Travco Insurance Company v. Larry Ward

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 10-1710
TRAVCO INSURANCE COMPANY,
Plaintiff – Appellee,
v.
LARRY WARD,
Defendant – Appellant.
------------------------------
NATIONAL ASSOCIATION OF HOME BUILDERS,
Amicus Supporting Appellant,
NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES; AMERICAN
INSURANCE ASSOCIATION,
Amici Supporting Appellee.
Appeal from the United States District Court for the Eastern
District of Virginia, at Norfolk. Robert G. Doumar, Senior
District Judge. (2:10-cv-00014-RGD-TEM)
Argued: September 20, 2011 Decided: March 1, 2012
Before SHEDD and WYNN, Circuit Judges, and Damon J. KEITH,
Senior Circuit Judge of the United States Court of Appeals for
the Sixth Circuit, sitting by designation.
Unpublished Order of Certification of a question of law to the
Supreme Court of Virginia.
ARGUED: Michael Francis Imprevento, BREIT DRESCHER IMPREVENTO &
WALKER, PC, Norfolk, Virginia, for Appellant. Stephen Edward
Goldman, ROBINSON & COLE LLP, Hartford, Connecticut, for
Appellee. ON BRIEF: Jeffrey A. Breit, John W. Drescher, BREIT
DRESCHER IMPREVENTO & WALKER, PC, Norfolk, Virginia; Richard J.
Serpe, LAW OFFICES OF RICHARD J. SERPE, PC, Norfolk, Virginia,
for Appellant. John B. Mumford, Jr., Kathryn E. Kransdorf,
HANCOCK, DANIEL, JOHNSON & NAGLE, PC, Glen Allen, Virginia;
Wystan M. Ackerman, Daniel F. Sullivan, Jamie M. Landry,
ROBINSON & COLE LLP, Hartford, Connecticut, for Appellee. David
S. Jaffe, NATIONAL ASSOCIATION OF HOME BUILDERS, Washington,
D.C., for National Association of Home Builders, Amicus
Supporting Appellant. Thomas W. Curvin, Amy K. Averill,
SUTHERLAND ASBILL & BRENNAN LLP, Atlanta, Georgia; Steuart H.
Thomsen, SUTHERLAND ASBILL & BRENNAN LLP, Washington, D.C., for
National Association of Mutual Insurance Companies, Amicus
Supporting Appellee. Raoul G. Cantero, Michelle Holmes Johnson,
WHITE & CASE LLP, Miami, Florida, for American Insurance
Association, Amicus Supporting Appellee.
2
PER CURIAM:
Larry Ward (“Ward”) appeals from an order granting summary
judgment in favor of the issuer of his homeowners insurance
policy, Travco Insurance Company (“Travco”), and declaring that
he is not entitled to coverage for damages to his home allegedly
caused by the drywall used therein. Although the district court
found that Ward had suffered a loss within the policy’s
coverage, it also concluded that coverage was excluded by four
provisions: the latent defect exclusion, the faulty material
exclusion, the corrosion exclusion, and the pollution exclusion.
Pursuant to the Supreme Court of Virginia’s Rule 5:40, we
now certify the following question of Virginia law to the
Supreme Court of Virginia:
1. For purposes of interpreting an “all risk”
homeowners insurance policy, is any damage resulting
from this drywall unambiguously excluded from coverage
under the policy because it is loss caused by:
(a) “mechanical breakdown, latent defect,
inherent vice, or any quality in property
that causes it to damage itself”;
(b) “faulty, inadequate, or defective materials”;
(c) “rust or other corrosion”; or
(d) “pollutants,” where pollutant is defined as
“any solid, liquid, gaseous or thermal
irritant or contaminant, including smoke,
vapor, soot, fumes, acids, alkalis,
chemicals and waste?
3
This court acknowledges that the Supreme Court of Virginia
may restate this question. See Va. Sup. Ct. R. 5:40(d).
Counsel of record for Larry Ward is Michael F. Imprevento,
Jeffrey A. Breit, and John W. Drescher, Breit Drescher,
Imprevento & Walker, PC, 1000 Dominion Tower, 999 Waterside
Drive, Norfolk, Virginia, 23510; and Richard J. Serpe, Law
Offices of Richard J. Serpe, PC, 580 East Main Street, Suite
310, Norfolk, Virginia, 23510. Counsel of record for Travco
Insurance Company is John B. Mumford, Jr. and Kathryn I.
Kransdorf, Hancock Daniel Johnson & Nagle, P.C., 4701 Cox Road,
Suite 400, Glen Allen, Virginia, 23060; and Stephen E. Goldman,
Wystan M. Ackerman, Daniel F. Sullivan, and Jamie M. Landry,
Robinson & Cole LLP, 280 Trumbull Street, Hartford, Connecticut,
06103.
I
The underlying facts of this appeal are undisputed. On May
1, 2007, Ward purchased a newly constructed home located in
Virginia Beach (the “Residence”). On May 7, 2007, Travco issued
an “all risk” homeowner’s insurance policy (the “Policy”) for
the Residence. The Policy initially covered the Residence from
May 7, 2007 to May 7, 2008; Ward twice renewed the Policy,
extending his coverage to May 7, 2010.
The Policy “insure[s] against risk of direct physical loss
to property described in [the Policy].” J.A. 38. The Policy does
4
not define “direct physical loss”; however, it does define
“Property Damage” as “physical injury to, destruction of, or
loss of use of tangible property.” J.A. 32. In addition, the
Policy also contains several exclusions, four of which are
relevant here. Under these four exclusions, the Policy excludes
from coverage any damage to the Residence caused by:
(1) “Mechanical breakdown, latent defect, inherent
vice, or any quality in property that causes it to
damage or destroy itself.” J.A. 38.
(2) “Faulty, inadequate or defective: . . . Design,
specifications, workmanship, repair, construction,
renovation, remodeling, grading, compaction; Materials
used in repair, construction, renovation or
remodeling; or Maintenance; of part or all of any
property whether on or off the ‘residence premises’.”
J.A. 42.
(3) “Smog, rust or other corrosion, mold, fungi, wet
or dry rot.” J.A. 38.
(4) “Discharge, dispersal, seepage, migration, release
or escape of pollutants unless the discharge,
dispersal, seepage, migration, release or escape is
itself caused by a Peril Insured Against named under
Coverage C. Pollutants means any solid, liquid,
gaseous or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis, chemicals
and waste. Waste includes materials to be recycled,
reconditioned or reclaimed.” J.A. 38.
The Residence contains walls that were constructed using
Chinese-manufactured drywall. 1 Over time, the drywall released
1
Apparently, within the building industry, this type of
drywall is commonly referred to as “Chinese drywall” because of
its place of origin.
5
sulfuric gas into the Residence, allegedly creating noxious
odors and causing damage and corrosion to its structural,
mechanical, and plumbing systems. 2 Eventually, the Residence
became uninhabitable, and Ward and his family were forced to
move.
II
Ward filed a lawsuit in Virginia state court on August 10,
2009, against the development and supply companies who
constructed the Residence. 3 In addition, Ward reported an
insurance claim to Travco on September 23, 2009, seeking
coverage under the Policy for the damages allegedly caused by
the drywall. On January 7, 2010, Travco sent Ward a letter
denying coverage for his claims. On the same day, Travco filed a
declaratory judgment action in federal court seeking a
2
The alleged damaged components of the Residence include
the framing, heating, HVAC units, refrigeration coils, copper
tubing, faucets, metal surfaces, electrical wiring and computer
wiring. It also includes personal and other property, such as
microwaves, utensils, electronic appliances, jewelry,
televisions, and other household and personal items.
3
That suit is captioned Ward v. Peak Building Corp., and is
currently part of a multi-district litigation pending in the
Eastern District of Louisiana. See In re Chinese-Manufactured
Drywall Prods. Liability Litig., MDL No. 2047, 626 F. Supp. 2d
1346 (J.P.M.L. June 15, 2009). Along with his answer to the
declaratory judgment complaint, Ward also filed a motion to
transfer the action to the United States District Court for the
Eastern District of Louisiana. The motion to transfer was
denied.
6
declaration that it had no obligation under the Policy to
provide coverage for any losses allegedly caused by the drywall.
Prior to discovery, Travco filed a motion for summary judgment,
arguing the Residence had not sustained a direct physical loss
and therefore did not fall within the grant of coverage in the
Policy. In the alternative, Travco asserted that even if there
was a direct physical loss to the Residence, this loss was
excluded from coverage under the faulty materials, latent
defect, corrosion, and pollution exclusions.
Following a hearing, the district court entered an order
granting in part and denying in part Travco’s motion for summary
judgment. As an initial matter, the district court found that
Ward’s Residence did suffer a direct physical loss, concluding
that “direct physical loss” includes “total loss of use” and
that physical damage to the property is not necessary when “the
building in question has been rendered unusable by physical
forces.” J.A. 697-98.
However, despite finding that Ward had met his burden of
bringing himself within the coverage of the Policy, the district
court also found that each of the four relevant exclusions
unambiguously applied to operate as a bar to coverage under the
Policy. First, the district court found the damage to the
Residence was a loss caused by a latent defect. The court relied
specifically on Glens Falls Ins. Co. v. Long, 77 S.E.2d 457, 459
7
(Va. 1953), and U.S. West, Inc. v. Aetna Cas. & Sur. Co., 117
F.3d 1415 (4th Cir. July 16, 1997) (unpub. table op.), in
defining a latent defect as one that is “not readily
discoverable” and is also “integral to the damaged property’s
design or manufacture or construction.” J.A. 701-02. Although
the district court acknowledged that “[i]n a certain sense, the
Drywall is not ‘damaged property’ at all, and thus its defects
cannot be latent defects within the meaning of U.S. West,” it
also concluded that Ward cannot claim to have suffered a “direct
physical loss” under the Policy while simultaneously claiming
the relevant property remains undamaged. J.A. 701-02. Therefore,
the district court concluded that even though the drywall was
damaging other components of the Residence, because the flaw in
the drywall was undetectable and the drywall was integral to the
Residence’s maintenance and construction, the loss from
defective drywall must fall within the latent defect exclusion.
J.A. 702.
Second, the district court concluded that coverage is
barred by the faulty materials exclusion. Relying on the
ordinary meaning of “faulty” and “defective,” the district court
concluded that the faulty material exclusion applies even to
property that may be serving its intended purpose because
although the drywall in the Residence had not collapsed or
8
physically deteriorated, it was not serving its intended purpose
as a component of a livable residence. 4 J.A. 704.
Third, the district court determined that coverage for loss
caused by corrosion is barred by the corrosion exclusion.
Although “corrosion” is not defined in the Policy, the district
court found the exclusion applied because the ordinary meaning
of corrosion includes the “action or process of corroding” and
that the damage to the structural, mechanical and plumbing
systems in the Residence was caused by the “action or process of
corroding.” J.A. 707. Moreover, in light of the weight of
authority in other jurisdictions, the district court found that
the exclusion precludes recovery for damages caused by corrosion
regardless of what caused the corrosion or how suddenly it
occurred. J.A. 707.
Finally, the district court found the pollution exclusion
also applied. While acknowledging that pollution exclusions are
frequently litigated and that there is a split of authority as
to the breadth of pollution exclusions, the district court
concluded that, “[u]nder Virginia law, pollutant exclusions are
not limited to ‘traditional environmental pollution.’” J.A. 711.
In reaching this conclusion, the district court relied on City
4
The district court noted that Ward described the drywall
as “inherently defective” in his state court complaint. J.A.
705.
9
of Chesapeake v. States Self-Insurers Risk Retention Group,
Inc., 628 S.E.2d 539 (Va. 2006), in which the Supreme Court of
Virginia found that a pollution exception applied to the release
of toxic trihalomethanes into a municipal water supply. Although
the district court acknowledged that City of Chesapeake involved
traditional environmental pollution, it found that the Court’s
holding was not expressly limited to traditional environmental
pollution and it “decline[d] this invitation to second-guess the
Virginia Supreme Court.” J.A. 710 (citing Firemen’s Ins. Co. v.
Kline & Son Cement Repair, Inc., 474 F. Supp. 2d 779 (E.D. Va.
2007) (finding that coverage for injuries caused by the release
of epoxy fumes is barred by the pollution exclusion)). Thus, the
district court concluded that the exclusion applies because the
drywall discharged or dispersed sulfuric gas and that gas
plainly qualifies as irritants, contaminants, or fumes. J.A.
712-13.
In light of its conclusions, the district court entered
declaratory judgment that the Policy does not provide coverage
for the damages presently claimed by Ward, but denied Travco’s
request for a declaratory judgment that the Policy does not
cover any subsequent secondary but as-yet-unclaimed losses. J.A.
717.
10
III
On appeal, Ward contends the district court erred in
holding that the Policy exclusions barred coverage for his
claimed losses. Under Virginia law, courts interpret insurance
policies in accordance with the intent of the parties as
determined from the words used in the policy. Copp v. Nationwide
Mut. Ins. Co., 692 S.E.2d 220, 223 (Va. 2010). Moreover,
Insurance policies are contracts whose language is
ordinarily selected by insurers rather than by
policyholders. The courts, accordingly, have been
consistent in construing the language of such
policies, where there is doubt as to their meaning, in
favor of that interpretation which grants coverage,
rather than that which withholds it. Where two
constructions are equally possible, that most
favorable to the insured will be adopted. Language in
a policy purporting to exclude certain events from
coverage will be construed most strongly against the
insurer.
St. Paul Fire & Marine Insurance Co. v. S.L. Nusbaum & Company,
Inc., 316 S.E.2d 734, 736 (Va. 1984). When an insurer seeks to
limit coverage under a policy, language of the exclusion must be
“reasonable, clear, and unambiguous.” Virginia Farm Bureau Mut.
Ins. Co. v. Williams, 677 S.E.2d 299, 302 (Va. 2009). The
language of an insurance policy “is ambiguous when it may be
understood in more than one way or when it refers to two or more
things at the same time.” Williams v. Commonwealth Real Estate
Bd., 698 S.E.2d 917, 925 (Va. Ct. App. 2010) (quoting Eure v.
Norfolk Shipbuilding & Drydock Corp., 561 S.E. 2d 663, 668 (Va.
11
2002). If there is any doubt, ambiguous language in an insurance
policy will be given an “interpretation which grants coverage,
rather than one which withholds it.” St. Paul Fire, 316 S.E.2d
at 736.
Ward contended below and continues to contend on appeal
that Travco failed to meet its burden of establishing that the
exclusions apply. See Allstate Ins. Co. v. Gauthier, 641 S.E.2d
101, 104 (Va. 2007) (noting the burden is on insurer to prove
applicability of exclusion). In particular, Ward argues the
language in each of the exclusions at issue in Travco’s policy
is not clearly or unambiguously defined, and the broad,
expansive interpretations ascribed to those exclusions by Travco
and the district court are therefore unreasonable. Moreover,
Ward argues his claimed losses were unexpected, fortuitous, and
extraneous, and are the very types of events for which a
reasonable homeowner would purchase insurance coverage.
According to Ward, because each of the four exclusions is
ambiguous, the district court erred in interpreting them in such
as way as to limit, rather than provide, insurance coverage for
his losses.
Ward likewise makes specific arguments regarding each
exclusion. With regard to the latent defect exclusion, Ward
argues that “latent defect” is susceptible to multiple meanings,
as illustrated both on the face of the Policy and in case law.
12
First, the term “latent defect” is qualified in the Policy by
the modifier “that causes it to damage or destroy itself.” J.A.
38. Thus, Ward argues the term must mean something more than
merely a defect that is undetectable or undiscoverable.
Moreover, Ward notes the apparent conflict between Glen Falls
and U.S. West as to the meaning of “latent defect.” Compare Glen
Falls, 77 S.E.2d at 459 (defining latent defect as one “which
reasonably careful inspection will not reveal”), with U.S. West,
117 F.3d at *5 (“Not every defect that is not readily
discoverable is a ‘latent’ one; only those not readily
discoverable that also are integral to the damaged property’s
design or manufacture or construction fit that description.”).
Ward also notes that the history of the latent defect
exclusion, as well as the insurance industry’s own definition of
“latent defect,” indicates that the latent defect exclusion was
intended to apply to “a loss due to any quality in the property
that causes property to damage or destroy itself.” See Finger v.
Audubon Ins. Co, No. 09-8071, 2010 WL 1222273, slip op. at 6
(La. Civ. Dist. Ct. Mar. 22, 2010) (emphasis added) (citation
omitted). In other words, Ward argues the exclusion was intended
to prevent an insurer from providing coverage over property that
“has its own shelf life and will eventually wear out or break
down because of intrinsic quality or nature.” Id. (citation
omitted). In light of this, Ward argues the latent defect
13
exclusion is inapplicable here because the drywall is not
structurally inferior, has not deteriorated or destroyed or
damaged itself, and has not failed to serve its intended
purpose. 5
With regard to the faulty materials exclusion, Ward argues
the term “faulty material” is ambiguous, and that the exclusion
is inapplicable here because of the unique nature of the
“defect” in the drywall, to wit: even while the drywall emits
sulfuric gasses that destroy other components of the residence,
it continues to serve its intended purpose as a wall and divider
and does not deteriorate or breakdown. In other words, the
drywall is not subject to the faulty material exception because
it continues to serve its normal function and intended purpose
as a structural element of the residence and has not caused
damage to itself. See Finger, 2010 WL 1222273, slip op. at 8
(“Chinese drywall is not defective within the meaning of the
[faulty material] exclusion.”). Ward notes that the district
court, in declining to follow Finger, did not rely on any
5
The district court acknowledged that, “in a certain sense,
the Drywall is not ‘damaged property’ at all, and thus its
defects cannot be latent defects within the meaning of U.S
West.” J.A. 701. Further, the district court noted the latent
defect exclusions are “historically related to wear and tear
exclusions, which do exclude coverage for inevitable and
predictable loss over time.” J.A. 702.
14
particular Virginia precedent but rather on the decisions of
other circuits.
With regard to the corrosion exclusion, Ward argues that
his loss is the actual corrosion of the metals caused by the
sulfuric gases rather than any subsequent damage to any other
part of the Residence otherwise resulting from this corrosion.
He argues that the loss is not caused by another house component
which damaged the house after it had been corroded; rather, the
damage is the corrosion itself. See Finger, 2010 WL 1222273,
slip op. at *6. Ward contends that corrosion exclusions in
insurance policies are generally intended to apply to
maintenance related problems, such as the expected and natural
occurrence of corrosion which causes damage to property over
time, see Adams-Arapahoe Joint Sch. Dist. No. 28-J v.
Continental Ins. Co., 891 F.2d 772, 777 (10th Cir. 1989) (“[T]he
corrosion exclusion applies only to naturally occurring
corrosion.”), and that the chemical reaction resulting from the
drywall emissions is not the normal, anticipated corrosion
referenced in the exclusion. 6
6
Ward also cites the Fire, Casualty & Surety Bulletin
(“FC&S Bulletin”), an insurance industry publication which
provides expert analysis on insurance policy interpretation.
According to the FC&S Bulletin, “the intent of the corrosion
exclusion is to exclude corrosion that is part of the normal
aging process. The corrosion that results from the [Chinese]
drywall is not part of a normal process and is directly related
(Continued)
15
Finally, with regard to the pollution exclusion, Ward
argues the meaning of “pollutant” is ambiguous under Virginia
law. Ward argues the pollution exclusion was not intended to
apply to product liability claims but was intended to limit or
exclude coverage for past environmental contamination. Ward
notes that although the district court relied on City of
Chesapeake, it also acknowledged that City of Chesapeake
involved traditional environmental pollution and that there is a
split of authority as to the scope of pollution exclusions
generally. 7 Ward argues this issue is controlled by Unisun Ins.
Co. v. Schulwolf, 53 Va. Cir. 220 (Va. Cir. 2000), in which the
Virginia Circuit Court declined to apply a pollution exception
to lead paint, stating that “it is reasonable to conclude that
the exclusion clause applies only to claims based on
environmental pollution.” Id. at *4. Ward argues that because
to the vapors emitted from the drywall. Therefore, in our
opinion, it would still be covered.” Appellant Br. at 39
(quoting FC&S Online, Chinese Drywall and Corrosion, Questions
and Answers, 2009, http://www.nationalunderwriterpc.com.
7
The district court made clear it was not endorsing or
rejecting City of Chesapeake as a matter of policy. Moreover,
the district court acknowledged that Ward’s interpretation of
the pollution exclusion may be more consistent with precedent
from other jurisdictions, public policy in reigning in overly
broad exclusion clauses, and the historical development of the
pollutant exclusion in insurance law, but that it was bound by
City of Chesapeake unless and until the Supreme Court of
Virginia holds otherwise. J.A. 712.
16
the gasses emitted from the drywall are not considered
traditional environmental pollutants, the exclusion is
inapplicable to a compound originating in and remaining within
the Residence. 8
IV
Several factors justify certification. Considering these
arguments and with this legal background, we find no clear
controlling Virginia precedent to guide our decision. There are
no disputed fact issues, and the questions presented are pure
questions of state law which have not been squarely addressed by
the Supreme Court of Virginia. In addition, we recognize the
importance of allowing the Supreme Court of Virginia to decide
questions of state law and policy with such far-reaching impact.
The question of how to interpret these standard exclusions, in
light of the increasing number of insured homeowners who are
seeking to recover under their first-party property insurance
policies for losses resulting from the drywall, is a matter of
exceptional importance for state insurers and insureds. In
short, we are uncertain whether the Supreme Court of Virginia
would conclude that each of these four exclusions is unambiguous
8
We note that Ward raises an additional issue on appeal,
namely, whether the Policy’s “ensuing loss” provision restores
coverage for damages caused to other components of the
Residence. We do not certify this issue.
17
and reasonable in its form, scope, and application in light of
the unusual nature of the losses involved, and the answer to
this question is sufficiently unsettled and dispositive that
certification is warranted.
Therefore, because no controlling Virginia appellate
decision, constitutional provision, or statute appears to
address the precise question presented in this case, and the
answer to the certified question is potentially determinative of
this appeal, the question is properly subject to review by the
Supreme Court of Virginia on certification.
V
Accordingly, pursuant to the privilege made available by
the Supreme Court of Virginia Rule 5:40, we respectfully hereby
ORDER:
(1) that the question stated above be certified to the
Supreme Court of Virginia for answer;
(2) that the Clerk of this Court forward to the Supreme
Court of Virginia, under the official seal of this Court, a copy
of this Order of Certification, together with the original or
copies of the record before this Court to the extent requested
by the Supreme Court of Virginia; and
18
(3) that the Clerk of this Court fulfill any request for
all or part of the record simply upon notification from the
Clerk of the Supreme Court of Virginia.
QUESTION CERTIFIED
19