Chinese Drywall Case
January 21, 2013
Insurers that had issued commercial general liability policies and umbrella policies brought a federal diversity action against a drywall supplier and home builders seeking a declaratory judgment that the insurers had no obligation to defend or indemnify the insureds with respect to a claim arising out of the installation of Chinese drywall. This case is Granite State Insurance Company v. American Building Materials, Inc., 2013 WL 28430.
KB Home hired a consultant after receiving complaints from homeowners in Florida. The consultant reported that the drywall, which KB Home had received from American Building, was emitting unusual amounts of sulfide gases. KB alleged that American Building supplied KB Home with defective gypsum drywall manufactured in China.
American Building carried liability policies issued by Granite State and New Hampshire Insurance. Both policies had pollution exclusions. After receiving notice of claims against American Building, the insurers filed an action in federal court alleging diversity jurisdiction and sought a declaratory judgment that there was no obligation to defend or indemnify American Building. The district court entered a partial summary judgment for the insurers and the insureds appealed.
The appeal was interesting in that, even though the district court had ruled in favor of the insurers, the insurers challenged the conclusion of that court that the insurance policies are governed by the substantive law of Massachusetts; the insurers said that Florida law should govern the policies. The insureds alleged that Massachusetts law applies, but then appealed the interpretation of that law by the district court. The court of appeals declared that the damages would be excluded by the insurance policies under either Florida or Massachusetts law, so the ruling of the district court was affirmed.
The appeals court said that under Florida law, the damages from the Chinese drywall would be excluded from coverage under the plain language of the pollution exclusion. Florida courts have held that nearly identical pollution exclusions were clear and unambiguous. The sulfide gas released by the Chinese drywall falls within the definition of pollutant and the injury and damages would not have occurred but for the discharge or release of the pollutant. The state courts have agreed that claims from defective Chinese drywall arise solely from damage or injury resulting from the release of sulfide and other noxious gases and are clearly excluded from coverage by the pollution exclusion.
As for Massachusetts law, the court noted that Massachusetts courts have adopted a different method of interpretation of the pollution exclusion, but with the same result. The Supreme Court of Massachusetts has counseled that the pollution exclusion has to be interpreted and applied in a commonsense manner with due attention to the circumstances of the accident giving rise to a coverage claim. The pollution exclusions generally are not applied to exclude coverage for injuries resulting from everyday activities gone slightly awry.
The court of appeals found that the damage caused by the defective Chinese drywall falls within the scope of the pollution exclusion as interpreted by Massachusetts courts for two reasons. First, the defective drywall cannot be considered an everyday activity gone slightly awry. Second, the unexpected emission of sulfuric gas is the kind of release that a reasonable insured would understand as pollution.
Since both the Florida and the Massachusetts interpretation of the pollution exclusion would prevent any coverage for these claims arising out of the use of Chinese drywall, the Court of Appeals declined to decide the choice-of-law question and affirmed the ruling of the district court.
Editor's Note: The decision of the U.S. Court of Appeals, Eleventh Circuit, is interesting not just for its reinforcement of the rulings that the pollution exclusion prevents coverage for Chinese drywall claims, but also for its finding that even though Florida interprets the pollution exclusion one way and Massachusetts interprets the exclusion in another way, the result is the same.