Another Lawsuit. Another Builder.

Centerline Homes (@FLNewHomes) – a Florida “Neighborhood Home Builder” is the latest contractor to face litigation related to Chinese Drywall.

The suit was filed as a class action, but is unlike other class actions in that it seeks recovery from the builder.

In a comment made to the press, Centerline Homes seems to feel a bit jaded by the Chinese Drywall situation in Floriday, blaming “plaintiff attorneys and the media” for fueling a “hysteria” over Chinese Drywall.

The lawsuit against Centerline Homes will likely be among the 10-15 class action suits set for hearing on May 27th before a U.S. Judicial Panel on Multidistrict Litigation.  According to the TC Palm, the suit requests the following from builders:

  • Replace all Chinese Drywall, as well as all wiring, pipes, building materials, furniture, appliances and household items ‘affected by sulfur emissions’;
  • Have houses tested to make sure they are “sulfur free;”
  • Pay homeowners for the loss in the value of their home;
  • Give homeowners a lifetime, transferable warranty on the homes;
  • Compensate residents for all current and future health problems resulting from the emissions.

Clearly, tall orders for any builder, and cause for concern for any builders, installers or suppliers out there who supplied or installed Chinese Drywall.

Concerned and wondering what to do?  Check out this how-to here.

Chinese Drywall Crisis Presents Builders, Construction Lawyers and Homeowners With Difficult Choices (Construction Lawyers)

Previously, we examined difficult choices and considerations facing builders who have installed or supplied Chinese Drywall.

Builders, however, are not the only folks at a legal crossroads with respect to the imported drywall crisis.   Construction attorneys – and plaintiff attorneys – too must make important decisions that will alter the course of litigation for their clients.

For those attorneys representing homeowners, the litigation choices they make will not only affect the merits of their client’s case, but also their lifestyle.

If an attorney chooses to file simply a class action, for example, the client’s home may go unattended to for years, requiring the client to find living quarters elsewhere at great expense and inconvenience.

For attorneys representing builders, they too have decisions with consequences beyond the litigation itself.

Correcting imported drywall problems could cost a builder thousands, if not over a hundred thousand dollars.   Builders without deep pockets, and with more than one Chinese Drywall claim, could be facing huge liability.   How should an attorney advise a builder to mitigate its losses? To balance the cost of litigation with the cost of repairing drywall problems?

The questions are aplenty. Here are a few frequently discussed issues facing construction attorneys.

The Role of Class Actions

Plaintiff attorneys across the country are signing up Chinese Drywall victims in droves.    The problem: class action suits are largely against foreign manufactures or huge drywall importers.   It looks like class action attorneys are doing little, if anything, to explore other remedies for homeowners.

There are real problems with this, and the problem is only exasperated by the “class action culture” that may result in homeowners signing papers with a class action attorney, and forgetting about the problem.

Here are a few:

  1. Homeowners want the drywall out of their homes.   The class action remedy, however, will likely take years to organize and resolve itself, and then it’s not certain how homeowners will be compensated. See Donald Brenner’s argument on Construction Litigation Law Blog: Class Action Suits May Not Help Homeowners for Years If Ever.
  2. There are problems with collecting judgments against foreign companies, like those named in the class actions.   See Dan Harris’ commentary on his China Law Blog titled “Show Me The Money;
  3. Time Ticks against homeowners on all of their other claims (warranty, contract, tort, insurance, etc.).   By signing up with a class action attorney, these other claims may be ignored, and their statute of limitations will approach quickly.

Warranties and The Role of Builders

It doesn’t seem fair that builders would be liable for drywall installed in perfectly good condition, without any way of knowing of the defects.

However, those representing homeowners ought to seriously consider an action against builders, since builders have contractual and warranty obligations to the homeowner, and a clear duty of care.

Those representing homeowners, consider the action taken by North Carolina attorneys in bringing the Flannigan v. Stafford Custom Homes, Inc. matter. While other parties will likely get involved with this action (suppliers, insurers, etc.), the plaintiffs in that case leave those issues to the builder….which brings me to those representing builders…

Those representing builders ought to consider the role of insurance, and potentially bringing an action against its suppliers, installers and the drywall importers and manufactures.   Be cautious of the Pollution Exclusion clause in CGL policies, but review the actions taken by Lennar Co. in the face of Chinese Drywall claims as an example of how to proceed aggressively for a builder client.

Mitigating Damages

As construction attorneys know, everyone has a duty to mitigate.   Since Chinese Drywall damages appear to be of the type that will get progressively worse with time (i.e. continued decay), the role of the mitigation duty is pronounced.

The duty is a difficult one under these circumstances because of the potential cost of remedying Chinese Drywall damages and defects.

Whether the homeowner is suing its homeowners insurance or the builder….or the builder is suing its CGL for coverage…talk of the mitigation duty is likely to surface.

Should builders be notifying homeowners of potential contamination?

Should homeowners and builders be tearing out drywall and other contaminants to avoid further decay?

What is the consequence of not doing these things, or simply not being able to afford to do them? Less insurance coverage? More exposure for the builder/homeowner?

Advising your client with respect to its duty to mitigate in the face of a Chinese Drywall claim may be significant advice…but it will certainly be costly.

Homeowner Sues Their Homeowners Insurer for Chinese Drywall Defects

On the Chinese Drywall Blog, we’ve talked about class action suits, individual suits against builders and suppliers, suits by builders against its suppliers, and other similar actions.

However, in Florida, one couple seeks to hold another party liable for their Chinese Drywall damages:  their own homeowners insurer.

The claim makes a great deal of sense, and it adds to the mystery of who will eventually be responsible for the Chinese Drywall damages.

The suit was brought in a Florida U.S. District Court, and is captioned Baker v. American Home Assurance Company, Inc., Middle District of Florida, No. 09-cv-188-FtM-99DNF.  (read here)

According to the complaint, the homeowners made a claim in December 2008 related to damages caused by Chinese Drywall.  The complaint describes the cause of the damage as coming from “drywall…emitting gases which have damaged the Subject Property and the contents therein.”

After inspection and testing, the insurer denied the claim for “contamination.”     The Baker complaint argues that the damages were not caused by “contaminants” as defined by the policy.

The policy at the center of the Baker action defines “contaminates” as follows:

An impurity resulting from the mixture of or contact with a foreign substance.

According to the complaint, there was not ‘mixture or contact with a foreign substantance,’ and therefore, the pollution exclusion would not apply.

The Baker exclusion is far less detailed then some of the other pollution exclusions found in Commercial General Liability policies…and therefore, may be interpreted differently.

If pollution exclusions in homeowners policies are generally less complex than GCL policies, it may be prudent for homeowners to make timely claims against their homeowner policies if they are faced with Chinese Drywall damages.

It’s too early to predict exactly who will be responsible for damages associated with Chinese Drywall, especially since so many parties are involved.   To rely simply on one remedy (i.e. a class action) is probably an irresponsible choice for homeowners faced with significant damages.

We’re likely to see a flood of suits in the coming months against builders, home insurers, suppliers and other responsible parties.   Home insurance policies will likely file subrogation claims against builders, suppliers and other parties as well.

We’ll monitor the Baker suit as it proceeds.  Stay tuned.

Green Building and Risk Management

Just recently, the U.S. Green Building Council published an update to its readers explaining Risk Management issues to its readers, explaining that while green building is growing even in the current U.S. Economy, it presents unknowns that makes it difficult for the industry and insurance underwriters to manage risks.

Here is a snippet:

Underwriting insurance coverage is the art of understanding, assessing, and mitigating risk. Green building has presented challenges to insurance carriers stemming from the fact that green building design and construction is new. New things are tougher to understand from a historical loss perspective, requiring leading insurance carriers to take a proactive approach to understanding the possible ramifications of providing expanded coverage to meet the needs of firms engaged in the green building industry, while anticipating the market demand for these specialty insurance products.

As mentioned in previous posts, as the green building market continues to boom, green litigation and losses becomes more likely.   What if the planned LEED certification is not achieved?  What if the design is not as energy efficient as planned?

And the questions go on and on.

One question that is still unanswered, as hinted by the USGBC above, is with regard to Risk Management & Insurance.

In December 2008, Wolfe Law Group published an informative article on its Construction Law Monitor titled Green Building Insurance & Limiting Exposure.   The article discusses the need for specialty insurance, the packages available to contractors and the idea of green building performance bonds.

Just last week, ACE USA announced the launch of a Green-Specific Contractors Insurance Program, joining the ranks of companies like Fireman’s Fund, Travelers & AON.

Like everything else in the green building industry, the waters here are untested.   While we can read the policies and the brochures on the policies, it’s too early to determine what types of claims will be paid versus those denied, or the role green building insurance will play – or ever play – in protecting a contractor from professional liability losses.

Pollution Exclusion at Center of 5th Circuit Decision this Week

On April 22, 2009, the U.S. Fifth Circuit released an opinion in Nautilus Insurance Company v. Country Oaks Apartments, Ltd. that may bear some significant on the question of whether contractor GL insurance policies will cover Chinese Drywall claims.

Explaining The Suit

The suit required the appeals court to address the scope of the absolution pollution exclusion under Texas law.

The facts of the case are disturbing:  Suit was filed against a Commercial General Liability carrier for an apartment complex, where the Plaintiff lived.   During the policy period, works accidentally blocked the vent to the furnace in several apartments, exposing the plaintiff to carbon monoxide that would have otherwise been released outside.   The exposure affected the plaintiff’s pregnancy, and her child was born with difficulties.

The insurance company refused to pay the claim, contenting that the damage was caused by pollution and excluded under the policy’s absolute pollution exclusion.

That policy’s exclusion clause read as follows:

f. Pollution
(1) “Bodily injury” or “property damage” which would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of “pollutants” at any time.

The term “pollutant” was described as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes material to be recycled, reconditioned or reclaimed.”

Under Texas law, the US 5th Circuit held that the pollution exclusion did apply to this loss, and that there was no insurance coverage under the policy for plaintiff’s claim.   The court summarized its holding as follows:

In sum, the emission of carbon monoxide from a furnace into an apartment unambiguously satisfies the pollution exclusion’s requirement of a “discharge, dispersal, seepage, migration, release, or escape.” It is irrelevant that a reasonable insured might not expect this result, or that, given sufficient imagination, we can think of ways – not presented here – in which enforcement of this exclusion would lead to absurd results. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994) (on rehearing, vacating its prior opinion) (“[N]either conflicting expectations nor disputation is sufficient to create an ambiguity.”

How Country Oaks Decision Applies to Chinese Drywall Claims

Many commentators (see here, here, and here) monitoring the Chinese Drywall situation predict that insurance claims related to the loss will be denied by insurers based on the absolute pollution exclusion.

From a review of the Country Oaks case just released by the 5th Circuit, if property damage and bodily injury is caused by a “pollutant” from the Chinese Drywall…it seems likely that homeowners, builders and insurers will be in for a spicy legal argument over whether the exclusion does or does not apply.

However, how the Country Oak decision and reasoning applies to Chinese Drywall claims will depend largely on (a) Where the damage is incurred and claim is made; and (b) What exactly is causes the damages.

First, the Country Oak decision examines the absolute pollution exclusion under Texas law only (although it does comment on Mississippi law).   Under Texas interpretations of insurance contracts, the absolute pollution exclusion is given broad applicability, and therefore, the exclusion will more likely apply in Texas than in states with a stricter review of insurance exclusions and policies.

States, for example, like Louisiana.  As we reviewed just last week, Louisiana courts have taken a completely different approach from Texas to interpreting pollution exclusions.

According to Louisiana case law, since the pollution exclusion was drafted to apply to “environmental contaminants,” Louisiana courts have limited its applicability to such.   Read our in-depth analysis of Louisiana case law on pollution exclusions here.

The second factor that will determine the applicability of Country Oak is more scientific, relating to the actual cause of the damage.

Although most everyone involved with this crisis can recognize the symptoms of Chinese Drywall…we don’t yet have a definite cause.   Once science catches up in this area, the cause of the damages will be important in determining whether the pollution exclusion applies.     The more like a “pollutant” the cause – the more likely insurers will cite pollution exclusions.

Chinese Drywall Crisis Presents Builders, Construction Lawyers and Homeowners With Difficult Choices (Builders)

In Florida, Louisiana and other Southern states, the Chinese Drywall situation is causing concern in the construction industry and among homeowners.

A few months ago, we began posting about the Chinese Drywall problem and how it may affect builders on the Construction Law Monitor (tag: Chinese Drywall). As the situation grew in scope, however, we decided to launch an entire blog on the subject: The Chinese Drywall Blog.

While most news reports about the imported drywall problem has focused on filed class actions in Louisiana and Florida, the problem is a bit more complex.   Notably, because the Chinese Drywall claims present an interesting distinction to other class actions.

The difference presents builders, construction attorneys and homeowners with complex and difficult decisions about who will be ultimately liable for the damages, and how to pursue liability.

Over the next few days, we’ll examine the decisions facing Builders, Homeowners and Construction Attorneys.   Today, we’re looking at the decisions facing Builders.

The Builder

Builders who have installed or supplied Chinese Drywall to a home or business face possible breach of contract and warranty claims, and even claims based on negligence or tort.

When examining whether its GL policy will indemnify it from imported drywall caused damages, builders worry about the applicability of policy pollution exclusions.

With these issues in mind, the builder is now faced with the following questions:

  • Making Insurance Claims: If the builder knows that it has installed Chinese Drywall, is it required to put its insurer on notice of the potential liability?   Many have suggested that they are required to do this, regardless of whether a claim has been made against the builder.   And even if they are not required by the terms of an insurance policy, perhaps they should.Many insurance policies have strict requirements that an insured notify the company of any claims or potential claims within a short timeframe.   Builders who choose not to do this, decide to roll the dice, or simply forget about the obligation, may later have their claim denied on this basis.
  • Remedying the problem. Are builders responsible to replace the defective drywall, and compensate homeowners for damages?Unfortunately, under contractual and warranty theories, the answer is likely YES.    And as builders may imagine, remedying a Chinese Drywall problem is substantially more involved than remedying something like a broken faucet.

    Contaminated drywall is causing problems to the drywall itself, building contents, electrical wiring, HVAC systems and even the building elements.   A “call-back” could require a builder to virtually rebuild a property.

    With the requirement to remedy the problem persisting…what does a builder do?

  • Builder Options: Builders faced with Chinese Drywall claims can (a) file insurance claims against their insurer; (b) file suit against their suppliers and installers; and (c) file suit against drywall manufacturers.Lennar Co. – a nationwide homebuilder – is perhaps the most prominent builder caught installing Chinese Drywall.   They have done all of the above with respect to Chinese Drywall claims received, and have even  offered to replace any defective drywall and compensate customers for time away from home.

    The next and final question for builders is…what if they can’t and don’t repair the problem immediately? Will this affect their position?

  • The Duty to Mitigate.   Builders, like everyone else, have the duty to mitigate their losses.  The question is, therefore, how does this duty apply to Chinese Drywall claims?Well, let’s look from two perspectives.

    First, Chinese Drywall damages could (and likely will) get progressively worse if left unattended to. Therefore, if a builder receives a ‘call-back’ or complaint related to Chinese Drywall, will his insurer hold it liable if the builder fails to take steps to prevent the problem from getting worse (i.e. tear out the drywall)?

    Second, what if the builder doesn’t get a complaint…but knows it installed Chinese Drywall in a home. Since the drywall may cause health problems, is the builder liable for not mitigating losses if it fails to inform the homeowner that their home may be contaminated? What if the drywall does cause serious health effects with prolonged exposure and the builder keeps quiet?

Next post:  Choices for Construction Lawyers.

Builders Starting To Tango with Chinese Drywall Claims

As the Chinese Drywall crisis unfolded over the last few months, news reports were abound of class action litigation against large drywall manufacturers, but it appeared that builders were getting a “free pass” on liability.

Unfortunately, but inevitably, it appears the tide is changing.

Recently, the shoe dropped for Lennar Co., who was arguably the most predominate home building company facing Chinese Drywall claims.  While Lennar Co. made every attempt to thwart litigation, suit was formally filed against them just last week, and they are now preparing a defense and examining applicable exclusions in their insurance policies.

However, large building outfits like Lennar Co. or South Kendall Construction Corp. are no longer alone as builder-defendants in Chinese Drywall claims.

Here are some examples from across the affected areas.

Flannigan v. Stafford Custom Homes, Inc.

Last week, a news station in North Carolina reported that a couple with Chinese Drywall had filed suit against their local builder:  Stafford Custom Homes, Inc.

The plaintiff’s counsel in that case, Joel R. Rhine of Lea Rhine Rosbrugh & Chleborowicz was kind enough to share a copy of that complaint with the Chinese Drywall Blog, and its available to read here.

The complaint asserts the following claims against the homebuilder…and importantly, the homebuilder alone:

  • Breach of Contract;
  • Breach of Implied Warranties;
  • Breach of Express Warranties;
  • Negligence;
  • Negligent Misrepresentation;
  • Unfair and Deceptive Trade Practices

As mentioned, the suit against Stafford Custom Homes, Inc. is between the homeowner and the homebuilder only, and the plaintiffs did not bring suit against the subcontractor installer, the drywall supplier or the drywall manufacturer.

It will be interesting to watch this action progress, and especially to see how Stafford Custom Homes, Inc. defends itself in the case.   Likely, a claim will be made against Stafford’s General Liability insurance policy, and an argument will ensue about the applicability of the pollution exclusion clause.

Further, the builder will be well-served to take a page out of the Lennar Co. defense book, and file suit against its supplier, installer and the drywall manufacturer.

The case is in Wake Count, North Carolina, and is captioned Flannigan v. Stafford Custom Homes, Inc., General Court of Justice Superior Court Division, No. 09CV006759.

We’ll monitor this case as it moves forward.

Pronto v. Venture Supply, LLC, et al.

In Virginia, another couple has brought a claim against their contractor individually, as opposed to a class action, suit.  While the news report breaking the story doesn’t mention the contractors name, the couple also brought suit against Venture Supply, L.L.C., who is the purported supplier of the drywall.

Like Stafford Custom Homes, Venture Supply, L.L.C. is a self-proclaimed “locally owned” company.

The couple in this suit – Benjamin and Holly Pronto – are seeking more than $600,000 in damages associated with the Chinese Drywall contamination.

The estimate of damages by the Prontos is a haunting wake-up call to builders who have unknown exposure to Chinese Drywall claims.

Builders Mutual Insurance Company v. The Dragas Co.

This is another case out of Virgina, but unique in that here an insurance company has sued its insured.

The insured, The Dragas Co., is a Virginia builder who has installed Chinese Drywall in Virginia homes.

According to the report in The Virginian-Pilot, Dragas’ insurance company has denied coverage for Chinese Drywall damages, and has filed suit in federal court asking a federal judge to declare who is responsible for the drywall damages.  Download the Complaint here.

How To Pay Your Attorney Less

As Chris Rock stated in his 2008 tour “Kill the Messenger,” “yeah, I said it.”

Times are tough, and it’s important for your company to make smart economic decisions. Legal costs are clearly an area where businesses would like to scale back.

A legal budget is not like a marketing budget, where a business hopes to get a ROI.   In fact, the terms “legal expense” and “ROI” are rarely uttered together, and for good reason.   Legal expenses are usually a business’ “necessary evil.”

So in these tough economic times, what can those in the construction industry do to lower legal expenses?   A few solid ideas were published in the Portland Business Journal last week, among them:

  • Handling more legal-related activities internally, rather than farming work out to law firms.
  • Negotiating more cost-effective compensation structures with outside counsel, including contingency and incentive arrangements.
  • Pursuing less risky and costly means of dispute resolution, such as arbitration and mediation, rather than litigation.

How Do These Apply to Construction Businesses?
When published in the Portland Business Journal last week, these ideas were intended to speak to businesses in general.   But how can these ideas be specifically used by a construction outfit?

It’s a cinch.

Get educated about collection practices, and bring your collections department in-house.    Incorporate arbitration and mediation provisions into your contracts, or agree to arbitrate or mediate existing disputes with your adversaries.   Contact your attorney and request alternative billing arrangements, including contingency and mixed-fee agreements.

You can even hire a consultant to help lower your attorneys fees.

In the end, there are proactive and reactive measures that can be taken to lower your attorneys fees, and even avoid the need for an attorney on many matters.