The Controversy and Uncertainty

This much is clear:  it is not certain how the courts will interpret insurance policies and insurance policy exclusions, as they apply to Chinese Drywall claims.

Many predict that the insurance industry will rely on what is called a “pollution exclusion” to deny Chinese Drywall insurance claims.

A South Carolina Construction Insurer, Contractor-Insure.com, makes this claim in a recent press release:

Most contractor General Liability insurance policies contain the Total Pollution Exclusion.  All claims adjusters who have been interviewed will take the position that the sulfur dioxide fumes released by the defective Chinese drywall are ‘pollution’ and as a result all legal defense and damages under the General Liability policy will be denied.

While the press release largely discussed builder general liability policies, the same controversy exists for homeowners insurance policies.

Further, the controversy and predication are proving to be true, as across the country there are already suits on the issue.

As already reported on the Chinese Drywall Blog, in Baker v. American Home Insurance Company, a homeowner sued their insurance carrier claiming coverage for Chinese Drywall claims.   In Builders Mutual v. The Dragas Company, a builder’s general liability insurer brought a declaratory judgment action to have a judge declare that Chinese Drywall damage was not insured.

The claimed exclusion:  Pollution.

Both suits are very important to homeowners with Chinese Drywall claims.   But for Louisiana homeowners….how will the issue be resolved?

Why Louisiana Is Different

Unlike in South Carolina and most other states, Louisiana has very narrowly interpreted the pollution exclusion.   We reviewed the applicability of the pollution exclusion to Louisiana insurance claims in a previous blog post here:  Home Builders v. Insurance Pollution Exclusion.

There, we quoted the seminal case in Louisiana on this subject titled Doerr v. Mobil Oil Corp.  The long and short of things:  “Using the Doerr analysis, it seems that builders or suppliers would not be considered a “polluter” within the meaning of the exclusion” in Chinese Drywall claims.

For homeowners with Chinese Drywall, and builders with potential exposure, this is welcome news.    While the issue remains unresolved, the Doerr decision at least gives homeowners and homebuilders hope that Chinese Drywall losses may be insured, and therefore, within reach.

The problem now?   Getting homeowners and home builders to timely make claims and pursue recovery.

In the Chinese Drywall litigation world, the flame is getting closer and closer to contractors, suppliers and home builders.  Just this week it was reported that Lennar Co. was named in a Florida class action and a comment on this blog suggested that an individual suit against a builder had been filed.

As these actions continue to turn up, will insurance policies cover builders and suppliers for damages caused by the installation of Chinese Drywall?

Those monitoring the matter have predicted that insurance companies may attempt to rely on a broad pollution exclusion in most GL policies to deny coverage.   And in fact, the pollution exclusion clause makes a “center-stage appearance” in a lawsuit recently filed regarding insurance coverage for Chinese Drywall damages.

What is a “Pollution Exclusion”

Of course every insurance policy is different…but in the construction industry, a general liability policy usually has some form of “pollution exclusion” within it.   And generally speaking, it looks a little something like this:This insurance does not apply to:

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

(2) Any loss, cost or expense arising out of any:

(a) Request, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants; or

(b) Claim or suit by or on behalf of a governmental authority or others for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of pollutants.

Pollutants means solid liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste. [Pg 3] Waste includes material to be recycled, reconditioned or reclaimed.

This exclusion does not apply to “bodily injury”, “property damage”, “personal injury” or “advertising injury” caused by heat, smoke or fumes from a hostile fire. As used in the exclusion, a hostile fire means one which becomes uncontrollable or breaks out from where it was intended to be.

Insofar as Chinese Drywall is concerned, the possible applicability of the pollution exclusion is clear:  The drywall has been alleged to emit gases that cause physical problems and deterioration of property.

Courts, therefore, will be called upon to determine whether the damages caused by Chinese Drywall is caused by a “pollutant” as contemplated by the insurance contract.

If it is, builders, suppliers and other construction professionals will be liable for the losses without the benefit of insurance coverage.

If it is not, involved parties will breathe a huge sigh of relief as the potential offset of expense will tally in the millions.

How Louisiana Will Interpret the Pollution Exclusion

The seminal case on insurance pollution exclusions in Louisiana is Doerr v. Mobil Oil Corp., a 2000 Louisiana Supreme Court decision.

In that decision, Chief Justice Calogero examines the history of the pollution exclusion in insurance contracts to conclude that “there is no history in the development of the exclusion to suggest it was ever intended to apply to anyone other htan an active pollutor of the environment.”

Overruling a Louisiana Supreme Court case decided just 1 year prior (Ducote v. Koch Pipeline Co., L.P., 730 So.2d 432, La. 1999), the Doerr court stated as follows:

In light of the origin of pollution exclusions, as well as the ambiguous nature and absurd consequences which attend a strict reading of these provisions, we now find that the total pollution exclusion was neither designed nor intended to be read strictly to exclude coverage for all interactions with irritants or contaminants of any kind. Instead, we find that “it is appropriate to construe [a] pollution exclusion clause in light of its general purpose, which is to exclude coverage for environmental pollution, and under such interpretation, [the] clause will not be applied to all contact with substances that may be classified as pollutants.” The applicability of a total pollution exclusion in any given case must necessarily turn on several considerations:

(1) Whether the insured is a “polluter” within the meaning of the exclusion;

(2) Whether the injury-causing substance is a “pollutant” within the meaning of the exclusion; and

(3) Whether there was a “discharge, dispersal, seepage, migration, release or escape” of a pollutant by the insured within the meaning of the policy.

Using the Doerr analysis, it seems that builders or suppliers would not be considered a “polluter” within the meaning of the exclusion.  However, as the Doerr court makes clear, this is a fact-based conclusion that must result after consideration of all relevant circumstances.

Additional Resources about Pollution Exclusions and Chinese Drywall

Since many are anticipating a fight over the applicability of the pollution exclusion to Chinese Drywall claims, there is a significant amount of commentary from lawyers across the Gulf Coast on the topic.   Here are some valuable resources for those interested in learning more on this topic:

• Insurance and Financial Implications of Defective Chinese Drywall upon the Construction Industry, Saxe Doernberger and Vita, P.C.
• Applying the Absolute Pollution Exclusion in the ISO CGL Form, Bates & Carey, LLP
• Enforcement of Pollution Exclusions in Standard CGL Policies in the Wake of Doerr v. Mobile Oil Corp., G. Andrew Veazey
• Louisiana Court Strikes Pollution Exclusion for Workplace Exposure, Anderson Kill & Olick, P.C.