Chinese drywall -- litigation over the smell of a rotten egg, er, rolls on. There has been lots of coverage litigation over the past few years concerning various issues associated with Chinese drywall. But last week’s decision in Chartis Property & Casualty Company v. Jassy, No. 12-2087 (M.D. Fla. Nov. 4, 2013) involved one that I had never seen before. While the case may not be hugely significant, Chinese drywall issues are important to many, this one is unique and it may foretell others like it. So I decided to give it a few words here.

The case involved the availability of coverage, under the liability section of a homeowners policy, for a suit against insureds, the Jassys, alleging that they sold their home without disclosing to the buyers that it contained Chinese drywall. Upon moving in the buyers discovered the corrosive effect of the Chinese drywall and suffered damage to personal and real property.

The court easily disposed, as not covered, all but one cause of action: “[T]he breach of covenant of good faith and fair dealing, negligent misrepresentation and fraudulent misrepresentation claims all allege intentional acts by the Jassy’s and therefore fall squarely into the intentional act exclusions of all three policies.”

The negligence cause of action took a little more work. The Jassys and the home buyers argued that the negligence claim triggered a duty to defend because it supported the conclusion that an “occurrence” caused “property damage” and such cause of action did not fall within the intentional act exclusions. In support of this they pointed to the following allegations: “‘the Jassys owed a duty of due care to Kuhn and McDermott [buyers] in connection with their dealings with Kuhn and McDermott relating to the sale of the home,’ and that they breached that duty of care. They allege that the breach was the proximate cause of the property damage suffered by Kuhn and McDermott, including physical injury to, destruction, loss of use, replacement and repair of ‘personal property, furnishings, electronic appliances and other metal surfaces and household items.’”

The court tackled the negligence argument as follows. The negligence allegation against the Jassys could only be for their negligence in not discovering the Chinese drywall and disclosing that discovery to the buyers. However, under Florida law, the Jassys had no duty to discover the Chinese Drywall and only a duty to disclose in situations where “the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer.” In other words, the seller of a home is liable only for failing to disclose material defects of which he is aware. Therefore, the court concluded, “[s]ince the negligence allegation against the Jassys is based entirely on the Jassys failure to disclose the Chinese Drywall, and the Jassys could only be liable for omissions of material facts of which they were aware at the time of the sale, the claim falls under the intentional act exclusions.”

Claims against sellers of homes, brought by buyers, for the sellers’ failure to disclose a condition of the property, are common -- and there is no shortage of coverage law addressing them. In that sense, the Florida federal court’s decision in Jassy is far from groundbreaking. But it involves Chinese drywall and is the first I’ve seen of such type. [I couldn’t find others but admittedly I did not research it to the ends of the earth.] And also given the possibility that these types of claims will continue, as owners of Chinese drywall affected homes sell them, I thought it met the criteria for addressing in CO.