Source: http://www.jdsupra.com, November 12, 2015
By: Kristin Suga Heres, Zelle Hofmann Voelbel & Mason LLP
On March 1, 2015, television news magazine “60 Minutes” aired a report concluding that Chinese-manufactured laminate flooring sold by Lumber Liquidators contained and “off-gassed” formaldehyde at levels exceeding health and safety standards promulgated by the California Air Resources Board (CARB). Much has happened in the eight months since the allegations regarding Lumber Liquidators’ laminate flooring became a topic of conversation in living rooms across the country: Lumber Liquidators is the focus of several ongoing investigations into its practices, continues to be the target of numerous consumer lawsuits and faces litigation in connection with its claims for insurance coverage.
From the moment the 60 Minutes piece aired, it was clear that the allegations concerning Chinese-manufactured laminate flooring would have an impact on the insurance industry. Almost immediately, the specter of potential insurance claims prompted comparisons with the onslaught of Chinese drywall claims the industry has faced in recent years. While it may be too early to predict whether laminate flooring will be the “new Chinese drywall,” recent developments suggest that the insurance industry has in mind the lessons learned during the Chinese drywall crisis and is applying those lessons to address this new species of claims.
Lumber Liquidators on the Defensive
In the wake of the 60 Minutes report, Lumber Liquidators took issue with the “deconstructive” testing methods relied upon by 60 Minutes, which involved removing the laminate surface of the flooring before measuring formaldehyde emissions. In its view, these testing methods did not produce meaningful results because they did not reflect how the products are actually used by consumers. The company denied that its products were unsafe and continued to sell Chinese-manufactured laminate flooring. However, to assuage customers’ concerns, Lumber Liquidators offered to provide customers with indoor air quality test kits. The company did not offer to replace flooring.
Various politicians, including Sen. Charles Schumer, D-N.Y., called for probes of Lumber Liquidators’ products and practices. In late March, the Consumer Product Safety Commission heeded these calls and launched an investigation, which is still ongoing. In May, shortly after the CPSC investigation was announced, Lumber Liquidators suspended sales of its Chinese-produced laminate flooring. The same month, embattled CEO, Robert Lynch, abruptly quit his post.
In addition to its laminate flooring woes, Lumber Liquidators also faced an unrelated criminal probe by the U.S. Department of Justice of the company’s practice of importing hardwood from foreign suppliers that allegedly violated timber harvesting regulations. Just last month, the company reached a $13.2M settlement with the DOJ and pled guilty to violations of the Lacey Act and customs laws.
And the Litigation Begins …
Almost immediately after the 60 Minutes report aired, purchasers purporting to have bought Chinese-manufactured laminate flooring began filing lawsuits against Lumber Liquidators. By early October 2015, Lumber Liquidators claimed that 130 class action lawsuits, arising from the sale of laminate flooring manufactured in China, had been filed against it and that “[t]he suits collectively purport to assert claims on behalf of hundreds of thousands of purchasers resident in all 50 states.”[1] Generally speaking, the claimants have alleged that Lumber Liquidators was aware of the elevated levels of formaldehyde contained in its Chinese-made laminate flooring products, but labeled and marketed the products in a manner indicating (falsely) that they complied with health and safety standards, including California’s CARB emissions standards.
In June, the United States Judicial Panel on Multidistrict Litigation consolidated the laminate flooring cases for pretrial proceedings in the Eastern District of Virginia, the district in which Lumber Liquidators is based.[2] While the panel recognized that the litigation could have been centralized in one of the many other jurisdictions suggested by the parties (various districts in California, among others, were considered), it ultimately settled on the Eastern District of Virginia, in part because Lumber Liquidators touted the convenience of locating the MDL in its own backyard. The panel also identified the Eastern District of Virginia as an attractive choice because its docket was relatively uncluttered by other MDLs and also because centralization there would allow for the “coordination of this litigation with a securities action against Lumber Liquidators that was filed in the Eastern District of Virginia in November 2013, which has grown to include allegations concerning formaldehyde emissions from Chinese-made laminate flooring.”[3]
Lumber Liquidators’ Coverage Row
Facing a multitude of lawsuits, Lumber Liquidators sought coverage from its liability insurers. The company’s insurers, however, denied coverage and initiated a declaratory judgment action against Lumber Liquidators in the U.S. District Court for the Eastern District of Virginia — the same district in which the MDL is located. The insurers sought a declaration that they have no duty to defend or indemnify the tendered claims on the grounds that the underlying claimants have not alleged that bodily injury or property damage occurred and that several policy exclusions, including the total pollution exclusion, operate to bar coverage. Lumber Liquidators, however, fired back and filed a competing coverage action in Dane County Circuit Court in Madison, Wisconsin. At the end of October, the insurers scored a victory in the forum battle when a Virginia federal judge declined to permit Lumber Liquidators to pursue an interlocutory appeal of the trial court’s September ruling which, in effect, kept the case in the insurers’ chosen forum.
The New Chinese Drywall? Maybe …
Eight months after the 60 Minutes piece aired, industry sources report that laminate flooring claims are indeed a reality. So far, however, the volume of these claims has not approached the volume the industry saw in connection with Chinese drywall. One explanation for this is that the laminate flooring concerns, unlike the Chinese drywall issues, appear to be limited to a single distributor: Lumber Liquidators. Also, there is no indication that formaldehyde emissions from the laminate flooring are causing corrosion or damage to other property in homes where it is installed (as was the case regarding Chinese drywall). The concerns appear to be limited to potential health issues relating to formaldehyde exposure and reimbursement of replacement and tear out costs.
While we are just beginning to understand the coverage issues presented by Chinese-manufactured laminate flooring, we are continually learning more as the underlying claims brought by consumers move forward and as Lumber Liquidators and its carriers litigate coverage. Already, it is becoming clear that many of the same coverage issues that arose in connection with Chinese drywall claims are being revisited in the laminate flooring context.
Notably, almost all of the major decisions rendered in connection with the Chinese drywall cases addressed the application of pollution exclusions. In those cases, courts 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 Insurance 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.’”[4] 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.[5]
Notably, both of these key decisions with respect to the application of pollution exclusions came out of the Eastern District of Virginia: the venue in which the laminate flooring MDL is located and the venue which Lumber Liquidators’ insurers have selected for the litigation of their coverage dispute. There is no question that the lessons of the Chinese drywall crisis are fresh in the minds of the insurance industry and that these lessons are shaping the industry’s approach to laminate flooring claims.
[1] Memorandum in Support of Motion to Dismiss Amended Complaint in Liberty Mutual Fire Insurance Co. v. Lumber Liquidators Inc., Case No. 4:15-cv-34 (E.D. Va., filed on Oct. 2, 2015).
[2] In re Lumber Liquidators Chinese-Manufactured Flooring Products Marketing, Sales Practices and Products Liability Litigation, MDL No. 2627, — F. Supp. 3d –, (June 12, 2015).
[3] Id.
[4] 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 Insurance Co. v. Ward, 736 S.E.2d 231, 330 (2012).
[5] Nationwide v. Overlook, 785 F. Supp. 2d 502 (E.D. Va. May 13, 2011).