CGL Absolute Pollution Exclusion Barred Coverage for Chinese Drywall Damages
Kent Holland | June 1, 2012
Where a general contractor (GC) incurred remediation costs due to sulfur gases from Chinese drywall that caused damage to heating, ventilating, and air-conditioning coils, wiring, copper pipes, and electronics in houses, it was held that, under Virginia law, the absolute pollution exclusion in the commercial general liability (CGL) policy applied. The court held that the exclusion is clear and unambiguous, that the sulfur gases from the drywall were a pollutant under the policy, and that damages from such a pollutant are, therefore, not covered under the insurance.
In Dragas Mgmt. Corp. v. Hanover Ins. Co., 798 F. Supp. 2d 766 (E.D. Va. 2011), the court addressed damages that resulted from a drywall subcontractor's decision to use Chinese drywall in the construction of 74 houses. The houses experienced a failure of more than 30 percent of the air-conditioning coils. Homes built with domestic drywall had less than a 1 percent failure rate in the air-conditioning coils. The houses with the Chinese drywall also exhibited pitting of copper piping, blackening of wiring, and corrosion of metal objects inside the home. Plus, many of the home owners reported a rotten-egg smell. The cause of the corrosion and other damage, as agreed upon by all parties to the litigation, was reduced sulfur gases, including hydrogen disulfide, carbon disulfide, and carbonyl sulfide.
As a result of the problems, the GC demanded that its subcontractor remediate all the damages and replace the drywall, the adversely affected structural components, and the damaged personal property. The subcontractor refused, and the matter went to arbitration, with the arbitrator finding in favor of the GC against the subcontractor in the amount of almost $5 million. To collect the judgment, the GC filed suit against the CGL insurer and the umbrella policy insurer of the subcontractor. Those insurers both responded with motions for summary judgment seeking a declaratory judgment that the pollution exclusions in their policies barred coverage.
Pollution Exclusion Unambiguous
In opposing the motions of the insurance companies, the contractor argued that the exclusion was ambiguous and unreasonable and that there was insufficient evidence of "dispersal, discharge, or release of pollutants." Finding no ambiguity in the CGL policy, the court further stated that, as to the Hanover umbrella policy, that policy denied coverage for any injury "contributed to in any way" by pollutants, making it an even broader exclusion than the typical absolute exclusions concerning harm to "bodily injury" or "property damage." Whether the particular pollutants are deemed "traditional environmental pollution" or "nontraditional" makes no difference under the law since there is no such distinction made in the policy language.
Having determined to enforce the pollution exclusion as written, the court explained that "the question to be addressed is whether the Chinese drywall under these facts was a 'pollutant' as defined by the policy." The contractor argued that gypsum, from which drywall is made, is a naturally occurring substance that often can contain sulfur and is therefore not a pollutant because it is used every day around the country to build houses. The court rejected this argument, stating that it agreed with the contractor that drywall itself, no matter where it is sourced (from China or America, for example), is not normally a pollutant, but the court then stated:
However, even a product or substance which is not normally a pollutant may be rendered so in certain situations, and that is why the court looks to the specific facts of the case, not the characteristics of the substance in general, to determine whether it is a pollutant.
Sulfur Gases Are Pollutants
With regard to the specific facts concerning "reduced sulfur gases" and why they were deemed a "pollutant," the court explained its reasoning. "Pollutant" is defined in the policies as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor soot, fumes, acids, alkalis, chemical and waste. Waste includes materials to be recycled, reconditioned or reclaimed." Because the policy makes no indication that any specialized meaning is to be used for the terms "irritant" and "contaminant," the court stated that it would use the commonly understood definitions of those words found in Webster's Dictionary.
[C]ourts considering whether reduced sulfur gases are pollutants have looked to their effects. [Nationwide Ins. v.] Overlook found that the gases were both irritants and contaminants because they caused health issues in the inhabitants of the homes where the Chinese drywall was installed, as well as extensive property damages to the homes (citation omitted). This court agrees. First, the court concurs that the focus should be on the sulfur gases that came from the drywall, not the drywall itself. The court finds it determinative that the sulfur gases caused extensive damage by corroding, pitting, backing, and tarnishing metal components all over the home. Under the definition of contaminant—"to soil, stain, corrupt, or infect by contact or association"—it is clear the reduced sulfur gases "corrupted" the wiring, pipes, and electronics rendering them unsafe for use…. Therefore, the court finds that the reduced sulfur gases from the drywall were a pollutant under the policies.
Gases Were Dispersed
The final issue decided by the court was whether the "pollutant" (i.e., sulfur gas from the drywall) was the result of "discharge, dispersal, seepage, migration, release or escape" as those words are used in the insurance policies. In arguing that there was no movement of the gas/pollutant as required by the terms of the policy, the contractor asserted that the formation of sulfur was a natural process in which the elemental sulfur was exposed to air such that the compounds in the gas were formed, and thus no movement took place. Once again looking to Webster's Dictionary for a definition of the terms "discharge," "disperse," and "release," because the policy itself did not define those terms, the court concluded that since the parties agreed that the defective drywall caused the damage, the court found this to be "a clear case of dispersal, discharge, or release," and the "exact" process by which the sulfur moved from the drywall into the atmosphere in gas form did not matter. The key is that "somehow it did so move."
Conclusion
For these reasons, the court found that the pollution exclusion was not ambiguous, that the reduced sulfur gases were a pollutant that dispersed into the atmosphere causing the property damage, and that the absolute pollution exclusion of the policies therefore barred insurance coverage.
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