Attorneys Jeff Vita and David Jordan explain in excellent article how contractors sued for Chinese Drywall problems may defeat their General Liability carriers’ use of the pollution exclusion to deny their claims.

Under the standard General Liability policy, “pollutants” are defined to mean “any 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.”

Some courts such as in CA may extend this definition further to follow the EPA or equivalent state definition of “pollutants”. In these states, even dirt and rocks can be pollutants once they are removed from their original location.

According to Vita and Jordan, the successful use of the pollution exclusion to deny coverage will depend on state case law to a large degree. As a result, choice-of-law issues can be important if the option is available to choose the state of defense.

Some states define “pollutants” differently than others for the purposes of such exclusion. For example, some states may define “pollutants” in their traditional sense and require the pollutants in question to involve an environmental catastrophe caused by reckless or intentional misconduct (ex: dumping of hazardous chemicals) in order for the exclusion to stand. Other states may allow the exclusion to stand where the negligent use or handling of toxic substances occurs in the ordinary course of business (ex: unintentional release of carbon monoxide by an HVAC contractor).

For More Information: See article entitled The Not-So-Great Drywall Of China by Jeffrey J. Vita and David G. Jordan

Source: Saxe Doernberger & Vita, P.C.  www.sdvlaw.com

General Liability carriers specializing in contractor insurance for builders and drywall subs are “sweating it out” over the potentially massive claims dollars that could be paid out in litigation, settlement, and adverse jury verdicts arising from Chinese drywall.

However, due to the impact of little known policy exclusions, and evolving case law in many states, General Liability carriers may escape liability for all or a significant percentage of claims leaving builders and trade subs facing huge uninsured losses and potential bankruptcy.

From the point of view of the homeowner, these claims will not likely be covered by Homeowners Property Insurance. And, to the extent that the damages are not covered by the General Liability policies of builders, subs, and distributors, home owners will incur devastating out of pocket losses.

Per House Damage Could Be Astronomical

There is a lot at stake for all parties because the damages on a per house basis are likely to be astronomical. The lawsuit papers will allege that the fumes from the defective Chinese drywall have resulted in corrosion damages to all metal parts of the house including electrical systems, copper piping, HVAC and other metal fixtures. In addition, it will be alleged that the non metal parts of the house have been damaged by foul smelling and noxious sulfur dioxide fumes.

Some experts may claim that the drywall can be sealed, but this approach is questionable and unlikely to be accepted by home owners. Most lawsuits will likely ask for the total removal and replacement of all drywall and electrical systems as well as other building materials that may have been contaminated by the fumes.

Next, add damages for remediation or replacement to household contents for exposure to corrosive and foul smelling fumes. Top this off with the possibility of bodily injury claims due to adverse health consequences to occupants due to exposure.

Pollution Liability Exclusions

All Contractor General Liability policies include a standard exclusion for liability arising from the “actual, alleged or threatened discharge, seepage, release or escape of pollutants’,” “Pollutants” are defined as any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. “Based on this broad definition, the carriers will take the position that the fumes released from Chinese drywall fall under the policy definition of “pollution.”

Fortunately, the standard policy language includes an exception to the exclusion for pollution that results from the products or completed operations of an insured. In other words, the insurance carrier can’t use the pollution exclusion to deny a claim when the pollution arises after the house has been sold.

Unfortunately, many General Liability policies that are sold to contractors include a Total Pollution Exclusion that does not allow the exception that is mentioned in the above paragraph. The presence of the Total Pollution Exclusion (or similar exclusion) on a policy will allow the insurance carrier to take the position of denial of all damages and legal defense. The success of such a position will be determined by the allegations in a specific lawsuit as well as case law. The successful use of the Total Pollution exclusion, if upheld by the courts, will have a devastating impact on all defendants.

Property Damage Exclusions And Emerging Case Law

In the event that the Total Pollution Exclusion is not present on the General Liability policy or if it is not ultimately upheld by the courts, the claims adjusters will have a fallback position in their quest to deny a significant percentage of Chinese drywall claims.

As a result of the construction defect crisis, most General Liability carriers specializing in builders insurance began to insert special policy exclusions around five years ago to escape liability for construction defect claims. The most common exclusion entitled “Exclusion: Damage To Work Performed By Subcontractors On Your Behalf” (CG2294), virtually eliminates all property damage liability for damage to the builder’s faulty work itself (drywall) and resulting damage to the builder’s non faulty work (corrosion to electrical systems, copper piping, HVAC, and other metal fixtures).

Existing case law in many states has resulted in claim denials for construction defect under the theory that property damage to a builder’s work is not considered to be an “occurrence” or accident and thus the policy should not act as a warranty. Therefore, the end result in these states is the same as the application of exclusion CG2294.

However, General Liability coverage under the builder’s insurance policy will still likely apply to property damage to contents and bodily injury claims by occupants. Since most lawsuit papers are likely to allege at least some covered damages, coverage will still be triggered for the entire legal defense for all claims at the expense of the insurance carrier.

As concerns drywall subcontractors, their General Liability policies will not cover property damage to their work (drywall) but will cover resulting property damage to other parts of the house and contents. Their policy will also cover bodily injury to occupants. In addition, their policy will likely trigger a full legal defense of all claims.

Assuming that both the builder and drywall sub have General Liability insurance in force continuously from the completion of the job to the filing of the lawsuit papers, their combined policies won’t likely cover the cost to tear out and replace the drywall. Such a repair job represents a huge undertaking and will be very expensive.

US Suppliers And Chinese Manufacturers

US suppliers of Chinese drywall will undoubtedly participate in these lawsuits with both builders and drywall subs. Plans for class action lawsuits are already under way. Under a worst case scenario, some US suppliers may run out of general aggregate limits under their General Liability policies and it is unlikely that Chinese manufacturers will share in these claims due to the difficulties in enforcing judgments against foreign manufacturers.

Builders can protect themselves from future construction defect and pollution claims by implementing the following practices:

* Implement mandatory subcontractor agreements with all subs including insurance requirements for General Liability, hold harmless/indemnification provision, and a requirement for all subs to participate in arbitration proceedings.

* If the builder’s General Liability policy includes the Exclusion-Damage To Your Work Performed By Subcontractors On Your Behalf (CG2294) or a similar exclusion, find out if the insurance carrier provides a buyback for an additional premium charge.

* Ask the insurance agent if any insurance carriers are available that don’t use exclusion CG2294 or have a less severe version that covers resulting property damage to the builder’s non faulty work.

* Purchase a Pollution Liability policy.

Source: John Sadler

“The three most commonly used additional insured endorsements in construction relationships are the Insured-Owners, Lessees Or Contractors-Scheduled Person Or Organization (CG 20 10); Additional Insured Owners, Lessees Or Contractors-Automatic Status when Required In Construction Agreement With You (CG 20 33); and Additional Insured-Owners, Lessees Or Contractors-Completed Operations (CG 20 37).”

Our agency conducts annual insurance checkups for our contractor clients, and I am often asked “Why is this necessary or recommended since updated information has already been provided in the renewal applications and over numerous phone conversations that occur throughout the year?”

• W-2′s (employee payrolls)
• 1099′s (subcontractor payrolls)
• ledger statements
• certificates of insurance on your subcontractors (please make sure that the policy effective and expiration dates on your subcontractor’s certificate are in line with the dates of their service; sometimes you will need to have more than one certificate on your subcontractor).
• Job duties of your employees and subcontractors — this is needed to make sure that they are properly classified according to insurance rules and regulations

I have been in the insurance industry for longer than I care to say, and there are numerous myths that seem to endure over time.  In an attempt to put these myths to rest I will be be discussing some of the more “common” ones in a series of blogs.

The fact is that this is more complicated than it seems at first glance.  For purposes of determining the employee count, most state laws also count uncompensated officers as well as employees of sucontractors.  In addition, state laws count the total number of employees during an entire year, and not the average number of employees at any given time.

If an employer is required to carry Workers’ Compensation but does not do so, the injured worker can file his Workers’ Compensation claim with the state’s Uninsured Employer’s Fund and will get paid the traditional benefits.  The state’s Uninsured Employer’s Fund will then file a lien against the non-complying employer for the amount of the payout and can levy substantial fines against the employer in addition to the benefits.

 After I tell my client this, their next response is sometimes “Can’t I file the claim under my General Liability policy?”.  The answer to this is very simple – “No”, as these types of claims are excluded.