MEALEY S LITIGATION REPORT:

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1 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, 2009 Commentary Insurance Coverage For Chinese Drywall Claims By John T. Waldron III [Editor s Note: John T. Waldron is a partner in the Pittsburgh offi ce of K&L Gates LLP, a law fi rm that regularly represents policyholders in insurance coverage disputes, including several policyholders in constructionrelated insurance coverage disputes. The views expressed herein are those of the author and not necessarily those of the law fi rm or its clients. This article is for informational purposes only and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without fi rst consulting with a lawyer. This article was adapted from John Waldron, Insurance Coverage for Chinese Drywall Claims, 45:1 TORT TRIAL & INS. PRAC. L.J. (2009) (forthcoming). Reprinted with permission of the American Bar Association.] Recent news reports have publicized that numerous houses more than 100,000 homes, according to some estimates 1 may contain drywall that was designed, manufactured and processed in China and that is alleged to be defective and causing property damage to the houses and their contents. Of even greater concern, certain homeowners are alleging bodily injury as a result of the emission of gases from the drywall. For instance, on March 3, 2009, Jill M. Donaldson and her husband, John Jared Oertling, filed a putative class action on behalf of Louisiana homeowners whose homes were built using so-called Chinese drywall. 2 Specifi cally, the plaintiffs alleged that the drywall is defective and emits levels of sulfur, methane and/or other volatile organic chemical compounds that cause corrosion of HVAC coils and refrigerator units, certain electrical wiring and plumbing components, and other household items, as well as create noxious, rotten egg-like odors. 3 In addition to these allegations of property damage, the plaintiffs asserted that the drywall causes bodily injury, including allergic reactions, coughing, sinus and throat infection, eye irritation, respiratory problems and other health concerns. 4 Other class action suits have been filed in Florida, Ohio, Louisiana, Alabama, and Mississippi and make similar allegations. 5 These class actions have in turn led to litigation between a homebuilder and the manufacturers and distributors of the Chinese drywall. 6 Additional homebuilders presumably will seek to pass the costs of the drywall claims further up the supply chain. In response to the damage and injury allegedly arising from the Chinese drywall, insureds may begin to seek coverage from their insurance carriers under (depending on the insured) liability and property insurance policies. In response to these requests for coverage, insurers can be expected to raise a number of coverage defenses. Ultimately, a significant amount of coverage litigation between policyholders and insurers is likely to ensue. For instance, on March 30, 2009, owners of a home in Florida filed a complaint for breach of contract against AIG under their homeowner s policy, seeking coverage for the property damage caused by the emitting of gases from their drywall. 7 The homeowners in particular seek a judgment that the pollution or contamination exclusion, on which AIG based its denial of the claim, does not apply. 1

2 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance As discussed further below, insureds under liability and property policies should examine their policies closely to determine whether coverage may exist for the losses and/or liabilities arising out of Chinese drywall claims, including the cost of defending themselves against such claims. I. Liability Insurance In Response To Drywall Claims Depending on the facts and specific policy language at issue, policyholders faced with liability from drywall claims may be able to protect themselves by accessing their insurance coverage under both (i) bodily injury and property damage liability coverage, and (ii) personal injury liability coverage. A. Bodily Injury And Property Damage Liability Coverage To determine whether insurance is available under bodily injury and property damage liability coverage, there are several key questions that must be addressed, including: (1) what is the appropriate trigger of coverage? (2) were the damages at issue expected or intended? (3) does the pollution exclusion apply? and (4) do the so-called business risk exclusions apply? 1. Trigger Of Coverage The trigger-of-coverage issue involves the question of which policy periods insurance policies are responsible for covering a particular claim. Depending on the facts involved, there are several different theories of the trigger of coverage that potentially may be applicable to drywall-related claims. For instance, because the drywall presumably was introduced into the property at a specifi cally-identifi able point in time, a party could contend that the policies on the risk at that point of the initial exposure should be triggered. 8 If the claimants were exposed to gases from the drywall over multiple policy periods, all of the policies on the risk during those periods would be triggered under an exposure theory. 9 If the alleged personal injuries of the claimants were diagnosed or became reasonably capable of medical diagnosis at a specific point in time (or an analogous analysis for any alleged property damage), the policies on the risk at that time would be triggered under a manifestation trigger of coverage. 10 Finally, if the house and its inhabitants were continuously exposed to gases emitted from the drywall and, during and after that period of exposure, developed progressively worsening damage or injury as a result of that continuous exposure, then all of the policies on the risk from the time of the initial exposure through the manifestation of the alleged damage or injury could be triggered under a continuous injury trigger theory. 11 Determining which trigger-of-coverage theory applies may depend on the specific policy language at issue, the intent of the parties in using that language, the individual facts of the case, and applicable state insurance law. When determining which particular liability insurers are potentially responsible for covering these types of claims and thus which insurers should be placed on notice of the claims, consideration should be given to each of the foregoing trigger theories. 2. The Expected Or Intended Exclusion In an effort to avoid their coverage obligations, insurers may contend that the injuries allegedly suffered by the claimants are excluded because the policyholders allegedly knew or should have known that the drywall would deteriorate prematurely and lead to the emission of certain chemicals. In response, policyholders have two primary arguments that they should assert in rebuttal. First, policyholders may assert that the question is not whether they knew about the alleged presence of certain chemicals in the drywall, but whether they knew that that condition would cause the specific bodily injury and property damage allegedly suffered by the claimants. 12 Second, policyholders may argue that a loss is covered even if a court were to find that they reasonably should have known that the use of Chinese drywall would cause damage, so long as they did not actually know that damage would ensue. 13 Obviously, whether a particular policyholder actually knew that the use of such drywall would cause bodily injury or property damage in a given instance is a fact-specific inquiry that will vary from case to case. Policyholders should be sensitive to the above arguments as the facts are developed in their defense of specific cases so that they may maximize their ability to withstand an insurer s contention that the injuries suffered by the claimants were expected or intended. 3. The Pollution Exclusion In addition to their assertion that the injuries at is- 2

3 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, 2009 sue were expected or intended, insurers may raise the so-called pollution exclusion as a defense to drywall claims. Several decisions involving indoor air quality, including cases involving exposure to carbon monoxide, carbon dioxide, and other gases, may provide insight into how courts will handle denials by insurers of drywall-related claims based on the pollution exclusion. A typical pollution exclusion commonly provides that coverage is excluded for bodily injury and property damage: arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, oil, or other petroleum substances or derivatives (including any oil refuse or oil mixed with waste), liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water. 14 Policyholders can attack the application of this and similar exclusions on four principal grounds. First, an insured may assert that, as a threshold matter, such pollution exclusions apply only, if ever, to cases of industrial environmental pollution, and are clearly inapplicable to cases involving indoor air quality. 15 Second, an insured may contend that the inside of a house or other building does not constitute the atmosphere or land for purposes of this exclusion. Third, an insured may similarly argue that the emission of gases from drywall is not the kind of gases or other irritants, contaminants or pollutants intended to fall within the scope of the pollution exclusion. 16 Finally, an insured may contend that the emission of gases from drywall does not constitute discharge, dispersal, release or escape within the meaning of the pollution exclusion. a. Insureds Reasonable Expectations Of Coverage For Claims Based On Indoor Air Quality In determining the applicability of the pollution exclusion, many courts refer to the common sense approach, which focuses on the reasonable expectations of the insured. For instance, in a frequently cited case, Pipefi tters Welfare Educ. Fund v. Westchester Fire Ins. Co., the United States Court of Appeals for the Seventh Circuit examined the limits of the terms irritant and contaminant in the pollution exclusion. 17 The court explained: The terms irritant and contaminant, when viewed in isolation, are virtually boundless, for there is virtually no substance or chemical in existence that would not irritate or damage some person or property.... Without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to some absurd results. To take but two simple examples, reading the clause broadly would bar coverage for bodily injuries suffered by one who slips and falls on the spilled contents of a bottle of Drano, and for bodily injuries caused by an allergic reaction to chlorine in a public pool. Although Drano and chlorine are both irritants or contaminants that cause, under certain conditions, bodily injury or property damage, one would not ordinarily characterize these events as pollution. 18 Under Pipefi tters, the determinative factor, the court explained, is whether a reasonable policyholder would characterize the hazard as pollution. 19 If the answer is no, then the court should find the policy ambiguous and construe its language in favor of coverage. 20 The reasoning of the court in Pipefi tters is frequently cited in decisions that attempt to put reasonable limits on the broad interpretation of pollution exclusions proffered by insurers. Under Pipefi tters, courts shift their focus to the reasonable expectations of the insured. If a court concludes that a reasonable insured would expect coverage, then it should find the policy language ambiguous and construe it reasonably in favor of coverage. b. The Pollution Exclusion As Limited To Instances Of Industrial Environmental Pollution Courts frequently hold that the pollution exclusion is intended to apply only, at most, to instances of industrial environmental pollution. For instance, relying in part on Pipefi tters, the Maryland Court of 3

4 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance Appeals, in Sullins v. Allstate Insurance Co., held that the pollution exclusion did not apply to injuries resulting from exposure to lead paint. 21 Examining the historical development of the pollution exclusion, the court concluded that the insurance industry s intention was to exclude only environmental pollution damage from coverage. 22 This result was further evidenced by the use of the words discharge, dispersal, release, escape, contaminant, and pollutant. These terms, according to the court, are terms of art in environmental law, further supporting its conclusion that the pollution exclusion is limited to instances of environmental pollution. 23 Hence, the exclusion was found inapplicable to injuries arising from indoor lead paint exposure. 24 Another series of decisions, discussing the applicability of the pollution exclusion to releases of carbon monoxide and carbon dioxide, have similarly limited the scope of the exclusion. For example, in Donaldson v. Urban Land Interests, Inc., the Wisconsin Supreme Court held that the pollution exclusion was ambiguous when applied to the buildup of carbon dioxide in a sick building case and, consequently, did not bar coverage. 25 In reversing the lower court s unanimous ruling that carbon dioxide is a pollutant, the court relied on Pipefitters reasonableness limitation on the pollution exclusion. 26 As Pipefitters explained, injuries resulting from everyday activities gone slightly, but not surprisingly awry necessitate a finding that the pollution exclusion clause is ambiguous because [the insured] could reasonably expect coverage for injuries from carbon dioxide buildup. 27 The court focused on the fact that unlike the nonexhaustive list of pollutants contained in the pollution exclusion clause, exhaled carbon dioxide is universally present and generally harmless in all but the most unusual circumstances. 28 Similarly, the United States Court of Appeals for the Second Circuit, in Stoney Run Co. v. Prudential-LMI Commercial Ins. Co., held that the release of carbon monoxide into an apartment was not the type of environmental pollution contemplated by the pollution exclusion clause. 29 This finding was based on the court s review of New York law, which interprets the pollution exclusion to apply only to environmental pollution, and not to all contact with substances that can be classified as pollutants. 30 This determination supported a finding of ambiguity resulting in coverage for the insured. 31 In another case involving carbon monoxide, the Supreme Court of Illinois refused to apply the pollution exclusion to injuries stemming from the accidental release of carbon monoxide fumes emitted from a faulty furnace. 32 In that case, the insurer argued that carbon monoxide is defined as a colorless odorless very toxic gas and regulated by the federal government as a pollutant under the Clean Air Act, and hence that the pollution exclusion should bar coverage. 33 The court though was chiefly concerned with what it perceive[d] to be an overbreadth in the language of the exclusion as well as the manifestation of an ambiguity which results when the exclusion is applied to cases which have nothing to do with pollution in the conventional, or ordinary, sense of the word. 34 The court agreed with the insured s argument that, in the absence of a Pipefi tters-type limitation, the exclusion is so expansive that the terms irritants and contaminants could even be applied to such everyday elements as water and air. 35 In finding coverage, the court agreed with those cases restricting the exclusion s otherwise limitless application to only those hazards traditionally associated with environmental problems. 36 This result was premised on the court s review of the history of the pollution exclusion which demonstrated that the predominate [sic] motivation in drafting... [the exclusion] was the avoidance of the enormous expense and exposure resulting from the explosion of environmental litigation. 37 The common thread in each of these cases is the courts unwillingness to extend the pollution exclusion beyond its intended meaning, despite the broad interpretation of the exclusion advanced by the insurers. 38 The applicability of indoor air quality cases to drywall cases is unclear. However, some of these decisions may be instructive. For instance, the emission of gases from drywall may be analyzed under the Pipefi t- ters and Donaldson approaches. Under Pipefi tters, a court must determine whether a reasonable insured would consider the emission of gases from drywall to fall within the meaning of the exclusion. Under Donaldson, a court would focus on the fact that certain of the chemicals in question occur naturally and are not 4

5 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, 2009 typically considered to be pollutants by reasonable insureds. Under either analysis, a court should find that the pollution exclusion does not apply to bodily injury or property damage arising out of the use of Chinese drywall. c. What Constitutes Discharge, Dispersal, Or Release Under The Pollution Exclusion The question of whether the emission of gases from drywall involves a discharge, dispersal, or release as those terms are used in the pollution exclusion represents another challenge facing the courts. To date, in analyzing arguably analogous contexts, the courts have not provided clear guidance as to how this challenge will be resolved. For instance, in Leverence v. United States Fid. & Guar., the Court of Appeals of Wisconsin held that the formation of mold over time in the walls of a residence did not constitute a release of contaminants. 39 In Leverence, the plaintiffs were purchasers of numerous homes built by the policyholder who alleged that the homes were defectively designed and constructed by the policyholder. The plaintiffs alleged that these defects resulted in the retention of excessive moisture within the homes exterior walls, causing mold, mildew, fungus, spores and other toxins to form and grow. The plaintiffs thus sued both the policyholder and its liability insurers under Wisconsin s direct action statute. Certain insurers argued that coverage was excluded under the pollution exclusion. According to these insurers, the requirement of a release of contaminants was satisfied because the trapping of the water vapor in the exterior walls would allegedly result in the production of airborne contaminants through a rotting process. 40 Rejecting the insurers reliance on the pollution exclusion, the Leverence court held that [n]o contaminants were released, but rather formed over time as a result of environmental conditions. 41 In contrast to the decision in Leverence, the court in Lexington Ins. Co. v. Unity/Waterford-Fair Oaks, Ltd. recently rejected the policyholder s argument that mold damage did not result from a release, discharge, escape or dispersal under a pollution exclusion contained in a property insurance policy. 42 Relying on the testimony of the insurer s expert that the growth of mold bodies resulted in the dispersal of reproductive spores into the air, the court concluded that the exclusion applied to damage in an apartment complex caused by the airborne transmission of spores. 43 In addition to the few cases that have addressed the requirement of a release, discharge, escape or dispersal in the context of mold-related claims, several courts have addressed this issue in the context of indoor air quality claims and have held that these policy terms should be narrowly construed and were not intended to apply to such claims. These decisions illustrate the courts focus on the history of the pollution exclusion in determining the intent of terms discharge, dispersal, and release. For example, in Island Assoc. v. Eric Group, Inc., the court explained that the pollution exclusion does not bar coverage for fumes confined to a small area within a worksite because such fumes had not been discharged, dispersed, [or] released. 44 In doing so, the court stated: Without belaboring the obvious, we hold that this exclusion is intended to shield the insurer from the liabilities of the insured to outsiders, either neighboring landowners or governmental entities enforcing environmental laws, rather than injuries caused by toxic substances that are still confined within the area of their intended use. 45 Lending further support to the court s holding was the fact that the operative terms discharge, dispersal, release and escape constitute environmental terms of art. Hence, the pollution exclusion is limited, at most, to certain discharges of pollutants in the industrial environmental context. 46 Similarly, the United States Court of Appeals for the Sixth Circuit has also refused to classify the presence of fumes in a manufacturing plant as a discharge, dispersal or release. 47 In that case, the policy terms at issue excluded coverage for damages arising out of the discharge, dispersal, release or escape of pollutants into or upon land, the atmosphere, or any watercourse or body of water. 48 In construing the meaning of these terms, the court noted: 5

6 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance A discharge is defined as a flowing or issuing out. To disperse is defined as to cause to breakup and go in different ways ; to cause to become spread widely. A release is defined as the act of liberating or freeing: discharge from restraint. An escape is defined as an evasion of or deliverance from what confines, limits, or holds. The fumes and dust leading to the injuries at issue were confined to the inside of the plant, to the area where the injuries occurred. 49 Thus, based on the intent of these terms, the court found that the presence of the fumes and dust in the air inside the plant did not fall within the scope of the pollution exclusion: It strains the plain meaning, and obvious intent of the language to suggest that these fumes, as they went from the container to [the injured s] lungs, had somehow been discharged, dispersed, released or escaped. Or considering that the fumes were confined to [the injured s] work area, that they had been discharged into the atmosphere, as that word is ordinarily understood. 50 Given the limited case law applying the pollution exclusion to indoor air quality claims, it is difficult to predict with certainty how a court would respond to an insurer s reliance on that exclusion under differing factual scenarios. Nevertheless, based on the favorable case law rejection the insurers assertion of the pollution exclusion in the indoor air quality cases, policyholders may succeed in defeating the insurers anticipated attempt to evade coverage for drywallrelated claims based on this exclusion. 4. The So-Called Business Risk Exclusions When faced with any coverage claims arising out of their policyholders products or completed operations, insurers will often rely upon so-called business risk exclusions in their policies as a basis to deny coverage. Indeed, insurers have advanced interpretations of these exclusions that are so broad that they render the supposed coverage nearly illusory. 51 Policyholders can protect themselves from unreasonable interpretations of these often-ambiguous exclusions by taking note of the various court decisions that have set forth the limits of these exclusions application. a. Own Product Exclusion In cases involving products manufactured or supplied by the policyholder, insurers routinely assert that coverage for property damage arising from the products is barred by the own product exclusion. A common version of this exclusion states that coverage does not apply to property damage to the named insured s products arising out of such products or any part of such products. 52 The primary debate that arises as insurers attempt to bar coverage through application of the own product exclusion is whether and to what extent the property damage that exists constitutes property damage to the named insured s product. In the context of drywall-related claims, the insurers will contend that the own product exclusion precludes coverage for the drywall itself. Policyholders and insurers often engage in disputes over whether such exclusion excludes simply the material cost of such product or whether the costs of replacing or repairing the product are also excluded. Courts that have addressed the own product exclusion have generally agreed either that it did not apply at all or that it applied only to the cost of the material of the new product itself, and not to the costs involved in replacing the product or the larger system using the product. For instance, in Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 53 the United States Court of Appeals for the Second Circuit ruled, in an asbestos property-damage case, that the own-product exclusion did not apply because the underlying claimants were seeking to recover for damage to property other than the policyholder s asbestos products, such as the damage to the building structures in which the policyholder s products were installed. 54 Similarly, in Pittway Corp. v. Am. Motorists Ins. Co., 55 the insured manufactured valves used in the assembly of hair spray cans, which ultimately were shown to be defective and to lead to leakage. The hair spray cans were useless without the valves and were thus scrapped. The insurer argued that the only property damaged was the policyholder s valves, and thus that the own-product exclusion precluded coverage. 6

7 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, 2009 Rejecting the insurer s position, the court held that, where a component part is so intertwined with the entire mechanism that the defect necessarily results in damage to the completed product the component will be deemed to have caused property damage. 56 Having concluded that property damage occurred, the court awarded damages for the costs of the lost hair spray cans, less the costs of the defective valves (which were precluded from coverage). Depending on the court s trigger-of-coverage theory, a policyholder may succeed in arguing that there simply is no property damage to its product at all. For instance, under an installation-trigger theory, the moment in time at which the policyholder s product was installed into the larger whole is chosen as the trigger date because the larger whole is deemed to be diminished in value or made useless as soon as the product was physically linked with it. 57 At the precise moment of installation though, according to this view of property damage, the policyholder s product itself has not yet incurred any property damage because the product has incurred neither a physical impairment nor a diminution in value as a result of installation. Therefore, courts applying the installation trigger may conclude that the own-product exclusion is inapplicable because there is no property damage to the product to serve as a basis for application of the exclusion. In conclusion, the own-product exclusion seems ill-suited to handle the complexities involved in some of the drywall-related claims. Given the wellestablished rules that exclusions are to be interpreted narrowly 58 and that the burden of proof is on insurers to establish their applicability, 59 courts should continue to hold that the own-product exclusion either does not apply at all to the damages sought by the underlying claimant or, at most, is limited to the property damage to the policyholder s product itself (narrowly defined) and does not bar coverage for the costs associated with exchanging the failed drywall at issue. b. Sistership Exclusion In addition to the own-product exclusion, insurers faced with claims for coverage of drywall-related liabilities may assert that the sistership exclusion precludes coverage. The standard 1973 version of the sistership exclusion bars coverage for: damages claimed for the withdrawal, inspection, repair, replacement, or loss of use of the named insured s products or work completed by or for the named insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. 60 With the addition of the defi nition of impaired property 61 in the 1986 and subsequent versions of the standard-form CGL policy, the sistership exclusion was rewritten to preclude coverage for: Damages claimed for any loss, cost or expense incurred by the insured or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of: (1) Your product ; (2) Your work ; or (3) Impaired property ; If such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it. 62 The sistership exclusion is ambiguous when applied to the typical facts surrounding drywall-related liabilities. For instance, in the class-action suits filed to date, gases are alleged to be emitted from the drywall, resulting in alleged property damage to the drywall itself and to the building into which it was installed (and the building s contents). The drywall presumably will be exchanged for a different type of drywall to prevent further property damage. Other buildings in which Chinese drywall has been installed may be similarly exchanged, even before property damage has become apparent. In attempting to determine whether the sistership exclusion applies in this context, several questions arise, including: (1) whether the switch from Chinese to different drywall constitutes a withdrawal, inspection, repair, replacement, or loss of use ; 7

8 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance (2) whether the Chinese drywall was withdrawn or recalled from the market or from use ; and (3) whether the Chinese drywall was so withdrawn because of any known or suspected defect or deficiency therein. Given all of these undefi ned terms with less than clear meanings, it is difficult to apply the sistership exclusion to the Chinese drywall claims. Even assuming arguendo that these undefined terms are not ambiguous, the possible application of the sistership exclusion should be limited to those cases in which the drywall has not yet failed. The language of the sistership exclusion provides that it applies only if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein. Based on this language, the courts that have addressed this exclusion have consistently held that the sistership exclusion does not preclude coverage when property damage has already been caused by the policyholder s product. For instance, in Int l Envt l Corp. v. Nat l Union Fire Ins. Co., 63 the policyholder supplied fan coil units that were installed in a larger heating, ventilation, and air conditioning system in a building. The system subsequently failed allegedly because of the policyholder s component part. Consequently, the policyholder was potentially liable for the cost of investigation, the cost of repairing water damage, and the cost of repairing faulty pipes. 64 The insurer denied coverage based on the sistership exclusion. Rejecting the insurer s position, the court held that the exclusion did not apply to the repair or replacement of products that had already failed, because such costs were simply a measure of the property damage incurred. 65 In addition to requiring that no product failure have occurred, the majority of courts that have addressed the 1973 version of the sistership exclusion holds that the exclusion applies only if the recall at issue was commenced voluntarily by the policyholder, not compelled by any third party. For instance, in the leading case of Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co., 66 a soup manufacturer recalled its soup because the soup incorporated allegedly contaminated noodles made by the policyholder. The insurer denied coverage based on the sistership exclusion. However, given that the purpose of insurance was to protect the policyholder from third-party claims for damages caused by its product, it would render the coverage nearly illusory to conclude that the sistership exclusion included recalls instituted by third parties. 67 Therefore, the New York Court of Appeals held that the sistership exclusion did not apply. 68 c. Failure To Perform Exclusion The 1973 ISO standard-form CGL policy contains a so-called failure to perform exclusion that provides that the insurance does not apply: to loss of use of tangible property which has not been physically injured or destroyed resulting from (1) a delay in or lack of performance by or on behalf of the named insured of any contract or agreement, or (2) the failure of the named insured s product or work performed by or on behalf of the named insured to meet the level of performance, quality, fitness or durability warranted or represented by the named insured; but this exclusion does not apply to loss of use of other tangible property resulting from the sudden and accidental physical injury to or destruction of the named insured s products or work performed by or on behalf of the named insured after such products or work have been put to use by any person or organization other than an insured. 69 Faced with claims for coverage of drywall-related liabilities, insurers may attempt to deny coverage on the basis of this failure-to-perform exclusion. However, the exclusion is generally inapplicable. First, the failure-to-perform exclusion is generally inapplicable to drywall that has not failed. Given that they are successfully serving their purpose, drywall that has not failed should be considered to be 8

9 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, 2009 meet[ing] the level of performance, quality, fitness or durability warranted or represented by the named insured. 70 Second, the exclusion typically will not apply to drywall that has in fact begun to emit gases, because these emissions may cause physical injury to the surrounding components of the wall and to the contents of the building into which the drywall has been installed. By its express language, the exclusion does not apply to property that has been physically injured. Thus, in the absence of a delay in or lack of performance by... the named insured of any contract, it is difficult to conceive of a loss of use of property for which the failure-to-perform exclusion would preclude coverage in the context of a drywall-related claim. Nevertheless, even if the exclusion were to apply to the loss of use of property, the exclusion is subject to an exception where that loss of use resulted from the sudden and accidental physical injury to the policyholder s products after such products have been put to use by someone other than the policyholder. This exception may preclude applicability of the failure-to-perform exclusion to drywall-related liabilities. First, with respect to liability insurance, the drywall has almost always been put to use by someone other than the policyholder at the time of the physical injury to the drywall. Second, the emission of gases that cause the loss of use of the other property may be considered to constitute sudden and accidental physical injury to the drywall. 71 For instance, many courts that have addressed the phrase sudden and accidental in other contexts have concluded that the phrase refers to damage that is unexpected and unintended, whether the damage occurs abruptly or gradually over time. 72 In these jurisdictions, assuming that damage to the drywall is unexpected and unintended, the sudden and accidental exception may prevent application of the failure-to-perform exclusion. Even in those jurisdictions in which the term sudden has been given a temporal meaning, 73 the abrupt nature of the emission of gases at issue in drywall-related cases 74 may similarly preclude insurers from relying on the failure-to-perform exclusion to bar coverage. Accordingly, insurers should generally not succeed in their attempts to apply the failure-to-perform exclusion to exclude coverage for drywall-related liabilities. d. Impaired Property Exclusion ISO took the failure-to-perform exclusion from its 1973 standard-form CGL policy, revised it, and inserted the new exclusion, known as the impaired property exclusion, in its 1986 and subsequent versions of its standard-form CGL policy. 75 The impaired-property exclusion commonly provides that coverage is excluded for: Property damage to impaired property or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy or dangerous condition in your product or your work ; or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to your product or your work after it has been put to its intended use. 76 The term impaired property is defined in the 1986 and current ISO forms as: tangible property, other than your product or your work, that cannot be used or is less useful because: a. It incorporates your product or your work that is known or thought to be defective, deficient, inadequate or dangerous; or b. You have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by: a. The repair, replacement, adjustment or removal of your product or your work ; or 9

10 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance b. Your fulfilling the terms of the contract or agreement. 77 Despite the reworking by ISO of this exclusion, the impaired-property exclusion appears hopelessly ambiguous in the context of drywall-related liabilities. For instance, it is unclear whether the exclusion applies solely to loss of use of property that has not been physically injured. If so, like the original failure-toperform exclusion, the effect of the impaired-property exclusion should be minimal. Similarly, like the sistership exclusion, the undefined terms contained in the impaired-property exclusion, including terms in the definition of impaired property, make it exceedingly difficult to determine whether the drywallrelated claims fall within the scope of the exclusion. Consequently, it is not surprising that courts have found the impaired-property exclusion and similar provisions to be ambiguous. 78 Even if found unambiguous, the impaired property exclusion, like the so-called business risk exclusions generally, should not apply, at a minimum, to tort damages caused by the policyholder and its drywall product. For instance, in Glens Falls Ins. Co. v. Donmac Golf Shaping Co., 79 the policyholder was sued for breach of contract and negligence by a land developer when it erroneously built for that developer a project partly on federal wetlands without the proper permits. The policyholder sought coverage for the developer s suit, which sought recovery for the developer s expenses in restoring and preserving the damaged wetlands, elimination of certain encroaching areas of the project, and the resulting diminution in the fair market value of the property. The insurer denied coverage, contending, inter alia, that the damages sought arose out of a deficiency in the policyholder s work and therefore were excluded under the impaired property exclusion. Because these damages constituted an independent injury over and above the mere disappointment of [the underlying] plaintiff s hope to receive his contracted-for benefit, 80 the court rejected the insurer s attempt to apply the impaired property exclusion and held that these tort damages were in fact covered. 81 In addition, by its express terms, the term impaired property includes only tangible property that can be restored to use by... [t]he repair, replacement, adjustment or removal of your product. In certain instances of drywall-related failures, the loss of use of the property at issue may be the result of a combination of multiple causes, and the policyholder s product may be only one of those causes. In this situation, the repair or replacement of the policyholder s product may not restore[] to use the tangible property at issue because, as a result of the other alleged defects and negligence, the property may still be useless or less useful. Consequently, if the policyholder in this example tendered the defense of the underlying complaint to its liability insurer, the insurer should be precluded from denying its duty to defend on the grounds of the impaired property prong of the impaired property exclusion because, even if the policyholder s product were repaired or replaced, the property at issue would not be restored to use. Thus, where repair or replacement of the policyholder s product alone does not restore to use the property at issue, the impaired property definition is not satisfied and the impaired property exclusion may not apply. Finally, as in the context of the failure-to-perform exclusion, even if the impaired-property exclusion were to apply to the loss of use of property in a given case, the exclusion is subject to an exception where that loss of use resulted from the sudden and accidental physical injury to the policyholder s products after such products had been put to their intended use. This exception may preclude applicability of the impaired-property exclusion to drywall-related liabilities because (i) the drywall has almost always been put to its intended use by the time of the physical injury to the drywall, and (ii) the emissions of gases that cause the loss of use of the other property may constitute sudden and accidental physical injury to the drywall. 82 Accordingly, insurers should not be successful in attempting to apply the impaired-property exclusion to preclude or limit coverage for drywall-related liabilities of their policyholders. B. Personal Injury Liability Coverage In addition to coverage for bodily injury and property damage liability, building owners, operators, and contractors should look to their coverage, if any, for personal injury liability to respond to drywallrelated claims. For example, personal injury coverage often insures injury arising out of wrongful entry or eviction or other invasion of the right of private 10

11 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, 2009 occupancy. 83 In Chinese drywall claims, the claimants allegations may often be interpreted to fall within this covered offense. For instance, claimants may allege that the presence of gases has interfered with their use of the building or otherwise impaired their ability to occupy the building. In such cases, policyholders should analyze their personal injury coverage to ensure that insurance assets are being maximized. 84 As an example, one of the most highly publicized sick building cases involved construction defects caused in part by mold in a Florida courthouse. 85 Within a few years after the courthouse was completed, employees, occupants, and visitors were evacuated from the buildings based on complaints of health problems. 86 Subsequent air tests indicated the presence of two highly unusual toxic molds. 87 After incurring millions of dollars in remediation costs, the county in which the courthouse was located sued the construction manager and sureties for breach of contract. 88 At the conclusion of the trial, the jury awarded over $11.5 million to the county, and this award was affirmed by the appellate court. 89 II. Property Insurance To Cover The Cost Of Repairing Damage Caused By Chinese Drywall Many policyholders have alleged that their property has been damaged as a result of the emission of gases from the use of Chinese drywall. These policyholders may be required to expend substantial amounts of money repairing this damage. Property insurance policies may provide insurance protection for losses to insured property as a result of the use of Chinese drywall. For instance, homeowner policies potentially provide coverage for damage caused in residential contexts. Similarly, owners and operators of commercial buildings or multi-unit residential complexes may possess all-risk property insurance that provides coverage for the cost of repairing physical loss or damage caused by any risk not specifically excluded. 90 Insurers of these fi rst-party property policies will likely raise numerous defenses to claims for coverage for damage caused by Chinese drywall. As with claims for coverage under liability policies, claims for coverage under property policies will raise several questions, including: (a) what is the appropriate trigger of coverage? (b) were the damages at issue fortuitous? and (c) does an exclusion apply? A. Trigger Of Coverage Compared to cases involving liability insurance, there are relatively few cases in the context of property insurance policies that address the issue of the appropriate trigger of coverage for property damage claims involving a damage process that takes place over multiple policy periods before it is discovered. In Aluminum Co. of Am. v. Accident & Cas. Ins. Co., the court adopted a version of the continuous-injury trigger in a case involving environmental property damage claims. 91 Under this approach, the policies on the risk from the beginning of the damage process through the discovery of the damage would be triggered. Courts in other contexts though have adopted a manifestation trigger in which the only policies that would be triggered would be those in effect at the time that the damage was discovered. For example, in Prudential-LMI Commercial Ins. Co. v. Superior Court of San Diego County, 92 building owners sought to recover under property policies for damage to their building caused by cracking to the foundation and floor slab. Addressing the trigger of coverage, the California Supreme Court held that a manifestation trigger applied and hence that only the policy in effect at the time that the damage was discovered was triggered. B. Fortuity Property insurers may also contend that loss or damage caused by the use of Chinese drywall was not fortuitous. For instance, if a building owner knew at the time it purchased the insurance that the drywall was deteriorating, the property insurer may attempt to use this knowledge to allege that the building owner should have known that property damage would develop as a result. Policyholders can attack these fortuity-related arguments on several grounds. First, it is well settled that all risk policies are to be construed broadly in favor of coverage. 93 Second, the fortuity analysis turns on the policyholder s actual and subjective state of mind at the inception of the policy period, not on what the 11

12 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance insurer contends the policyholder objectively should have known. 94 In this regard, it is important to remember that losses that may seem, in hindsight, to have been inevitable or certain may not have been understood as such by the policyholder prior to the loss. C. Exclusions Property insurers may allege that coverage is precluded because of various policy exclusions contained in their policies. For instance, insurers may rely on exclusions commonly found in property insurance policies, such as the faulty workmanship, inherent vice, wear and tear, corrosion, or contamination exclusions. 95 For example, in cases in which wear and tear causes drywall to deteriorate, and that deterioration leads to the emission of gases, an insurer may contend that the damage caused by the gases is excluded under the wear and tear exclusion. However, the wear and tear exclusion often does not apply to property damage that ensues as a result of defective construction or other covered cause. 96 Similarly, in cases in which a defect causes the drywall to break down prematurely when exposed to moisture, an insurer may argue that the damage caused by the use of drywall is excluded under an exclusion for faulty workmanship. Depending on the circumstances, an insured may contend that this exclusion does not apply for at least two reasons. First, the insured may assert that the defect does not constitute faulty workmanship as those terms are used in the exclusion. 97 Second, the insured may argue that the moisture (assuming it is a covered peril) rather than any alleged faulty workmanship, was the efficient proximate cause of the deterioration of the drywall and resulting damage, and hence that coverage exists. III. Conclusion In sum, manufacturers, designers, suppliers, installers, building owners and other policyholders facing drywall-related liabilities or losses may have significant opportunities for insurance coverage. In fact, multiple insurers participating in multiple policy periods in a policyholder s insurance program potentially may have responsibility to cover all or part of the liabilities or losses at issue. In response to a coverage claim, insurers can be expected to erect a number of roadblocks to coverage, including the intentionality exclusion, the pollution exclusion, and the so-called business risk exclusions. Nevertheless, these exclusions may be more limited in their applicability than they may seem at first blush. Courts have frequently interpreted such exclusions narrowly in the context of potentially analogous liabilities and losses; indeed, such exclusions may not even be applicable in the first instance to the extent a policyholder is seeking coverage under the personal injury coverage of its liability policies. Thus, policyholders should vigorously pursue their rights to coverage notwithstanding the assertion of such exclusions. In this regard, policyholders should make use of the full panoply of affirmative weapons in their arsenal to compel insurers to meet their coverage obligations, including the assertion of claims for bad-faith and/or attorneys fees, if necessary. Endnotes 1. Brian Skoloff and Cain Burdeau, AP Impact: Chinese Drywall Poses Potential Risks, Apr. 11, 2009, available at wirestory?id= Donaldson v. Knauf Gips KG, No (E.D. La. filed Mar. 3, 2009). 3. Id. (Class-Action Compl. 2). 4. Id. 5. See, e.g., Morlas v. Knauf Gips, No (E.D. La. filed Apr. 9, 2009); Chauffe v. Knauf Gips, No (E.D. La. filed Apr. 2, 2009); Whitfield v. Knauf Gips, No (S.D. Miss. Filed Mar. 27, 2009); Ledford v. Knauf Gips, No (N.D. Ala. filed Mar. 18, 2009); Minafri v. M/I Homes, Inc., No (S.D. Ohio filed Mar. 5, 2009); Vickers v. Knauf Gips KG, No (S.D. Fla. filed Mar. 2, 2009); Allen v. Knauf Plasterboard Tianjin Co., No (M.D. Fla. filed Jan. 30, 2009); Harrell v. South Kendall Construction, No (Miami Dade County filed Feb. 3, 2009); see also Barone v. Knauf Gips, No (E.D. 12

13 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, 2009 La. filed Apr. 8, 2009) (suit filed by Louisiana homeowner). 6. Lennar Homes v. Knauf Gips KG, No (Miami Dade County filed Jan. 30, 2009). 7. Baker v. Am. Home Assurance Co., No (M.D. Fla. filed Mar. 30, 2009). 8. See generally Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805 (7th Cir. 1992) (holding that a building incurred property damage at the time of the installation of the defective product at issue). 9. See, e.g., Liberty Mut. Fire Ins. Co. v. Ravannack, No , 2002 WL (E.D. La. Mar. 19, 2002) (denying insurer s motion for summary judgment on the grounds that, because complaint alleged bodily injury based on exposure to mold during insurer s policy period, insurer s policy may be triggered under exposure trigger of coverage) (citing Cole v. Celotex Corp., 599 So. 2d 1058 (La. 1992) (adopting exposure trigger theory in context of asbestos bodily injury claims)); Porter v. Am. Optical Corp., 641 F.2d 1128, 1145 (5th Cir.) (exposure trigger), cert. denied, 454 U.S (1981); Ins. Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980) (same), reh g granted, in part, clarified, 657 F.2d 814 (6th Cir.), cert. denied, 454 U.S (1981). 10. See generally Eagle-Picher Indus., Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12 (1st Cir. 1982) (holding that coverage of an asbestos bodily injury claim was triggered when the disease manifested or became reasonably capable of medical diagnosis ), cert. denied, 460 U.S (1983). 11. See generally Keene Corp. v. Ins. Co. of N. Am., 667 F.2d 1034 (D.C. Cir. 1981) (adopting continuous trigger in asbestos bodily injury context), cert. denied, 455 U.S (1982); J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993) (same). 12. See, e.g., Vt. Mut. Ins. Co. v. Singleton, 446 S.E.2d 417 (S.C. 1994) (intentional injury exclusion did not bar coverage where insured had not intended the injury resulting from his voluntary act). 13. See, e.g., United States Fid. & Guar. Co. v. Armstrong, 479 So. 2d 1164, 1167 (Ala. 1985) ( [T]he legal standard to determine whether the injury was either expected or intended... is a purely subjective standard. ). 14. See, e.g., Park-Ohio Indus., Inc. v. Home Indem. Co., 785 F. Supp. 670, 674 (N.D. Ohio 1991), aff d, 975 F.2d 1215 (6th Cir. 1992). 15. See, e.g., Stoney Run Co. v. Prudential-LMI Commercial Ins. Co., 47 F.3d 34, 37 (2d Cir. 1995) ( [A] reasonable interpretation of the pollution exclusion clause is that it applies only to environmental pollution, and not to all contact with substances that can be classified as pollutants. We hold that the release of carbon monoxide into an apartment is not the type of environmental pollution contemplated by the pollution exclusion clause. ); MacKinnon v. Truck Ins. Exch., 73 P.3d 1205 (Cal. 2003) (pollution exclusion does not apply to claim for injuries allegedly arising from spraying of chemicals at apartment building). 16. See Cooper v. Am. Family Mut. Ins. Co., 184 F. Supp. 2d 960, (D. Ariz. 2002) (rejecting coverage for mold-related loss under a supplementary coverage provision for Pollutant Cleanup and Removal in a homeowner s policy on the basis that mold was not a pollutant, which was defined under the policy as follows: Pollutant means any solid, liquid, gaseous or thermal irritant or contaminant, in any form, including, but not limited to lead, asbestos, formaldehyde, radon, any controlled chemical substance or any other substance listed as a hazardous substance by any governmental agency. It also includes smoke, vapor, soot, fumes, alkalis, chemicals, garbage, refuse and waste. ) F.2d 1037, 1043 (7th Cir. 1992). 18. Id. 19. Id. 20. Id. at A.2d 617, 624 (Md. 1995). 22. Id. at Id. at

14 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance 24. Id. at N.W.2d 728, 732 (Wis. 1997). 26. Id. 27. Id. 28. Id F.3d 34 (2d Cir. 1995). 30. Id. at Id. at Am. States Ins. Co. v. Koloms, 687 N.E.2d 72, 73 (Ill. 1997). 33. Id. at Id. at 79 (citations omitted). 35. Id. at Id. at Id. at 81 (emphasis in original). 38. But see Assicurazioni Generali S.PA. v. Neil, 160 F.3d 997, 1006 (4th Cir. 1998) (denying coverage for injuries from carbon monoxide based on pollution exclusion); Peace v. Nw. Nat l Ins. Co., 596 N.W.2d 429, (Wis. 1999) (applying the pollution exclusion to the release of lead paint) N.W.2d 218, 232 (Wis. Ct. App. 1990). 40. Id. 41. Id. As an alternate basis for its holding, the court found that the sudden and accidental exception would apply because the growth of mold was unexpected and unintended. Id. (citing Just v. Land Reclamation Ltd., 456 N.W.2d 570, 574 (1990)). 42. No , 2002 WL , at *3 (N.D. Tex. Mar. 5, 2002). 43. Id. The exclusion at issue in Unity/Waterford expressly listed fungi as an excluded pollutant F. Supp. 200, 203 (W.D. Pa. 1995); but see Peace, 596 N.W.2d at 440 (applying the pollution exclusion to the release of paint in an insured s apartment). 45. Island Assoc., 894 F. Supp. at Id. at 204; see also Nautilus Ins. Co. v. Jabar, 188 F.3d 27, 30 (1st Cir. 1999) (terms discharge, dispersal, release and escape, are terms of art in environmental law and are generally used to refer to damage or injury resulting from environmental pollution). 47. Lumbermens Mut. Cas. Co. v. Sw. Indus., Inc., 39 F.3d 1324, 1336 (6th Cir. 1994). 48. Id. 49. Id. 50. Id.; see also Lititz Mut. Ins. Co. v. Steely, 785 A.2d 975 (Pa. 2001) (underlying lead paint bodily injury tort claims were not barred by the absolute pollution exclusion, since the process by which lead paint degraded and became available for ingestion/inhalation did not unambiguously involve a discharge, dispersal, release or escape as required by the exclusion); but see Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100, 108 (Pa. 1999) (discussing the pollution exclusion in the context of a case involving concrete sealant). 51. Thomas J. Lipton, Inc. v. Liberty Mut. Ins. Co., 314 N.E.2d 37, 39 (N.Y. 1974) ( To say that the categories of damage claimed here by [the underlying claimant] do not fall within such coverage would appear to exclude what, as a practical matter, would usually be some of the largest foreseeable elements of such damage. Such an interpretation... would render the coverage nearly illusory. ). 52. See, e.g., 1 Commercial Liability Insurance, IV.T.20 (reproducing the 1973 ISO specimen CGL coverage part). ISO slightly revised this exclusion in its 1986 standard-form policy to exclude coverage for [p]roperty damage to your product arising out of it or any part of it. Id. at IV.T.36, IV.T.47 14

15 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, 2009 (containing the 1986 occurrence and claims-made forms, respectively) F.3d 1178 (2d Cir. 1995). 54. Id. at 1210; see also Hoechst Celanese Corp. v. Nat l Union Fire Ins. Co., No. 89C-SE-35, slip op. at 4 (Del. Super. Apr. 13, 1994) (finding that, because the term own product could only reasonably include the resin material manufactured by the policyholder and did not include the fittings manufactured by others into which the resin was installed, the own product exclusion did not apply because the policyholder did not seek coverage for damages done to the resin) N.E.2d 1271 (Ill. App. Ct. 1977). 56. Id. at 1274; see also Int l Envtl. Corp. v. Nat l Union Fire Ins. Co., 843 F. Supp. 1218, 1229 (N.D. Ill. 1993) (rejecting insurers argument that it had no duty to defend because of own product exclusion where underlying complaint sought recovery for damages to property other than policyholder s product); Dayton Indep. Sch. Dist. v. National Gypsum Co., 682 F. Supp. 1403, 1412 (E.D. Tex. 1988) ( Under both New York and Texas law, the own product exclusion does not apply to bar coverage of third-party claims for damage to property into which the policyholder s property or product has been incorporated. ), rev d on jurisdictional grounds sub nom. W.R. Grace & Co. v. Cont l Cas. Co., 896 F.2d 865 (5th Cir. 1990); Sturges Mfg. Co. v. Utica Mut. Ins. Co., 332 N.E.2d 319, (N.Y. 1975) ( When one product is integrated into a larger entity, and the component product proves defective, the harm is considered harm to the entity to the extent that the market value of the entity is reduced in excess of the defective component. ); but see Travelers Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481, (Ill. 2001). Travelers overruled a prior Illinois decision (Marathon Plastics, Inc. v. Int l Ins. Co., 514 N.E.2d 479 (Ill. Ct. App. 1987), that had held that the own-product exclusion largely did not apply to a defect in PVC pipe, used as part of a larger water system, that had led to the pipe being replaced. The Supreme Court of Illinois found that the policy definition of property damage at issue in Marathon required that a physical injury occur, not just an injury as in Pittway. Because the Travelers court found that no physical injury had occurred in Marathon, it held that Marathon had incorrectly found property damage to exist, and thus explicitly overruled that decision. 57. See, e.g., Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805 (7th Cir. 1992). 58. See, e.g., 13 J. Appleman, Insurance Law and Practice, 7405 (rev. vol. 1976) ( The courts have frequently stated that provisions limiting liability of the insurer such as exceptions from coverage, exclusions, restrictions, and conditions are particularly deserving of strict construction so as not to cut down the coverage which the insured believed he was purchasing. (citing cases)). 59. See, e.g., 21 J. Appleman, Insurance Law and Practice, (rev. vol. 1980) (citing cases). 60. See, e.g., Susan J. Miller and Philip Lefebvre, Miller s Standard Insurance Policies Annotated, Vol. I, (containing specimen 1973 form). 61. See text accompanying note 77 infra for the definition of impaired property. 62. See, e.g., 1 Commercial Liability Insurance, at IV.T.37, IV.T.47 (containing the 1986 occurrence and claims-made forms, respectively), and IV.T.114, IV.T.128 (containing the 1996 occurrence and claims-made forms, respectively) F. Supp (N.D. Ill. 1993). 64. Id. at Id. at 1229; see also Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1211 (2d Cir. 1995); Action Auto Stores v. United Capitol Ins. Co., 845 F. Supp. 428 (W.D. Mich. 1993); Md. Cas. Co. v. W.R. Grace & Co., 794 F. Supp. 1206, 1227 (S.D.N.Y. 1991), rev d on other grounds, 4 F.3d 155 (2d Cir. 1993); Bigelow-Liptak Corp. v. Cont l Ins. Co., 417 F. Supp. 1276, 1282 (E.D. Mich. 1976); United States Fid. & Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 934 (Ill. 1991) (finding that earlier version of sistership exclusion did not apply to product that had already failed and hence did 15

16 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance not exclude claims for damages for the inspection of buildings and removal and replacement of asbestos products); Elco Indus., Inc. v. Liberty Mut. Ins. Co., 414 N.E.2d 41, 45 (Ill. App. Ct. 1980) ( [A]s the pins were inserted prior to discovery of the defect, the property damage to [the underlying claimant] thus may be said to have occurred prior to the discovery and subsequent recall. ) N.E.2d 37 (N.Y. 1974). 67. Id. at Id.; see also Aetna Cas. & Sur. Co. v. PPG Indus., Inc., 554 F. Supp. 290, 295 (D. Ariz. 1983); Elco Indus., Inc. v. Liberty Mut. Ins. Co., 414 N.E.2d 41, 45 (Ill. App. Ct. 1980); Clarostat Mfg. Co. v. Travelers Indem. Co., 495 N.Y.S.2d 671 (N.Y. App. Div. 1985) (following Lipton); Int l Hormones, Inc. v. Safeco Ins. Co. of Am., 394 N.Y.S.2d 260 (N.Y. App. Div. 1977); Olympic Steamship Co. v. Centennial Ins. Co., 811 P.2d 673 (Wash. 1991); but see Hamilton Die Cast, Inc. v. United States Fid. & Guar. Co., 508 F.2d 417 (7th Cir. 1975); Commercial Union Assurance Co. v. Glass Lined Pipe Co., 372 So. 2d 1305 (Ala. 1979). In an apparent attempt to avoid the effect of this case law, ISO modified its 1986 version of the sistership exclusion to include recalls by any person or organization. See, e.g., The Fire Casualty & Surety Bulletins, Casualty & Surety Volume Aa-18-19; 1 Commercial Liability Insurance, V.D See, e.g., Susan J. Miller and Philip Lefebvre, Miller s Standard Insurance Policies Annotated, Vol. I, For purposes of this discussion, it is assumed that there is not a delay in or lack of performance by the named insured under any contract or agreement that would bring the factual scenario within the scope of subsection (1) of the failure-to-perform exclusion. 71. See, e.g., Todd Shipyards Corp. v. Turbine Serv., Inc., 674 F.2d 401, 419 (5th Cir.) (policyholder s work to ship s turbine suffered sudden and accidental injury, causing loss of use of ship), cert. denied, 459 U.S (1982); Am. Int l Underwriters Corp. v. Zurn Indus., Inc., 771 F. Supp. 690, 700 (W.D. Pa. 1991) (finding coverage for loss of use of plant that became inoperable as a direct result of the accidental failure of the policyholder s underdrains through which wastewater flowed). 72. See, e.g., Al. Plating Co. v. United States Fid. & Guar. Co., 690 So. 2d 331 (Ala. 1996); Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d 1083, (Colo. 1991); Claussen v. Aetna Cas. & Sur. Co., 380 S.E.2d 686, (Ga. 1989); Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204 (Ill. 1992); Am. States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996); Greenville County v. Ins. Reserve Fund, 443 S.E.2d 552, 553 (S.C. 1994); Joy Techs., Inc. v. Liberty Mut. Ins. Co., 421 S.E.2d 493 (W. Va. 1992); Just v. Land Reclamation, Ltd., 456 N.W.2d 570 (Wis. 1990). 73. See, e.g., Dimmitt Chevrolet, Inc. v. Se. Fid. Ins. Corp. 636 So.2d 700 (Fla. 1993); Am. Motorists Ins. Co. v. ARTRA Group, Inc. 659 A.2d 1295 (Md. 1995); Lumbermens Mut. Cas. Co. v. Belleville Indus., Inc. 555 N.E.2d 568 (Mass. 1990), cert denied, 502 U.S (1992); Upjohn Co. v. N.H. Ins. Co., 476 N.W.2d 392 (Mich. 1991); Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 340 S.E.2d 374 (N.C. 1986); Hybud Equip. Corp. v. Sphere Drake Ins. Co., 597 N.E.2d 1096 (Ohio 1992), cert. denied, 507 U.S. 987 (1993); Kerr-McGee Corp. v. Admiral Ins. Co., 905 P.2d 760 (Okla. 1995). 74. See generally United Steel Fabricators, Inc. v. Fid. & Guar. Ins. Underwriters, Inc., No. 92 AP-1171, 1993 WL (Ohio Ct. App. Mar. 11, 1993) (finding that the cracking of welds in modular expansion joints was abrupt and therefore sudden, even if the stresses that caused the cracking and possibly the growth of the cracks took place gradually over time). 75. The Fire Casualty & Surety Bulletins, Casualty & Surety Volume Aa-17 (Sept. 1993); 1 Commercial Liability Insurance, V.D See, e.g., 1 Commercial Liability Insurance, at IV.T.37, IV.T.47 (containing the 1986 occurrence and claims-made forms, respectively), and IV.T.114, IV.T.128 (containing the 1996 occurrence and claims-made forms, respectively). 16

17 MEALEY S LITIGATION REPORT: Insurance Vol. 23, #29 June 3, See, e.g., 1 id., IV.T.42, IV.T.53 (containing the 1986 occurrence and claims-made forms, respectively), and IV.T.121, IV.T.137 (containing the 1996 occurrence and claims-made forms, respectively). 78. See St. Martin & Mahoney, APLC v. Eagle Aviation, Inc., No , 1995 WL at *4-5 (E.D. La. Dec. 28, 1995); Martinez v. Wildey, 612 So. 2d 155, (La. App. Ct. 1992), writ denied, 613 So. 2d 994 (La. 1993); see also Transcont. Ins. Co. v. Ice Sys. of Am., 847 F. Supp. 947, 950 (M.D. Fla. 1994) S.E.2d 197 (Ga. Ct. App. 1992). 80. Id. at 201 (quoting Tate v. Aetna Cas. & Sur. Co., 253 S.E.2d 775 (Ga. Ct. App. 1979)). 81. Id. at ; see also United States Fid. & Guar. Co. v. Barron Indus., Inc., 809 F. Supp. 355, (M.D. Pa. 1992) (rejecting insurer s attempt to exclude coverage apparently under the impaired property exclusion for physical damage to larger system into which policyholder s failing product was incorporated and for loss of use of facility into which system was installed). 82. See text accompanying notes supra; see also United Steel Fabricators, Inc. v. Fid. & Guar. Ins. Underwriters, Inc., No , 1993 WL (Ohio App. Mar. 11, 1993) (holding that cracking of policyholder s welds on bridge s expansion joints was abrupt, even if the stresses that caused the cracks occurred gradually over time, and therefore the cracking constituted sudden and accidental physical injury under the exception to the impaired property exclusion). 83. See 1 Commercial Liability Insurance, IV.T.23 to IV.T.28 (International Risk Management Institute 1996) (reprinting Broad Form Comprehensive General Liability Endorsement GL 0404). 84. Depending on the type of property damage alleged by a claimant, building owners and operators will also want to examine their first-party property insurance policies to determine whether the remediation of such damage would be covered by those policies. See Section II infra. 85. Centex-Rooney Constr. Co. v. Martin County, 706 So. 2d 20 (Fla. Dist. Ct. App. 1997). 86. Id. at Id. at Id. 89. Id. at 26. Centex-Rooney is one of the few reported decisions where the court allowed expert testimony relating to the alleged health hazards stemming from toxic molds. 90. All-risk policies are typically given a broad and comprehensive interpretation. See Ins. Co. of N. Am. v. United States Gypsum Co., 870 F.2d 148 (4th Cir. 1989). In contrast to named peril policies, which generally require that a loss event be covered by a specifically-identified peril, such as fire, windstorm, or lightning, all-risk insurance policies broadly cover physical loss or damage to insured property arising out of any peril, unless specifically excluded. 91. No (Wash. Super. Mar. 8, 1996) P.2d 1230 (Cal. 1990). 93. See, e.g., Compagnie des Bauxites de Guinee v. Ins. Co. of N. Am., 724 F.2d 369, 373 (3d Cir. 1983). 94. Id. at 372; see also Peters Township Sch. Dist. v. Hartford Accident & Indem. Co., 833 F.2d 32, 37 (3d Cir. 1987); Klockner Stadler Hurter Ltd. v. Ins. Co. of the State of Pa., 780 F. Supp. 148, 157 (S.D.N.Y. 1991). 95. See, e.g., Lexington Ins. Co. v. Unity/Waterford-Fair Oaks, Ltd., No , 2002 WL , at *3 (N.D. Tex. Mar. 5, 2002) (holding that Pollution, Contamination Debris Removal Exclusion Endorsement applied to mold-related damage in apartment complex caused by severe rainstorm and flooding where exclusion expressly defined contaminants and pollutants to include fungi ). 96. See, e.g., Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, (Minn. Ct. App. 1997) (loss caused by release of asbestos fibers in buildings fell 17

18 Vol. 23, #29 June 3, 2009 MEALEY S LITIGATION REPORT: Insurance within ensuing loss exception to wear and tear exclusion in all-risk property policy). 97. See, e.g., M.A. Mortenson Co. v. Indem. Ins. Co. of N. Am., No , 1999 WL (D. Minn. Dec. 23, 1999) (rejecting insurer s reliance on, inter alia, faulty workmanship and inherent vice exclusions and finding coverage under builder s risk policy for rain damage to construction subgrade). 18