Claims and Bad Faith Law Blog

HOW TO DETERMINE GOOD FAITH IN SELLING A DEFECTIVE PRODUCT?

By applying a "knew or should have known" legal standard where the sale was of Chinese Drywall, a Louisiana Federal Judge holds in a Multi-District Litigation Case:  In re Chinese Manufactured Drywall Products Liability Litigation, 2012 WL 5878730 (E.D. La. MDL No. 2047, November 21, 2012).

           This was an action in "redhibition," i.e., Louisiana's codified cause of action borrowed from Roman Law, for breach of an "implied warranty against latent defects and vices".  See In re Chinese Manufactured Drywall Products Liability Litigation, 2012 WL 5878730 *6 (E.D. La. MDL No. 2047, November 21, 2012).  North River Insurance Company is the Excess Carrier of two "Interior Exterior" corporations (collectively referred to by the Court as "INEX"), sellers of Chinese Drywall.  In re Chinese Manufactured Drywall Products Liability Litigation, 2012 WL 5878730 *1 (E.D. La. MDL No. 2047, November 21, 2012).

          The legal standard of liability determined by the Court involved the quality of knowledge that a seller of a defective product has when it sells the defective product.  The Court chose to apply, and amplify, a "knew or should have known" standard:

            In conclusion, the Court holds that the standard of knowledge applicable to the determination of INEX's good or bad faith is as follows: INEX was in good faith if, at the time of the sale, it did not know, and a reasonable seller in its position would not have known, of the defect in the drywall. If at the time of the sale INEX actually knew of the defect, should have known of the defect based on actions it in fact took, or committed an unreasonable act or omission without which the defect would have been revealed, INEX was in bad faith.

In re Chinese Manufactured Drywall Products Liability Litigation, 2012 WL 5878730 *8 (E.D. La. MDL No. 2047, November 21, 2012).

          Bad Faith conduct exposes the seller-defendant to liability to pay damages, which Good Faith conduct does not:

In essence, if the seller lacks the requisite knowledge of the defect, the seller is in good faith and liable only to refund the purchase price and interest. If however the seller has the requisite knowledge, the seller is in bad faith and responsible for full damages.

In re Chinese Manufactured Drywall Products Liability Litigation, 2012 WL 5878730 *2 (E.D. La. MDL No. 2047, November 21, 2012).

          This sounds very similar to how the treatment of Bad Faith conduct under the Common Law evolved to reach Bad Faith Insurance conduct in settlement of Liability and First-Party Claims, and also in providing and conducting an Insured's defense in Liability Claims.  The result is similar, also, namely, exposure to damages caused by Bad Faith conduct which are not available with respect to Good Faith conduct.

Please Read The Disclaimer.  This is a Multi-District Litigation case in the Eastern District of Louisiana.  According to the November 21, 2012 opinion cited in this article, a "bellwether trial" (apparently, a trial on the issue of liability only) was scheduled to begin on November 26, 2012.  If any readers know the outcome of the bellwether trial in this case, or even if it was rescheduled or settled, please add your Comment on this post to let us all know the status.  Thank you.

Coverage Excluded in Multi-District Litigation, No Louisiana Bad Faith.

   Holding that all First-Party Coverage was excluded, the Federal District Court further held in pertinent part that there could be no cognizable Claim for Louisiana Bad Faith, Statutory Penalties for "arbitrary and capricious" or "vexatious refusal to pay"  in In re Chinese Manufactured Drywall Products Liability Litigation,  Download In re Chinese Manufactured Drywall Products Liability Llitigation (E.D. La. No. MDL 2047, Order and Reasons Filed December 16, 2010) PUBLIC ACCESS, also published as 2010 WL 5288032 *27 (E.D. La. December 16, 2010)(Multi-District Litigation; Louisiana substantive law).

   The Federal District Court held in this case that there would have been Insurance Coverage under the Insuring Agreements of the Homeowner's Insurance Policies at bar, but that all such Coverage is excluded for the Chinese Drywall Damages alleged in that case.  The  Exclusions applied by the Court to the allegations in that case are the "faulty materials" Exclusions and the "corrosion" Exclusions contained in the Policies at bar.  In re Chinese Manufactured Drywall Products Liability Litigation, 2010 WL 5288032 at *19-*20.

Exclusions applied by Courts to Catastrophe Claims are analyzed by Dennis J. Wall in Chapter 7 of "CATClaims:  Insurance Coverage for Natural and Man-Made Disasters" (Thomson Reuters West 2010 Supplement).

Please Read The Disclaimer.

Chinese Drywall Insurance Claims: General Principles Without Cases.

   In the absence of Insurance Coverage case law directly addressing Issues of Insurance Coverage for Chinese Drywall Damages Claims, as I have often noted in this space and on www.insuranceclaimsissues.typepad.com, general principles of insurance law will therefore guide predictions in specific claims situations until there is a body of decided case law on the subject.  A recent decision of the Seventh Circuit Court of Appeals under Illinois law, proves the point once again if ever it needed proving.

   In Ace American Insurance Co. v. RC2 Corporation, Download Ace American Insurance Co. v. RC2 Corporation (7th Cir. Case No. 09.3032 Opinion Filed April 5, 2010), also published as 2010 WL 1267293 * (7th Cir. April 5, 2010), the Seventh Circuit panel addressed a specific policy provision which excluded coverage of occurrences that took place within the United States.  The Seventh Circuit held that this specific exclusion in that case, barred a duty to defend under Illinois law, where underlying cases filed against the insured were based on toys manufactured in China and which allegedly caused damage in the United States from exposure to lead paint put on the toys in China.

Please Read The Disclaimer.

Chinese Drywall Claims: Hidden Dangers Possible for Consumers, Policyholders.

   Hidden dangers are coming to light in Chinese Drywall Damages and Coverage Claims.  They include potential scams and other examples of Bad Faith.

   In evaluating Chinese Drywall Claims, whether for yourself or on behalf of your clients, caution is advisable.  If a particular offer to scan or remediate a home from Chinese Drywall Damage sounds too good to be true, it probably is, as they say.  See also Ivan Penn, "Drywall Test Holds Promise and Warning" (St. Petersburg Times Online, Friday, November 13, 2009). 

   The linked newspaper article also refers its readers who want more information, to "the federal Chinese Drywall Information Center at:  www.cpsc.gov/info/drywall/index.html."

Please Read The Disclaimer.

Another non-Insurance Remedy Suggested for Chinese Drywall Damage Claims: ....

 Remove it and Rebuild.

   The latest suggested non-Insurance remedy for Chinese Drywall Damage Claims comes in a newspaper report whose title carries the suggestion:  Paul Owers, "Rip Out Chinese Drywall and Start Over, Scientist Advises/With no Rules for Fixing Houses With Smelly Drywall, a Thorough Rebuilding Seems Best" (South Florida [Ft. Lauderdale] Sun-Sentinel.com, Friday, November 6, 2009).

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Chinese Drywall: "Tests" Here and Now, CPSC November Report Coming.

    Homemade "tests" for whether you or your clients have Chinese Drywall in their homes and other buildings resemble homemade remedies for the common cold:  Some may work, some may not.  See generally this post by Jennifer Saranow Schultz on "Bucks Blog/New York Times Online, Making the Most of Your Money," Wednesday, November 4, 2009, entitled:  "The Telltale Signs of Chinese Drywall".

   The Federal Consumer Product Safety Commission has given a preliminary pass to Chinese Drywall in preliminary findings of whether Chinese Drywall is injurious to human beings and damaging to property.  Later in November, however, the CPSC is expected to release a report which may lead the way "toward developing a testing approach".  Id.  The expected report is based on a CPSC "study" of fifty (50) homes, on the other hand.  Id.

Please Read The Disclaimer.