Related Practices

Recent Guidance For Insurers On Counting Drywall Events

Leah Quadrino
April 3, 2013

Law360, New York (April 03, 2013, 12:04 PM ET) -- Despite the proliferation of litigation in recent years surrounding defective Chinese drywall, relatively few courts have been required to determine the number of occurrences in this context for purposes of liability insurance coverage. In cases where courts find coverage — where there is no applicable pollution exclusion and other coverage defenses have been rejected — determining the number of occurrences can be a critical issue. Two federal district courts recently addressed the number of occurrences in the context of coverage for drywall claims.

In Cincinnati Insurance Co. v. Devon International Inc., the U.S. District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, recently granted an insurer’s motion for summary judgment based on the number of occurrences. Civ. A. No. 11-5930, (E.D. Pa. Feb. 15, 2013). Following the same approach the Fourth Circuit Court of Appeals applied in Mitsui Sumitomo Insurance Co. of America v. Duke University Health System Inc., No. 11-2057, (4th Cir. Feb. 11, 2013) (applying North Carolina law in the context of injuries to surgical patients), the federal district court determined that a Pennsylvania court would apply the “cause” approach to determine the number of occurrences in a dispute involving defective drywall.

Defendants Devon International Inc. and related entities (collectively, “Devon”) were sued in multiple underlying actions arising out of allegedly defective Chinese drywall. Devon, a sourcing agent for Chinese products, had ordered the drywall from a Chinese drywall manufacturer, arranged for it to be shipped to Florida in a single shipment, and then sold portions of that shipment to multiple buyers. Approximately three years later, multiple plaintiffs sued Devon, alleging that the drywall was defective because it emitted sulfur, thereby damaging their real and personal property.

Cincinnati Insurance Company provided Devon commercial general liability coverage and umbrella coverage for two consecutive one-year policy periods from Nov. 20, 2008 to Nov. 20, 2010. Devon at *1. The policy provided coverage for bodily injury or property damage “caused by an occurrence that takes place in the coverage territory” and that “occurs during the policy period,” and it defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. The parties agreed that Pennsylvania law governed the interpretation of the policy. Id. at *3.

The court described the three principal approaches to determining the number of occurrences: focusing on the cause, the effects, or the liability-triggering event. The policyholder argued that the court should follow the approach of the U.S. Court of Appeals for the Fifth Circuit in Maurice Pincoffs Co. v. St. Paul Fire & Marine Insurance Co., 447 F.2d 205 (5th Cir. 1971) (applying Texas law), in which the court held that the term “occurrence” in the policy must refer to “the occurrence of the events or incidents for which [the insured] is liable.” 447 F.2d at 206. In Pincoffs, the policyholder had imported contaminated bird seed and re-sold it to multiple buyers. Applying the “liability-triggering event” approach, the Fifth Circuit held that each of the policyholder’s sales constituted a separate occurrence under the policy. Id. at 207.

In contrast, the insurer argued that the court should apply the “cause” approach. The court outlined the Third Circuit’s application of that approach in Appalachian Insurance Co. v. Liberty Mutual Insurance Co., 676 F.2d 56 (3d Cir. 1982), in which the policyholder had faced a class action lawsuit arising out of its allegedly discriminatory employment policies. The Third Circuit there found only one occurrence under the insurance policy despite multiple instances of liability, on the basis that the adoption of the discriminatory policies was the common proximate cause of each instance of discrimination.

The court in Devon noted that Appalachian v. Liberty Mutual was not binding on it, however, because the policy at issue in that decision was governed by Massachusetts law. The court instead applied a similar analysis utilized by the Pennsylvania Supreme Court in Donegal Mutual Insurance Co. v. Baumhammers, 938 A.2d 286 (Pa. 2007).

In Baumhammers, the policyholders sought coverage for an underlying suit which alleged that their negligence in failing to take their son’s gun from him and failing to procure adequate mental health treatment for him enabled him to commit multiple shootings over a two-hour period. 938 A.2d at 288-89. The Pennsylvania Supreme Court applied the “cause” approach and held that “the occurrence should be an event over which [the insured] had some control.” Id. at 294-96. It further explained that, “[b]ecause coverage is predicated on [the insured’s] inaction, and the resulting injuries to the several victims stem from that one cause, we hold that [the insured’s] alleged single act of negligence constitutes one accident and one occurrence.” Id. at 295.

The Devon court concluded, based on Baumhammers and other relevant precedent, that “the cause approach does in fact govern the issue of how to determine the number of occurrences for insurance purposes under Pennsylvania law.” Devon at *4 n.5. Applying the Baumhammers holding, the court then determined that the policyholder’s “single purchase and shipment of defective drywall” was the proximate cause of all injuries and lawsuits against it. Id. at *5.

It also found, again applying the principles of Baumhammers, that the policyholder had “some control” over that cause by choosing “to purchase and distribute the defective drywall.” Thus, the court found only one occurrence. Id. Based on facts to which the parties stipulated — that some of the underlying plaintiffs allegedly suffered damage during the first policy period — the court found that the single occurrence took place during the first policy period, when “[t]he effects of the imported drywall thus manifested themselves.” Id. Accordingly, the insurer owed no coverage under the second policy period. Id.

The Devon ruling extends to a different context the application of the “cause” approach under Pennsylvania law to resolve the issue of single versus multiple occurrences, and reinforces Pennsylvania’s position within the majority of courts that employ the “cause” approach. Application of the “cause” approach, however, does not always dictate the same result.

Confronted with a similar issue in Dragas Management Corp. v. Hanover Insurance Co., 798 F. Supp. 2d 758, 764 (E.D. Va. 2011), a federal district court, applying Virginia law and employing the “cause” approach, held that each of 74 separate installations of defective Chinese drywall constituted separate occurrences. There, the insurance policies contained substantially the same definition of “occurrence” as that which was at issue in Devon. The insurers argued that the purchase of the defective drywall constituted the single occurrence under the policies. 798 F. Supp. 2d at 763.

The court looked to the particular role of the insured, which served as both the supplier and installer of the defective drywall, and rejected the applicability of cases in which the insured was only involved in the distribution of a defective product. Id. Explaining that “[t]he causation test directs the court to determine what ultimately caused the injury,” the court stated that “‘the proper focus in interpreting ‘occurrence’ under a liability policy is on the number of events that cause the injuries and give rise to the insured’s liability.’” Id. at 764. Applying that test, the court stated that “[w]hile it is true that the initial purchase of the Chinese drywall was certainly a but-for cause of the damage, it was the act of installing the drywall in each home which set the chain of events culminating in the damage to that home. Thus, there were seventy-four (74) occurrences in this case, one for each affected home.” Id.

Devon and Dragas illustrate the importance that courts sometimes place on the particular facts at issue, including the role of the insured, in determining the number of occurrences. These decisions also serve as a reminder that application of a particular test to the number of occurrences conundrum is not always outcome-determinative.

--By Virginia White-Mahaffey and Leah Quadrino, Steptoe & Johnson LLP

Virginia White-Mahaffey is a partner and Leah Quadrino is of counsel in Steptoe's Washington, D.C., office.

The opinions expressed are those of the author 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.