Chinese Drywall Claim Judgment

Court Granted Insurer Summary Judgment On Policyholder’s Chinese Drywall Claims

Toni L. Frain, Paul C. Steck and Daniel W. Gerber
July 9 2010

This environmental coverage dispute resulted from a property loss involving Chinese Drywall installed in policyholder’s residence. Over time, the Chinese Drywall released sulfuric gas into the residence causing damage to the interior structures of the home. Defendant filed a lawsuit against several development and supply companies, alleging that they constructed his home with "inherently defective" drywall. Thereafter, the insurer filed a declaratory judgment action seeking a declaration that, under the Policies, it has no obligation to provide coverage for the losses claimed by the policyholder.

The insurer requested judgment that the Policy does not provide coverage for the cost of removing and/or replacing the Drywall in the residence; nor coverage for any damage caused by the Drywall for any damage caused by the discharge of gas from the Drywall, including but not limited to any damage to wiring and copper components of the home.

Specifically, the insurer argued that the Policy does not provide coverage for the cost of removing the Chinese Drywall, because "the Drywall has not sustained a 'direct physical loss,' and therefore does not fall within the grant of coverage in the Policy." The insurer further argued that even if there had been a direct physical loss to the Drywall, the loss would be excluded from coverage under either the latent defect or faulty material exclusions.

Additionally, Plaintiff argued that any direct physical loss caused by gas and odor would be subject to the pollutant exclusion.

Based on a review of applicable Virginia law, the Court held that the policyholder’s residence and its components suffered a "direct physical loss" within the meaning of the Policy. However, the Court also concluded that four separate exclusions applied to the damage claimed. Specifically, the claimed losses were found to be excluded by the Policy's latent defect, faulty materials, corrosion, and pollutant exclusions.

As to the pollutant exclusion, the Court specifically rejected policyholder’s argument that Chinese Drywall is not a "contaminant" or a "pollutant." While the Drywall itself may not be a pollutant, the gases it releases were. The Court determined that there is no dispute that the Chinese Drywall has released reduced sulfur gases into the residence and that both state and federal authorities recognize reduced sulfur gases as pollutants. Moreover, the Court noted that the broad definition of pollutants in the Policy includes "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste." Thus, under any reasonable definition of these terms, the gases released in the home qualified as irritants and contaminants.