On the Chinese Drywall Blog, we’ve talked about class action suits, individual suits against builders and suppliers, suits by builders against its suppliers, and other similar actions.

However, in Florida, one couple seeks to hold another party liable for their Chinese Drywall damages: their own homeowners insurer.

The claim makes a great deal of sense, and it adds to the mystery of who will eventually be responsible for the Chinese Drywall damages.

The suit was brought in a Florida U.S. District Court, and is captioned Baker v. American Home Assurance Company, Inc., Middle District of Florida, No. 09-cv-188-FtM-99DNF. (read here)

According to the complaint, the homeowners made a claim in December 2008 related to damages caused by Chinese Drywall. The complaint describes the cause of the damage as coming from “drywall…emitting gases which have damaged the Subject Property and the contents therein.”

After inspection and testing, the insurer denied the claim for “contamination.” The Baker complaint argues that the damages were not caused by “contaminants” as defined by the policy.

The policy at the center of the Baker action defines “contaminates” as follows:

An impurity resulting from the mixture of or contact with a foreign substance.

According to the complaint, there was not ‘mixture or contact with a foreign substantance,’ and therefore, the pollution exclusion would not apply.

The Baker exclusion is far less detailed then some of the other pollution exclusions found in Commercial General Liability policies…and therefore, may be interpreted differently.

If pollution exclusions in homeowners policies are generally less complex than GCL policies, it may be prudent for homeowners to make timely claims against their homeowner policies if they are faced with Chinese Drywall damages.

It’s too early to predict exactly who will be responsible for damages associated with Chinese Drywall, especially since so many parties are involved. To rely simply on one remedy (i.e. a class action) is probably an irresponsible choice for homeowners faced with significant damages.

We’re likely to see a flood of suits in the coming months against builders, home insurers, suppliers and other responsible parties. Home insurance policies will likely file subrogation claims against builders, suppliers and other parties as well.

We’ll monitor the Baker suit as it proceeds. Stay tuned.

On April 22, 2009, the U.S. Fifth Circuit released an opinion in Nautilus Insurance Company v. Country Oaks Apartments, Ltd. that may bear some significant on the question of whether contractor GL insurance policies will cover Chinese Drywall claims.

Explaining The Suit

The suit required the appeals court to address the scope of the absolution pollution exclusion under Texas law.

The facts of the case are disturbing: Suit was filed against a Commercial General Liability carrier for an apartment complex, where the Plaintiff lived. During the policy period, works accidentally blocked the vent to the furnace in several apartments, exposing the plaintiff to carbon monoxide that would have otherwise been released outside. The exposure affected the plaintiff’s pregnancy, and her child was born with difficulties.

The insurance company refused to pay the claim, contenting that the damage was caused by pollution and excluded under the policy’s absolute pollution exclusion.

That policy’s exclusion clause read as follows:

f. Pollution
(1) “Bodily injury” or “property damage” which would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of “pollutants” at any time.

The term “pollutant” was described as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes material to be recycled, reconditioned or reclaimed.”

Under Texas law, the US 5^th Circuit held that the pollution exclusion did apply to this loss, and that there was no insurance coverage under the policy for plaintiff’s claim. The court summarized its holding as follows:

In sum, the emission of carbon monoxide from a furnace into an apartment unambiguously satisfies the pollution exclusion’s requirement of a “discharge, dispersal, seepage, migration, release, or escape.” It is irrelevant that a reasonable insured might not expect this result, or that, given sufficient imagination, we can think of ways – not presented here – in which enforcement of this exclusion would lead to absurd results. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 134 (Tex. 1994) (on rehearing, vacating its prior opinion) (“[N]either conflicting expectations nor disputation is sufficient to create an ambiguity.”

How Country Oaks Decision Applies to Chinese Drywall Claims

Many commentators (see here, here, and here) monitoring the Chinese Drywall situation predict that insurance claims related to the loss will be denied by insurers based on the absolute pollution exclusion.

From a review of the Country Oaks case just released by the 5^th Circuit, if property damage and bodily injury is caused by a “pollutant” from the Chinese Drywall…it seems likely that homeowners, builders and insurers will be in for a spicy legal argument over whether the exclusion does or does not apply.

However, how the Country Oak decision and reasoning applies to Chinese Drywall claims will depend largely on (a) Where the damage is incurred and claim is made; and (b) What exactly is causes the damages.

First, the Country Oak decision examines the absolute pollution exclusion under Texas law only (although it does comment on Mississippi law). Under Texas interpretations of insurance contracts, the absolute pollution exclusion is given broad applicability, and therefore, the exclusion will more likely apply in Texas than in states with a stricter review of insurance exclusions and policies.

States, for example, like Louisiana. As we reviewed just last week, Louisiana courts have taken a completely different approach from Texas to interpreting pollution exclusions.

According to Louisiana case law, since the pollution exclusion was drafted to apply to “environmental contaminants,” Louisiana courts have limited its applicability to such. Read our in-depth analysis of Louisiana case law on pollution exclusions here.

The second factor that will determine the applicability of Country Oak is more scientific, relating to the actual cause of the damage.

Although most everyone involved with this crisis can recognize the symptoms of Chinese Drywall…we don’t yet have a definite cause. Once science catches up in this area, the cause of the damages will be important in determining whether the pollution exclusion applies. The more like a “pollutant” the cause – the more likely insurers will cite pollution exclusions.