Insurance Coverage for Chinese Drywall Claims
Issues Affecting General Liability and Contractors Pollution Liability Policies
by Richard K Traub (NJ) and Brian Margolies (NY)
May 07, 2009
The growing volume of Chinese drywall claims has given rise to the first reported coverage litigation: Baker, et al. v. American Home Assurance Company, Inc., No. 09-cv-188, pending in the United States District Court for the Middle District of Florida. While Baker involves coverage under a homeowner’s policy, the coverage dispute central to the litigation - the application of the policy’s “pollution or contamination” exclusion - is of great interest to insurers having issued general liability or contractors pollution liability policies to contractors that installed defective drywall. Although there have been only few claims against installation contractors to date, there is a growing belief that this will change in the future.
The Baker complaint alleges that in December 2008, the policyholders notified their homeowner’s carrier - AIG - of damage to their home and contents therein, allegedly caused by gases emitted by defective drywall. AIG commenced an immediate investigation and later disclaimed coverage based on the policy’s “pollution or contamination” exclusion which barred coverage for “any loss ... caused by the discharge, dispersal, seepage, migration or release or escape of pollutants.” The exclusion defined “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and ‘waste.’” The exclusion further defined “contaminant” as “an impurity resulting from the mixture of or contact with a foreign substance.” AIG took the position that the alleged gases constitute a contaminant. Plaintiffs dispute this position, arguing in their complaint that gas is not an “impurity resulting from the mixture of or contact with a foreign substance.”
The Baker lawsuit illustrates one of the key issues that insurers will face in asserting the pollution exclusion as a defense to Chinese drywall claims; namely, whether emissions from drywall qualifies as a “pollutant” or “contaminant” in the first instance. The AIG policy’s pollution exclusion defined “pollutant” to include “fumes,” which is one of the main allegations regarding drywall claims. The majority of courts to have considered whether fumes qualify as “pollutants,” including courts in Florida, have held that chemical fumes qualify as a pollutant for the purpose of a pollution exclusion. See, e.g., Dantlzer Lumber & Export Co. v. Liberty Mutual Ins. Co., No. 99-7393 (S.D.Fla. 2001) (holding that emissions from grout factory causing property damage to adjacent facility a “pollutant” for purposes of pollution exclusion); City of Petersburg v. USF&G, No. 92-1224 (M.D.Fla. 1994); American States Ins. Co. v. Nethery, 79 F.3d 473 (5th Cir. 1996); National Union Fire Ins. Co. of Pittsburgh, Pa. v. CBI Industries, 907 S.W.2d 517 (Tex. 1995).
A second issue that is likely to arise is whether Chinese drywall claims will resemble traditional environmental claims in those states that require such for application of the pollution exclusion. In Florida, which appears to be ground zero for Chinese drywall claims, the courts do not recognize an “environmental” requirement for the application of the pollution exclusion. See, e.g., Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Insurance Co., 711 So. 2d 1135 (Fla. 1998) (“[w]e cannot accept the conclusion reached by certain courts that because of its ambiguity the pollution exclusion clause only excludes environmental or industrial pollution.”); Philadelphia Indemnity Ins. Co. v. Yachtman’s Inn Condo Assoc., Inc., 595 F.Supp.2d 1319 (S.D.Fla. 2009). By contrast, in jurisdictions such as New York, California and other states where there have been a growing number of Chinese drywall claims, there must be an element of traditional environmental pollution for the exclusion to apply. See, e.g., Belt Painting Corp. v. TIG Ins. Co., 763 N.Y.S.2d 790 (NY 2003); Westview Assocs. v. Guar. Nat'l Ins. Co., 717 N.Y.S.2d 715 (NY 2000); MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 365 (Cal. 2003); Doerr v. Mobile Oil Corp., 774 So.2d 119 (La. 2000), opinion corrected, 782 So.2d 573 (La. 2001) (“we find that the proper interpretation of the total pollution exclusion in this case is that the exclusion was designed to exclude coverage for environmental pollution only ...”).
Contractor’s pollution liability (“CPL”) insurance, of course, provides coverage for “pollution conditions” or “pollution incidents” created by contractors. Thus, the resolution of whether fumes and gases emitted by defective drywall is covered under general liability policies will be of particular importance to CPL carriers. CPL carriers will have to closely scrutinize whether their policies’ definition of “pollution condition” or “pollution incident” includes releases of fumes within a closed structure such as a house or condominium. Further, CPL policies will often times contain “known conditions” exclusions that may be applicable to Chinese drywall claims.
We will continue to follow important developments in the underlying litigations as well as developing coverage issues. |
