Source: http://www.jdsupra.com, March 9, 2015
By: Kristin Suga Heres, Zelle Hoffmann Voelbel & Mason LLP
Recent media reports alleging that certain laminate flooring manufactured in China and distributed in the U.S. contains unsafe levels of formaldehyde may have a familiar and frightening ring to them, particularly for insurers that weathered years of coverage litigation involving claims arising out of Chinese-made drywall. After last week’s “60 Minutes” report concluding that a national flooring distributor sold Chinese laminate flooring that may not comport with California health and safety standards, many are left to wonder whether costly testing, tear-outs and replacements will be required and who will foot the bill for these costs.
The Allegations
According to the recent “60 Minutes” report, Lumber Liquidators Inc., a U.S.-based distributor of both hardwood and laminate flooring, has imported and marketed Chinese-made laminate flooring that contains a quantity of formaldehyde that exceeds the California Air Resources Board’s safety standards. Formaldehyde, a known carcinogen, is commonly used in the glue that binds wood particles in constructing “core boards,” which are subsequently laminated. Test results cited in the “60 Minutes” report showed that some samples of Chinese-made laminate flooring sold by Lumber Liquidators contained between six and 20 times the amount of formaldehyde permitted under California’s standard. According to the report, prolonged exposure to formaldehyde can result in adverse health consequences, including myeloid leukemia, nasopharyngeal cancer, asthma and other respiratory issues. At least one senator has called for a federal investigation of the issues raised in the report.
Deja Vu All Over Again?
For many, allegations regarding Chinese-made laminate flooring will likely call to mind unpleasant memories of the Chinese drywall crisis, during which countless insureds sought coverage, both liability and property, for losses incurred as a result of defective Chinese drywall. In those claims, some Chinese-made drywall was alleged to “off-gas” harmful chemicals, including sulfur-based gases, which caused foul odors, the corrosion of pipes, wiring and electronics, as well as various health problems, including respiratory ailments.
Typically, insurance claims relating to defective Chinese drywall came in two varieties: (1) homeowners seeking first-party property coverage for their alleged losses under homeowners’ policies and (2) distributors, retailers, installers, contractors and others that handled Chinese drywall seeking coverage from their third-party liability carriers after being sued by homeowners and condominium associations in connection with claimed losses relating to the defective drywall.
While investigations into the concerns surrounding laminate flooring have only just begun, at first blush, there are significant similarities between the Chinese drywall issues and the laminate flooring issues: (1) both drywall and flooring are installed indoors, including in residences; (2) the materials are widely used and appear to have been distributed nationwide; and (3) both involve the “off-gassing” of chemicals.
Based upon current information, however, there are also some notable differences. For instance, the laminate flooring concerns, unlike the Chinese drywall issues, appear to be limited to a single distributor. Also, at the moment, it does not appear that there are any allegations formaldehyde emissions from the laminate flooring are causing corrosion or damage to other property in homes where it is installed. The concerns appear to be limited to potential health issues relating to formaldehyde exposure and the removal and replacement of the flooring itself.
What Coverage Issues May be in Play?
While there will not likely be perfect alignment between the coverage issues that arose in connection with the Chinese drywall claims and the potential laminate flooring claims, there will likely be significant overlap, and there is much to be learned from past litigation.
Disputes regarding the availability of coverage for alleged Chinese drywall-related losses have been heavily litigated in recent years and have been the subject of at least 20 significant rulings issued by state and federal courts. Generally speaking, courts have tended to rule in favor of insurers in these actions, however that is not always the case. Even in those cases where courts have ruled in favor of insurers, there has been some notable variation in the bases for and reasoning behind the courts’ rulings. Where insurers have prevailed, courts have typically ruled that policy exclusions for pollution, latent defect, faulty materials or corrosion precluded coverage, or that the insured was not legally obligated to pay sums as “damages.”
Pollution Exclusion
Notably, almost all of the major decisions rendered in connection with the Chinese drywall cases have addressed the application of pollution exclusions. Many of these courts have grappled with the issue of whether pollution exclusions bar coverage in contexts other than “traditional” environmental pollution. For instance, in June 2010, a court in the Eastern District of Virginia held that a pollution exclusion, along with several other exclusions, operated to bar coverage for property insurance claims arising from Chinese drywall. Travco Ins. Co. v. Ward, 715 F. Supp. 2d 699 (E.D. Va. 2010). In Travco, the court found that the gases emitted from Chinese drywall are pollutants and concluded that “[u]nder Virginia law, pollutant exclusions are not limited to ‘traditional environmental pollution.’”[1]
In Nationwide v. Overlook, the Eastern District of Virginia extended the Travco holding by ruling that a pollution exclusion applied to preclude coverage for defense and indemnity of third-party liability claims arising from defective Chinese drywall.[2] Other courts have reached similar conclusions. E.g., Granite State Ins. Co. v. American Bldg. Materials Inc., 504 Fed. Appx. 815 (11th Cir. Jan. 3, 2013) (affirming grant of summary judgment in favor of insurers based on the application of a pollution exclusion under Florida and Massachusetts law); CDC Builders Inc. v. Amerisure Mut. Ins. Co., No. 10-21678-CIV (S.D. Fla. Aug. 16, 2011) (holding that “total pollution exclusion” contained in a general liability policy precluded coverage for Chinese drywall-related losses); but see In re Chinese Manufactured Drywall Products Liability Litigation, 759 F. Supp. 2d 822, 843 (E.D. La. 2010) (holding that a pollution exclusion did not apply to preclude coverage under homeowners’ policies and observing that “[t]he presence of Chinese drywall in the Plaintiffs’ homes is outside the ambit of the Louisiana Supreme Court’s concern with and focus upon environmental pollution for purposes of the exclusion.”)
The pollution exclusion will likely figure prominently in any potential coverage disputes that might arise in connection with the laminate flooring. Questions may arise with respect to whether formaldehyde is a “pollutant” within the meaning of the policies at issue.
Latent Defect Exclusion
While most litigation addressing coverage for Chinese drywall losses has focused on the application of the pollution exclusion, courts have also found that other exclusions to apply to preclude coverage. For instance, in addition to concluding that a pollution exclusion barred first-party coverage for Chinese drywall losses, the Travco court concluded that “the cost of removing and replacing the Chinese Drywall is excluded by the Policy’s latent defect exclusion.”[3] The court reasoned:
. . . [T]he Ward Residence contains defective Drywall that is off-gassing and damaging other components of the Residence. The Drywall is plainly integral to the Residence’s manufacture and construction. Accordingly, the Court finds that the damage to the Ward Residence is a loss caused by a latent defect.[4]
The latent defect exclusion may also have application in potential future claims involving laminate flooring.
Faulty Materials
Some courts have relied on faulty materials exclusions in holding that insurers were not liable for Chinese drywall losses.[5] A least one court has reasoned that even though the Chinese drywall served its intended purpose, it was unusable because it contained harmful materials.[6] Based on current facts, this exclusion may also have potential application in future claims involving laminate flooring.
Conclusion
Whether or not the recently raised concerns about Chinese-made laminate flooring will be the next new challenge for insurers remains to be seen. If insurance claims do materialize, however, both property and liability carriers should heed the lessons learned in the Chinese drywall litigation of yesteryear.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Id. at 717. The question of whether sulfuric gas released from the drywall in the insured’s home was a “pollutant” was certified to the Virginia Supreme Court. That court concluded that the gas was a pollutant and that the pollution exclusion applied to preclude coverage. Travco Ins. Co. v. Ward, 736 S.E.2d 231, 330 (2012).
[2] Nationwide v. Overlook, 785 F. Supp. 2d 502 (E.D. Va. May 13, 2011).
[3] Travco, 715 F. Supp. 2d at 711-12.
[4] Id. at 711.
[5] In re Chinese Manufactured Drywall Products Liability Litigation, 759 F. Supp. 2d at 845-46.
[6] Id. at 845.