Chinese Drywall caused damage that was not from coverage under a homeowner’s insurance policy because of several exclusions for (1) faulty, inadequate or defective materials, (2) latent defects, (3) rust or corrosion and (4) pollution. Two years after purchasing their home, the homeowners began having chronic malfunctions in the heating, ventilation and air conditioning (HVAC) system. It was determined that Chinese Drywall had been used in building the house and that it was releasing sulfuric gases causing corrosion of various metal components, including HVAC coils, refrigerator units, electrical wiring, plumbing, jewelry, appliances, electronics, and other household items. The homeowners filed suit against the homebuilder, the builder’s CGL insurance carrier (State Farm Insurance) and its own homeowner’s insurer (Louisiana Citizens). On cross motions for summary judgment on the homeowner’s policy, Louisiana Citizens argued that each of the four exclusions reference above applied to bar coverage under the policy. The trial court granted summary judgment in favor of the insurance company. This was affirmed on appeal in Ross v. C. Adams Construction & Design, LLC, 70 So.3d 949 (La. 2011) for the reasons explained herein.
Although the court agreed with the homeowner that the inherent qualities of the Chinese drywall caused a direct physical loss to the home, each of the exclusions of the policy cited by the carrier were effective to exclude coverage. First, the court said that “using the plain meaning of ‘faulty, inadequate, or defective material’ leads to a conclusion that the drywall in question is a faulty, inadequate, or defective material and is specifically excluded by the homeowner’s policy.” The complaint even referred to the drywall as “defective,” noted the court. Due to the defect causing it to emit sulfuric gasses, even if the drywall were still in place in the home, it could not be considered to be serving its intended purpose as a component of a livable residence. It was faulty, inadequate, and defective, and therefore excluded from coverage.
Next, the policy states that it does not insure for “mechanical breakdown, latent defect, inherent vice, or any quality in property that causes it to damage or destroy itself….” Was the Chinese drywall latently defective? In answering this, the court states, “A latent defect is considered a defect that is hidden or concealed from knowledge, as well as from sight, and which a reasonable customary inspection would not reveal.” The original complaint by the homeowner included an allegation that the material contained hidden defects and that the emission of gasses was unknown to them. This, says the court, falls within the definition of latent defect and is therefore excluded from coverage pursuant to the latent defect exclusion.
Another exclusion of the policy states, “We do not insure, however, for loss … caused by … smog, rust or other corrosion, or dry rot.” The complaint alleged that the drywall caused corrosion, and since the policy on its face states it does not cover corrosion, the court found this exclusion applies.
The final nail in this insurance coverage coffin was the pollution exclusion that provided the following:
2. We do not insure, however, for loss: …
c. Caused by: …
(6) Any of the following: …
(e) Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril Insured Against named under Coverage C.
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned, or reclaimed.
As understood by the court, “The sulfuric gas emitted from the [ ] drywall qualifies as a pollutant pursuant to this definition in the policy. Therefore, any damage caused by the release of these gases is excluded from coverage by the homeowner’s insurance policy.” For all these reasons, the court affirmed judgment in favor of the insurance carrier.
Comment: This decision only addresses the summary judgment motion concerning the homeowner’s insurance policy. It does not deal with the suit by the homeowner against the contractor of the contractor’s general liability carrier. Depending upon the contractor’s policy terms and conditions, it is conceivable that there could be coverage under the contractor’s policy. The “your work” exclusion could be an important potential impediment to coverage. If the drywall was installed by a subcontractor, however, the subcontractor exception to the “your work” exclusion might apply so that the contractor may have coverage for the damages caused by the defective work performed by its subcontractor. That will be little comfort to the contractor, however, if the policy contained a broad pollution exclusion since the sulfuric gasses that caused the corrosion could be deemed by the courts in California to the environmental pollutant subject to the exclusion. The need for contractor’s pollution liability (CPL) insurance is once again manifested by the problems associated with Chinese drywall.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No.1 (Jan 2012).
Copyright 2012, ConstructionRisk.com, LLC