a certain “stigma” attached to their home and this will not allow them to enjoy it, or resell it.

South Carolina case law does not provide specifically for the claim of stigma damages and the prevailing case law is only clear that some damage, albeit temporary, must be a pre-requisite to a monetary award.

Under South Carolina law, “[t]he general rule is that in case of an injury of a permanent nature to real property … the proper measure of damages is the diminution of the market value by reason of that injury, or in other words, the difference between the value of the land before the injury and its value after the injury. Where (defective construction practices or products) result in a temporary or non-permanent injury to real property, the injured landowner can recover the depreciation in the rental or usable value of the property caused by the pollution.” Yadkin Brick Co., Inc. v. Materials Recovery Co., 339 S.C. 640, 529 S.E.2d 764 (Ct. App. 2000).
Where the injury is temporary, the landowner can recover the depreciation in the rental or usable value of the property caused by the injury. Peoples Federal Savings and Loan Ass’n of South Carolina v. Resources Planning Corp., 358 S.C. 460, 596 S.E.2d 51 (2004).

Manufacturer Knauf Plasterboard Reportedly Settles with Beazer

Knauf Plasterboard Tianjin Co. Ltd. has reportedly settled with Beazer Homes for $800,000 for an unspecified number of homes that may have contained drywall that was tainted.

As the blog author and a representative of my firm, Olson Good & Brown, I would like to warn against speculation as settlements like these are typically kept in confidence when they are truly negotiated. Reports vary as to how many homes were “covered” as part of this payment. As of today, I have not read anything which verifies the scope of this settlement.

Beazer is known in the community as taking a pro-active approach to construction defect matters, as it makes more fiscal sense to repair potential problems on its own. Beazer has been successful in recouping these funds against subcontractors, material suppliers, and others in the past.

To be continued.

Chinese Drywall Analysis and The Economic Loss Rule- Forum Matters

This is an outstanding article by Timothy Hughes, a construction attorney with Bean Kinney & Korman in Arlington, Virginia.  With his permission, we are reprinting the text below.  For more information on Mr. Hughes, please check out his profile from the Bean Kinney website:

http://www.beankinney.com/index.phpoption=com_attysearch&Itemid=271&task=view_profile&profile_id=43

While this site focuses on South Carolina construction defect litigation, it is helpful and informative to follow well informed lawyers in other parts of the country.  Here is the text of Mr. Hughes’ article:

I spent this weekend thinking about thesignificant victory for Virginia home owners in the Chinese drywall litigationthat was tried as part of the pending class action in New Orleans.  It may have mattered quite a bit that this ruling was issued in New Orleans as opposed to Virginia. 

I run the risk of delving into legal complexity, but it is necessary here to understand these issues.  We have talked about the economic loss rule several times here, in particular as it relates to products liability cases, and implications of classifying damages in such cases.  Those interested in design and construction issues in Virginia absolutely need to understand the economic loss rule.  The contours of this rule define who can whom and for what.  This rule is heavily briefed, argued, and litigated and can mean the difference between a big payday and a big goose egg.

It is clear in the Chinese drywall case that the home owners purchased a single unitary home from various builders and that one part of the home (the drywall) damaged others (piping, wiring, HVAC, et c).  There is a strong argument these cases fall under the clear mandate of the seminal Virginia case on this topic, Sensenbrenner v. Rust, Orling & Neale.  At least as to the home repair issues, theSensenbrenner case would potentially eliminate all of the negligence based property damage theories of recovery for home repairs.

The remaining theories of recovery against remote manufacturers would be for breach of UCC warranties.  The next layer of analysis would be to evaluate whether the repair costs claimed are direct damages or whether they were consequential damages requiring privity of contract that are thus barred.  The products cases in Virginia have stuck to the statutory measure of direct damages which is the difference of the value of the product as warranted versus as delivered.

Reading the court’s opinion issued last week in the drywall case, the court never discussed any of these issues.  The court discusses Virginia law, property damage, and recoverable measures of damages for property damages at length.  The economic loss rule is never mentioned, nor is the Sensenbrenner case, nor is the UCC line of cases on direct versus consequential damages.  Reviewing the cases and our previous posts, this case may have turned out very differently if tried in a Virginia court.

I spent this weekend thinking about thesignificant victory for Virginia home owners in the Chinese drywall litigationthat was tried as part of the pending class action in New Orleans.  It may have mattered quite a bit that this ruling was issued in New Orleans as opposed to Virginia. 

I run the risk of delving into legal complexity, but it is necessary here to understand these issues.  We have talked about the economic loss rule several times here, in particular as it relates to products liability cases, and implications of classifying damages in such cases.  Those interested in design and construction issues in Virginia absolutely need to understand the economic loss rule.  The contours of this rule define who can whom and for what.  This rule is heavily briefed, argued, and litigated and can mean the difference between a big payday and a big goose egg.

It is clear in the Chinese drywall case that the home owners purchased a single unitary home from various builders and that one part of the home (the drywall) damaged others (piping, wiring, HVAC, et c).  There is a strong argument these cases fall under the clear mandate of the seminal Virginia case on this topic, Sensenbrenner v. Rust, Orling & Neale.  At least as to the home repair issues, theSensenbrenner case would potentially eliminate all of the negligence based property damage theories of recovery for home repairs.

The remaining theories of recovery against remote manufacturers would be for breach of UCC warranties.  The next layer of analysis would be to evaluate whether the repair costs claimed are direct damages or whether they were consequential damages requiring privity of contract that are thus barred.  The products cases in Virginia have stuck to the statutory measure of direct damages which is the difference of the value of the product as warranted versus as delivered.

Reading the court’s opinion issued last week in the drywall case, the court never discussed any of these issues.  The court discusses Virginia law, property damage, and recoverable measures of damages for property damages at length.  The economic loss rule is never mentioned, nor is the Sensenbrenner case, nor is the UCC line of cases on direct versus consequential damages.  Reviewing the cases and our previous posts, this case may have turned out very differently if tried in a Virginia court.

Virginia Case Rules that Proactive Remediation Measures and Expenses are Not Covered in Chinese Drywall Recovery Action

Opinion from Virginia http://valawyersweekly.com/vlwblog/files/2010/03/chinese-dec-opinion.pdf

Virginia homebuilder took proactive steps to remediate allegedly deficient home product due to the integration of Chinese manufactured drywall.  The opinion speaks for itself, although it sends a message that if a claim is not covered, it is irrelevant as to who brings the eventual coverage suit.  The court found no coverage and, thus, the homebuilder was not able to recoup repair costs. 

Editor’s Note:  While we all applaud the building company (Dragas Construction) for remediating in a pro-active matter, contractual policy considerations do not create coverage based on the identity of the claimant……at least in Virgina.

Chinese Drywall Claims and Insurance Coverage: Will Non-Specific Exclusions or Endorsements Curtail Coverage?

Chinese Drywall is becoming a household name, referring to certain drywall products manufactured in China and imported into the US between 2004 and 2008. A relatively new trend in the construction defect sector of the law, consumer complaints begin surfacing during the years 2007 and 2008. The consumer complaints originated in Florida, causing many to speculate that the drywall might be the result of a deficit in availability of traditional product due to the millions of repairs elicited by the hurricane seasons which plagued the country in 2003, 2004, and 2005. As complaints poured in from Louisiana and Texas, the theory on the products origin became widely accepted.

From a property damage perspective, most consumers complained that strange, sulfur-like odors were coming from certain areas of the home. In addition, preliminarily studies suggest that the subject drywall emits a sulfur compound responsible for the corroding of electrical wiring, HVAC components, and certain household appliances in those structures that have been restored or rebuilt with Chinese-manufactured drywall. While the cause of these problems has yet to be fully determined, the drywall at issue appears to emit gases such as carbon disulfide, carbonyl sulfide, hydrogen sulfide, and diethyl sulfide. While certain physical maladies have been reported by some homeowners, this discussion will not focus on that aspect of the controversy.
Several lawsuits have been filed on behalf of consumers. The suits cite studies performed by ENVIRON, a consulting firm retained during initial litigation, as well as public health studies which have been produced at both state and federal levels. Litigation involving the use of Chinese drywall alleges that it is defective because it smells like “rotten egg” and emits a variety of harmful toxins that can corrode and damage metal components such as HVAC coils and doorknobs.

The construction and insurance industries have been on a collision course for years as a direct result of one common antagonist: the unhappy property owner. These owners come in all shapes and sizes, as some are single family residential homeowners, while others are corporate entities that rely on the contractors for the infrastructure within which they conduct their businesses. A common enemy does not always produce a united front, however, as evidenced by positions taken by insurers and their policyholders within the construction industry. At the heart of these disputes between insurance carriers are lawsuits against businesses in the building trades, including developers, contractors, and materials suppliers, which allege “occurrences” which cause tangible, physical damage to property.

The standard CGL defines the term “occurrence” as follows: “the continued or repeated exposure to substantially similar harmful conditions”. Many courts have interpreted occurrences to be “unexpected and unintended” by the contractor or subcontractor. Further analysis requires the unexpected damage to extend beyond the work or work product of the insured.

POLICY EXCLUSIONS AND LEGAL THEORIES APPLICABLE TO CHINESE DRYWALL
There are several standard CGL policy exclusions that may serve as a bar to coverage in Chinese drywall cases. Because the notion of defective drywall from China was not contemplated during the installation period(s), there is current speculation as to how “standard” and non-specific exclusions might seek to limit coverage. The situation is analogous to CGL policies which were underwritten in the 1990’s, immediately prior to the synthetic stucco litigation which involved dozens of manufacturers, applicators, as well as general contractors that chose to install the product on the exterior of structures. While there is now a common “EIFS Exclusion” incorporated beyond the terms of the insuring agreement between builders and carriers, this was not the case until the product was declared to be defective.

POLUTION EXCLUSION
Specific jurisdictions have treated the pollution exclusion differently. Traditional environmental claims have seen the exclusion used successfully in most instances. The construction defect claims regarding Chinese drywall are, arguably, non-environmental in nature. Things are never black and white, however, and different jurisdictions have interpreted the exclusion to reach conflicting results.

Pollutants are defined in policies as “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.” The 5th Circuit ruled in 2008 that a particular pollution exclusion clause applies whenever a pollutant causes harm by a physical mechanism enumerated in the policy, irrespective of where the injury took place or whether the pollutant was released into the environment.‖ Noble Energy, Inc. v. Bituminous Cas. Co., 529 F.3d 642 (5th Cir. 2008).

The definition of a pollutant can be determined by the actual substance being released, such as carbon monoxide. (Carbon Monoxide a pollutant and subject to the exclusion, see Reed v. Auto-Owners Ins. Co., 667 S.E.2d 90 (Ga. 2008). Whittier Properties, Inc. v. Alaska Nat. Ins. Co., 185 P.3d 84 (Alaska 2008) involved a propane leak and the policyholder’s contention that the substance (petroleum) was not, in and of itself, a pollutant. The court concluded in favor of the insurer’s exclusion, reasoning that when “gasoline escapes or reaches a location where it is no longer a useful product, it is fairly considered a pollutant.”‖ Whittier Properties, 185 P.3d at 91.

MOLD OR FUNGI EXCLUSION
The “mold exclusion” excludes coverage for bodily injury or property damage relating to the inhalation, ingestion or exposure to fungi, mold or bacteria within a structure. Consider the following case from Florida, which involved a suit against a contractor alleging mold related damages. In Empire Indemnity Ins. Co. v. Winsett, 2009 WL 1178516 (C.A. 11 (Fla.)), the Eleventh Circuit Court of Appeals reviewed a factual pattern in which it appeared that the mold growth was a product of the builder‘s failure to install a vapor barrier. The Court, applying Florida law, found that even if the mold growth was caused by a covered preceding event, the clear and unambiguous meaning of the language of the exclusion nevertheless barred coverage for the claim. Thus, the moisture related damages to property as a result of negligent installation of the barrier would be deemed covered, although the production of harmful elements to the air were not a covered element of otherwise covered work. Current opinion regarding the scope of injuries attributable to Chinese Drywall will likely deem that these damages fall outside the mold exclusion. While there is some organic matter involved, it is not congruent with those elements covered by the mold and fungi exclusion.

THE YOUR WORK EXCLUSION
This exclusion bars coverage for damage to the policyholder’s work. The definition of “Your Work” includes the integration of materials, parts or equipment furnished as part of the work. “Products-Completed Operation Hazard” is defined as “All bodily injury and property damage occurring away from premises…….. arising out of your product or your work except: 1) products that are still in your physical possession; and 2) work that has not yet been completed or abandoned.

An important exemption to this exclusion involves coverage for damage arising from work performed on behalf of the insured by a sub-contractor. So long as the property damage arises out of a lower-tier contractor‘s work, materials, or design, the “your work” exclusion will not limit coverage for defects alleged against a general contractor. As such, there may be instances where a general contractor could be covered for damage to the building as a whole by virtue of the fact that the defective drywall was installed by a subcontractor. The subcontractor exclusion has been the subject of much litigation, and the national trend is currently favoring coverage for negligent work of a subcontractor. “Plainly, an interpretation of the policy which views the term “occurrence” categorically to preclude coverage for the simple negligence of a subcontractor subverts the plain language and purpose of the CGL part of these policies.” (Mississippi in Architex v. Scottsdale 2/10/2010 reversing a lower court ruling that a subcontractor exclusion allowed for coverage to be denied when the suit’s pretext was faulty work of a subcontractor).

THE SISTERSHIP EXCLUSION (RECALL OF DEFECTIVE PRODUCTS)
This exclusion bars claims for expenses associated with the repair or replacement of a product when it has been withdrawn from the market. Thus, if the insured is a distributor of building materials, this exclusion is of particular importance. It should be noted, however, that the exclusion does not exclude coverage for the actual damage caused by the product itself. See. e.g. Centillium Communications, Inc. v. Atlantic Mutual Insurance Co., 528 F. Supp. 2d 940 (N.D. Cal. 2007).

In light of the resolution introduced in the U.S. Senate seeking to impose a recall of all Chinese drywall, this exclusion may serve to bar claims associated with such a recall. However, the Sistership exclusion will not function to bar claims relating to the repair, removal and/or replacement of defective drywall if there is no general recall.

ENDORSEMENTS WHICH MIGHT LIMIT COVERAGEKNOWN OR CONTINUOUS INJURY
This endorsement prevents coverage for losses of which the insured is aware prior to the policy inception date. Again, the insured‘s knowledge of the defective nature of the drywall is an issue. The purpose of the exclusion is to prevent coverage for claims alleging damage to property that has not been physically injured arising out of a defect or dangerous condition in the named insured’s product or work. In other words, if the drywall makes the building uninhabitable, this exclusion would prevent coverage for the claim against the named insured. This exclusion applies only if the building can be restored to use by the replacement or removal of the work product. This means that if the building can be again made habitable by the removal of the defective drywall, the exclusion will apply. But, if the building cannot be used again even after the drywall has been removed and replaced by non-defective drywall, the impaired property exclusion is not applicable.

This endorsement will be important in claims that may arise from construction occurring after a reasonable and prudent contractor should have known about the problems associated with Chinese Drywall. In sum, restrictions remain limited to known products which are deemed defective at the relevant coverage period. This doctrine is subject to the state of mind and knowledge of the contractor who has installed the product, specifically centering along knowledge of inherent dangers.

CONCLUSION AND LESSONS TO BE LEARNED
Insurance coverage is not understood by most lawyers or insurance agents. While contractors might be aware that some items are not covered under a policy, it is a truly impossible burden for a contractor to keep up with the day to day shifting of case law, public policy, and the other complications which make this such an unknown risk. Contractors that are involved in Southeastern projects should make certain that they buy products from suppliers that they trust. Further, contractors need to make sure that their agents are more than brokers of insurance products lacking independent knowledge of relevant construction issues. Chinese Drywall is like EIFS in that there is much uncertainty regarding the concentration of the problem. Risk transfer protocol such as requiring suppliers and subcontractors to sign contractual obligations which require indemnity and additional insured treatment are key in all building environments. Properly drafted contracts and administration of contract formalities can alleviate the construction professional from dealing with the headaches contained within a CGL policy of insurance.

Chinese Drywall Information and Recommendations from Consumer Agencies Issued in February

The Consumer Product Safety Commission (CPSC) and the Housing and Urban Development Department (HUD) have released some guidelines to help homeowners determine if, in fact, their residences are built with defective drywall.
The guidance, or “protocol”, as defined by the release points to visible indicators such as metal corrosion, evidence of drywall installation in the relevant time period, and the identification of other corroborating evidence or characteristics. HUD and CPSC’s two-step guidance requires a visual inspection that must show blackening of copper electrical wiring and/or air conditioning evaporator coils; and the installation of new drywall for new construction or renovations between 2001 and 2008.
While HUD and the CPSC are consumer friendly, it should be noted that the guidelines aren’t necessarily hurtful to the home building industry. For instance, the literature allows for alternative causes which might impact corrosion within homes. Corroboration is encouraged by means of multiple tests to determine whether or not visible damages is truly the result of “Chinese” drywall integration.
The information encourages owners to make sure that suspect areas meet at least two additional criteria related to: the chemical analysis of metal corrosion in the home; elemental markers in the drywall; markings on the drywall; or specific chemical emissions from the drywall.