A recent report and recommendation by a federal magistrate judge in Arizona recommends that partial summary judgment be granted in favor of a certified class of insureds, in a property insurance class action involving polybutylene (PB) plumbing.  Given this result, other insurance companies might see new “piggyback” class action filings on this issue, which potentially could create significant exposure for the industry. 

In Guadiana v. State Farm Fire and Casualty Company, 2012 U.S. Dist. LEXIS 8262 (D. Ariz. Jan. 25, 2012), the plaintiff’s house had polybutylene (PB) piping that leaked.  She claimed that because of a defect in this kind of piping, it is not feasible to repair a leaky section of pipe.  She claimed that State Farm was contractually obligated to replace all of the piping in the house, in addition to replacing parts of the structure that must be torn out in order to access the piping.  Last March, the court granted certification of an Arizona statewide class.  After notice was sent to the class and the opt-out period expired, the plaintiff filed a motion for partial summary judgment on coverage.

The policy provision at issue provided that:

If loss to covered property is caused by water or steam not otherwise excluded, we will cover the cost of tearing out and replacing any part of the building necessary to repair the system or appliance.  We do not cover loss to the system or appliance from which the water or steam escaped.

According to the opinion, State Farm’s position was that the water damage was covered, but there was no coverage for the cost of accessing and replacing parts of the plumbing system that were not leaking.  State Farm also relied on an exclusion for loss due to a “latent defect” and an exclusion for “loss consisting of . . . defect . . . in . . . materials used in construction or repair.”  It does not appear there was any focus on the second sentence quoted above, i.e., “We do not cover loss to the system or appliance from which the water or steam escaped.”  That seems also potentially applicable here, but I have not read the briefs and prior decisions in this case.

The magistrate judge concluded that the exclusions were not applicable because “[t]hese provisions exclude any loss consisting of defective construction materials,” and “[t]he water damage is the covered loss, not the defective plumbing system.”  Id. at *10.  I find that conclusion somewhat puzzling because the latent defect exclusion, although not quoted with precision in the opinion, appears to apply where a loss is caused by a latent defect, and it seems like this loss likely was caused by a latent defect in the piping.  If the second exclusion (which is not quoted in its entirety in the opinion) applies only to “loss consisting of” a defect in materials, that would be different from some other commonly-used policy forms.  I’ve seen a number of policy forms that have exclusions for a loss “caused by” a defective material. 

This opinion also reflects a debate between the parties about the use of the word “repair” in the tear-out provision quoted above.  State Farm argued that “repair” must have a different meaning from “replace,” based on dictionary definitions, the context of the policy, and case law.  The court concluded essentially that “repair” could mean total replacement if the only practical and effective means of repair was a total replacement of all the piping.  The court also found, at a minimum, an ambiguity.  The court also cited public policy and a desire to make the insured whole.  The court ultimately concluded, in granting partial summary judgment in favor of the class, that:

If Guadiana can establish as a matter of fact that the system that caused the covered loss includes all the pipes in her house and it was necessary to replace all the pipes to repair that system, State Farm is obligated to pay the tear-out costs necessary to replace all the pipes, even those not leaking.

Id. at *18-19.

I don’t think this decision is a cause for alarm by insurance companies.  It is only a magistrate judge’s recommended ruling, which likely will be objected to and reviewed by the district judge.  And even if the district judge adopts this recommendation, that is only the view of one trial court, and there are some decisions elsewhere that disagree on some of these points.  But it would not surprise me to see some additional companies hit with new class action filings on this issue.  It potentially could create substantial exposure for the insurance industry if courts rule that every time a leak occurs with PB piping, homeowners’ policies require that the entire piping system must be replaced.  I come at this from an insurance industry perspective, but it seems like the kind of problem, somewhat analogous to Chinese-made drywall, for which the manufacturer, rather than a homeowners’ insurer, should bear the responsibility, as courts have concluded nearly unanimously with respect to Chinese-made drywall.