Mississippi Court Holds Pollution Exclusion Applicable to Chinese Drywall Claim

In its recent decision in Prestige Properties, Inc. v. National Builders and Contractors Ins. Co., 2013 U.S. Dist. LEXIS 146738 (S.D. Miss. Oct. 10, 2013), the United States District Court for the Southern District of Mississippi had occasion to consider the application of a total pollution exclusion in a general liability policy to underlying claims involving Chinese-manufactured drywall.

The insured, Prestige Properties, was a Mississippi contractor hired to perform repairs on a client’s home that had been damaged as a result of Hurricane Katrina.  Part of these repairs involved replacing damaged drywall. Prestige later was named as a defendant in the Chinese drywall multidistrict litigation pending in the Eastern District of Louisiana.  Prestige’s client alleged that Prestige had used defective Chinese manufactured drywall in their home and that the drywall resulted in bodily injury (eye irritation, nausea, respiratory ailments, etc.) and property damage (corrosion and damage to appliances, wiring and object with metal surfaces).

Prestige was insured for the relevant time period under a commercial general liability policy issued by National Builders.  National Builders disclaimed coverage to Prestige on the basis of its policy’s total pollution exclusion barring coverage for:

f. Pollution.

(1)  "Bodily injury" or "property damage" which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants" at any time.

(2)  Any loss, cost or expense arising out of any:

(a)   Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants"; or

(b)  Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of, "pollutants."

On motion for summary judgment, National Builders pointed out that the underlying suit alleged that the drywall was defective in that it emitted various sulfide and other noxious gases through off-gassing.  These allegations, argued National Builders, fell squarely within the terms of the exclusion.  While no Mississippi court considered the application of the exclusion on similar facts (i.e., to releases of gas indoors), National Builders cited to case law from other jurisdictions holding the exclusion applicable to indoor air quality claims.  National Builders also cited to case law from other jurisdictions holding the exclusion applicable to Chinese drywall claims.  See, e.g., Evanston Ins. Co. v. Germano, 514 F. App'x 362 (4th Cir. 2013), TravCo Ins. Co. v. Ward, 284 Va. 547, 736 S.E.2d 321 (Va. 2012); Granite State Ins. Co. v. American Bldg. Materials, Inc., 504 F. App'x 815 (11th Cir. 2013).  Prestige, on the other hand, cited to the decision in In re Chinese Manufactured Drywall Prods. Liab. Litig., 759 F. Supp. 2d 822 (E.D. La. 2010), in which the Eastern District of Louisiana, applying Louisiana law on the pollution exclusion, including the seminal decision in Doerr v. Mobil Oil Corp., 774 So. 2d 119 (La. 2000), held the exclusion inapplicable to Chinese drywall claims. 

The Prestigecourt distinguished the holding in In re Chinese Manufactured Drywall Prods. Liab. Litig. on the basis that the Louisiana court was considering coverage under homeowners policies rather than commercial general liability policies.  The Prestige court further reasoned that Mississippi’s Supreme Court would not follow the restrictive application of the pollution exclusion as set forth by Louisiana’s highest court in Doerr, but instead would apply the exclusion pursuant to its “plain terms.”  In other words, no distinction would be drawn between traditional and non-traditional environmental pollution.  As such, the court granted summary judgment in National Builder’s favor.

Florida Court Finds No Coverage for Chinese Drywall Claim

In its recent decision in First Specialty Insurance Corp. v. Milton Construction Co., 2012 U.S. Dist. LEXIS 97972 (S.D. Fla. July 16, 2012), the United States District Court for the Southern District of Florida had occasion to revisit the issue of whether the total pollution exclusion applied to a class action lawsuit alleging harms caused by Chinese drywall.

The insured, Milton Construction Company, was named as a defendant in a class action brought by homeowners alleging property damage and bodily injury as a result of the use of Chinese drywall in condominiums manufactured by Milton.  While the underlying suit was brought in Louisiana, the condominiums at issue were built in Florida.  Milton sought coverage under successive general liability policies issued by First Specialty, each of which contained total pollution exclusions precluding coverage for loss “arising out of, in whole or in part, the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.”  First Specialty denied coverage to Milton under both policies on the basis of this exclusion.

After determining that Florida law governed the coverage dispute, the court looked to Florida law governing the total pollution exclusion.  Citing to the Florida Supreme Court’s seminal decision in Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Ins. Co., 711 So. 2d 1135 (Fla. 1998), the Milton court observed a consistently broad application of the total pollution exclusion in Florida, even to matters not traditionally thought to involve environmental or industrial pollution.  The court further observed that the decision in Deniserved as the basis for decisions by the Southern District of Florida holding the exclusion applicable to Chinese drywall claims similar to those brought against Milton. See, e.g., Colony Ins. Co. v. Total Contracting & Roofing, Inc., 2011 U.S. Dist. LEXIS 120269 (S.D. Fla. Oct. 18, 2011); General Fidelity Ins. Co. v. Foster, 808 F. Supp. 2d 1315 (S.D. Fla. 2011).  The court found “these decisions well-reasoned and instructive,” explaining:

In this case, the sulfur compounds that exited the Chinese drywall allegedly caused "rapid sulfidation" to personal property, including home appliances, and "eye problems, sore throat and cough, nausea, fatigue, shortness of breath, fluid in the lungs, and/or neurological harm" to the homeowners. …  From these allegations, it is readily apparent that the drywall's release of sulfur compounds both contaminated and irritated people and things. Therefore, the sulfur compounds constitute "pollutants" and the Total Pollution Exclusion applies.

In reaching its decision, the court considered and rejected various arguments raised by Milton.  Among these assertions was that the underlying action did not specify whether the sulfur caused the loss or whether “it was in fact the Chinese Drywall that was causing the harm.”  The court concluded that on the contrary, the complaint clearly alleged that the installed drywall emitted injury-causing sulfur. The court also rejected Milton’s assertion that the exclusion “is overbroad and could lead to absurd results, if literally construed.”  In other words, Milton argued that the exclusion should be limited to traditional environmental pollution.  The court found this argument unavailing as well, explaining:

This argument is foreclosed by Deni Associates, wherein the Florida Supreme Court unequivocally stated: "[w]e cannot accept the conclusion reached by certain courts that because of its ambiguity the pollution exclusion clause only excludes environmental or industrial pollution." See Deni Associates, 711 So. 2d at 1138-39. … The cases upon which Milton relies, by contrast, apply Louisiana law, which is exactly the opposite of Florida's. In Deni Associates, the Florida Supreme held that the pollution exclusion was unambiguous, even while noting that a minority of jurisdictions, including Louisiana, had reached contrary conclusions. See Deni Associates, 711 So. 2d at 1137-39. Moreover, "the fact that different judges have reached different interpretations of similar policy language does not necessarily mean that the language is ambiguous."

Finally, the court rejected Milton’s argument that First Specialty had a duty to defend since it was possible that it would be required to perform destructive testing on the drywall, which could result in harm to other parts of the condos.  The court found that this argument made “no sense,” since the duty to defend is based solely on the allegations of the underlying complaint, which made no reference to destructive testing.  As the court explained “[i]f … the Louisiana plaintiffs have not sought compensation for destructive testing or cleanup, then obviously First Specialty would have no duty to defend against such non-existing allegations.”

Application of Exclusion to Drywall Claim Does Not Render Coverage Illusory

The United States District Court for the Southern District of Florida has held on several occasions that the pollution exclusion applies to Chinese drywall claims.  See, e.g., CDC Builders, Inc. v. Amerisure Mut. Ins. Co., 2011 U.S. Dist. LEXIS 114509 (S.D. Fla. Aug. 16, 2011); Gen. Fid. Ins. Co. v. Foster, 2011 U.S. Dist. LEXIS 103618 (S.D. Fla. Mar. 24, 2011).  In its recent decision Colony Ins. Co. v. Total Contracting & Roofing, Inc., 2011 U.S. Dist. LEXIS 129269 (S.D. Fla. Oct. 18, 2011), the Southern District of Florida added to this line of cases by holding that a hazardous materials exclusion applied to drywall claims.  In doing so, the court rejected the insured’s argument that application of the exclusion rendered coverage illusory.

The insured, Total Contracting, was sued for having allegedly installed defective drywall in a home that it renovated.  Underlying plaintiffs alleged that the drywall emitted sulfides and other noxious gases, resulting in property damage and bodily injury.  Total Contracting’s insurer, Colony, denied coverage under a series of consecutively renewed general liability policies on the basis of a hazardous materials exclusion, applicable to bodily injury or property damage “which would not have occurred in whole or in part but for the actual or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.”  “Hazardous materials” was defined as “‘pollutants’, lead, asbestos, silica and materials containing them.”  Thus, the exclusion tracked the language of a total pollution exclusion, but applied to a broader range of substances.

The underlying plaintiffs, who were parties to the declaratory judgment action, essentially conceded that the hazardous materials exclusion applied, as their suit against Total Contracting alleged that the drywall emitted gases that resulted in bodily injury and property damage.  Instead of challenging the applicability of the exclusion, underlying plaintiffs argued that application of the exclusion under the circumstances would render the policies illusory and thus violative of public policy.  The basis for this argument was that the exclusion contradicted in whole the coverage otherwise afforded under the policies.

The court initially agreed that based on Florida law concerning the pollution exclusion, as well as case law applying the pollution exclusion in the context of Chinese drywall, the policies’ hazardous materials exclusion had clear application to the underlying suit.  The court went on to hold that the exclusion did not render coverage illusory, since the policies provided “coverage for a seemingly wide-range of business activities described as ‘the contractors-subcontractors work.’”  The hazardous materials exclusion barred coverage for only a small portion of claims that otherwise fell within this coverage, and as such the exclusion could not be said to completely “contradict” the policies’ insuring agreements.  In other words, the exclusion did not completely negate coverage under the policies.  In passing, the court noted that if underlying plaintiffs’ argument were correct, then any policy with a hazardous materials exclusion (or a pollution exclusion) must be considered illusory, which would be an absurd result.