From the December 20, 2010 issue of National Underwriter Property & Casualty • Subscribe!

Policy Exclusions Upheld; Merged Chinese Drywall Cases Dismissed

Insurance policies do not cover losses due to the destructive properties of Chinese drywall because of two policy exclusions, a federal court has ruled.

Therefore, the motions of 10 insurers to dismiss consolidated litigation concerning the drywall were granted by U.S. District Court Judge Eldon Fallon in New Orleans.

Analyzing a handful of policy exclusions, the judge ruled that homeowners could not seek coverage due to the faulty materials and corrosion exclusions within the policies.

Citing the Merriam-Webster Dictionary on multiple occasions to define terms within the exclusions, Judge Fallon said the drywall is a faulty material--much like products containing asbestos--and therefore falls under the policy exclusion.

"Although the drywall serves its purpose as a room divider, wall anchor and insulator, the allegations in the complaints provide that the drywall emits foul-smelling odors and releases gases which damage silver and copper components in the home, including electrical devices, appliances and wiring," the judge wrote in his 50-page opinion.

The drywall is "like the radioactive table bases and building components containing asbestos or lead which function for all practical purposes as table bases and building components but are faulty because of the materials of which they are composed," Judge Fallon wrote.

Also, allegations contained in the consolidated litigation "trigger the corrosion exclusion since the corrosion is responsible for the majority of losses suffered by the plaintiffs."

In what became a moot portion of the ruling, Judge Fallon said the policies' latent defect and pollution/contamination exclusions do not apply.

The domino effect of the judge's determination knocked down the homeowners' case for coverage under "ensuing losses"--damages covered due to a separation in time.

Policyholders alleged the odor and corrosion were ensuing losses, which would resurrect coverage even if previously excluded under the policy. Judge Fallon ruled the losses were "neither sufficiently different in kind from the losses caused by the Chinese drywall, nor the result of an extraneous event."

Yet even the insurers concede that there is a possibility of a second, covered incident caused by the drywall, such as a fire. This would be an ensuing loss. With the passage of time, these types of losses from the drywall may occur.

Some drywall manufacturers have agreed to programs to remediate hundreds of homes in Alabama, Mississippi, Louisiana and Florida.

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