Chinese Drywall Case Moves Forward, Could Test Pollution Exclusion

Source: BestWire Services, February 22, 2011
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Insurers could be facing a test of their pollution exclusions as the complex multidistrict litigation involving allegedly defective Chinese drywall moves forward.

Judge Eldon E. Fallon of the U.S. District Court for the Eastern District of Louisiana rejected eight commercial general liability insurers’ contention that the lawsuits should be dismissed because the subcontractors who purchased the insurance policies for the plaintiffs were not named in the lawsuits.

Millions, if not billions, of dollars are at stake, said plaintiffs’ attorney Robert M. Horkovich, of Anderson Kill & Olick. “Thousands of houses are involved in the class action,” Horkovich said.

The lawsuits may come down to how the court interprets the insurance companies’ pollution exclusions.

Late last year, Fallon ruled in favor of 10 homeowners insurers who had asked that the cases against them be dismissed. Fallon ruled that coverage was barred under the faulty materials and corrosion exclusions contained in the policies (BestWire, Dec. 22, 2010).

However, Fallon also ruled the homeowners insurers’ pollution exclusions did not apply to drywall in homes, saying the exclusions were intended to cover environmental issues, according to his ruling.

“This is frustrating to insurance companies,” Horkovich said. “Louisiana and other states have a pro-policyholder view on the pollution exclusion. They don’t get past the first word: this is not pollution. This is not environmental contamination. Insurers fear that the judge will reach an adverse decision on their central defense, the pollution exclusion.”

In the latest round of arguments, the plaintiffs in the case said the multidistrict litigation “is the most efficient forum for resolution of the claims since all claims can be resolved at one time, in one forum,” Fallon said in his ruling. Fallon agreed, saying: “the court finds that the most practical approach is to proceed with the present cases without the subcontractors.”

The insurers involved are: American Guarantee & Liability Insurance Co.; Amerisure Mutual Insurance Co.; Chartis Specialty Insurance Co.; FCCI Commercial Insurance Co.; Landmark American Insurance Co.; Mid-Continent Casualty Co.; National Union Insurance Company of Pittsburgh; and NGM Insurance Co.

Both Chartis and Nation Union are subsidiaries of American International Group Inc. A spokeswoman for the company declined to comment on the ruling. American Guarantee is a subsidiary of Zurich Financial, where a spokesman there also declined comment.

The other insurers could not immediately be reached for comment.

The litigation stems from the manufacture, distribution, sale and installation of Chinese drywall in homes where it allegedly admits foul odors and damages metal, electronic elements and devices, as well as causing personal injuries to people living in those homes. The cases have been consolidated into a multidistrict litigation.

The ruling deals with three different plaintiffs, including Robert C. Pate as trustee for the WCI Chinese Drywall Trust. WCI was a Florida housing contractor that filed for bankruptcy, and created the Chinese Drywall Trust to assume WCI’s liability or losses from Chinese drywall. The goal of the trust is to collect all possible insurance money, and then distribute the money to the claimants.

Pate sued the commercial general liability insurers involved with WCI’s construction projects, including suing the insurers that provided cover to WCI’s subcontractors, Horkovich, Pate’s lead counsel, said.

WCI insisted that all subcontractors add WCI as a named insured to their general liability policies, Horkovich said.

Also involved in the litigation are homebuilders Centerline Homes Construction Inc. and Northstar Holdings Inc., which have claims similar to WCI.

In a related ruling, Fallon found that NGM Insurance Co. and Owners Insurance Co. could be dismissed from the case due to lack of jurisdiction. Neither company is licensed to write business in Louisiana, where the cases are being heard.

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