Insurer Loses Bid to Yank Coverage in Chinese Drywall Case

December 3, 2010

Insurers continue adopting aggressive stances in looking for ways to escape obligations for insurance coverage in the voluminous Chinese drywall (CDW) cases. In one of the most recent court opinions, the excess insurer lost its bid in a federal declaratory judgment action on the basis that its lawsuit was premature. The drywall company will likely face the fight in the future when the matter becomes ripe based on exhaustion of the primary layer of insurance.

As most readers know, numerous cases have been filed along the Gulf and East Coast states over the installation of CDW. The cases are aimed at developers, builders, installers, vendors and the manufacturers. Several multidistrict matters are also pending in New Orleans federal court. Running parallel to these liability cases are a host of ongoing insurance coverage disputes. The outcome of these latter insurance disputes will have broad implication far outside the construction industry, since one of the focal points concerns the application of the absolute pollution exclusion.

An interesting ruling has just been issued from the federal district court in South Florida concerning an insurance coverage dispute between National Union Fire Insurance of Pittsburgh, Pennsylvania (a unit of Chartis, formerly AIG) and a drywall installation company. National Union, an excess insurer, filed a declaratory judgment action to deny coverage based on the policy’s absolute pollution exclusion. The defendant filed a motion to dismiss for lack of subject matter jurisdiction by contending that the complaint did not allege a justiciable controversy. National Union Fire Ins. Co. of Pittsburgh, Penn. v. F. Vincino Drywall, II, Inc., Case No. 10-cv-60273-Gold/McAliley (S.D.Fla., Nov. 24, 2010).

Ignoring all other motions and issues raised by the parties, the judge went directly to the subject matter argument and dismissed the case. Noting the matter needed to be decided under federal law, the court looked to binding precedent, and acknowledged that “[t]he U.S. Supreme Court has interpreted the Declaratory Judgment Act by holding that a proper controversy under the statute must be definite, concrete, real, substantial, and not hypothetical.” citing Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 204-41 (1937). In response to National Union’s argument that the policyholder waived the right to contest subject matter jurisdiction, the court held that it cannot be waived, and can be raised at any point in the litigation. Thus, the court went on to address the merits of the defendant’s arguments.

The court noted that an excess insurer, in a declaratory judgment action, is obligated to meet the “actual case or controversy” requirement of the federal Declaratory Judgment Act. Such a requirement is also found in Article III of the Constitution. In looking at binding precedent, the court noted prior law holding “that no action for declaratory relief will lie to establish an insurers’ liability in [an excess insurance policy clause contest] until a judgment has been rendered against the insured since, until such judgment comes into being, the liabilities are contingent and may never materialize.” The court then analyzed the insurer’s complaint where the allegations noted that indemnity obligations may be incurred in the future. The insurer also argued that due to the number of other CDW cases in litigation, it was likely that its own policy would be implicated for this insured, which the court found to be an invalid argument. It noted that 11th Circuit precedent prevented trial courts from “considering other similar insurance disputes as a basis for establishing ‘case or controversy’ jurisdiction because it was too ‘speculative.’”

Based on the lack of an actual controversy at issue, the court dismissed National Union’s declaratory judgment action without prejudice. The insurer retains the right to re-file in if “a proper justiciable case or controversy arises” in the future. While the defendant may have won the battle, it may ultimately lose the war. Insurers are locked and loaded to litigate the issue of coverage for CDW matters with a main focus on the pollution exclusion clauses as discussed in a recent alert.

The ongoing dispute over interpreting pollution exclusions is likely to have a future impact on application to other types of incidents in the future for a variety of industries. Lest any business think CDW insurance cases will be limited to this specific scenario, they are likely to find out the hard way that favorable interpretations to insurers will be applied to them next.

For more information on this issue and how McGuireWoods assists policyholders in protecting and recovering their insurance rights, please contact the author.