Chinese drywall caused damage that was barred from coverage under a homeowners 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 home owners 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 home owners filed suit against the home builder, the builder's commercial general liability insurer (State Farm Insurance), and its own homeowners insurer (Louisiana Citizens).
On cross-motions for summary judgment on the homeowners policy, Louisiana Citizens argued that each of the four exclusions referenced 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 Constr. & Design, LLC, 70 So. 3d 949 (La. App. 5th Cir. 2011), for the following reasons.
Faulty, Inadequate, or Defective Materials
Although the court agreed with the home owner 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 insurer was 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 homeowners 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 stated, "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 home owner included an allegation that the material contained hidden defects and that the emission of gasses was unknown to them. This, said the court, falls within the definition of latent defect and is therefore excluded from coverage pursuant to the latent defect exclusion.
Rust or Corrosion
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 that it does not cover corrosion, the court found that this exclusion applied.
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 insurer.
This decision only addresses the summary judgment motion concerning the homeowners insurance policy. It does not deal with the suit by the home owner against the contractor or the contractor's general liability insurer. Depending on 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 be an environmental pollutant subject to the exclusion.
The need for contractors pollution liability insurance is once again manifested by the problems associated with Chinese drywall.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI.
Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion.
If such advice is needed, consult with your attorney, accountant, or other qualified adviser.