McCarter and English LLP on Key Coverage Issues Associated with Chinese Drywall

McCarter and English LLP on Key Coverage Issues Associated with Chinese Drywall


Lawsuits are occurring alleging property damage and bodily injury arising from contaminated Chinese Drywall in residential construction. Insurance coverage disputes have followed, some resulting in declaratory judgment actions. In this Analysis, Brian J. Osais, Nicholas M. Insua and Jason M. Alexander provide an overview of Chinese Drywall and associated claims and focus on key arguments commercial insurers are asserting in liability coverage disputes with their policyholders. They write:
 
INSURANCE COVERAGE LAWSUITS
 
     Aside from lawsuits, including class actions, filed by homeowners against their homeowners insurers, at least two lawsuits have been filed by commercial insurers seeking to escape their coverage obligations in connection with claims arising from contaminated Chinese Drywall. Both complaints allege, inter alia, that the pollution exclusion serves to bar insurance coverage for claims arising from Chinese Drywall.
 
THE APPLICABILITY OF THE POLLUTION EXCLUSION TO CHINESE DRYWALL CLAIMS
 
     As noted, Chinese Drywall claims have lead to denials of coverage based on the so-called pollution exclusion ─ just as with previous cases involving asbestos-containing building materials and mold. But a growing jurisprudence has recognized that the pollution exclusion should not apply to such claims, which are confined to the indoors and do not cause traditional, industrial pollution of the environment, of the type intended to be targeted by such exclusions.
 
     For example, in Nav-Its, Inc. v. Selective Ins. Co. of Am., 869 A.2d 929 (N.J. 2005), the New Jersey Supreme Court considered whether a pollution exclusion in a CGL policy precluded coverage for bodily injury claims resulting from alleged exposure to fumes from painting, coating and floor sealing work. The work was performed in a shopping center, and the claims were brought against the contractor by a tenant in the center. The pollution exclusion in Nav-Its provided that the insurer was not required to defend or indemnify a suit alleging injury arising out of a pollution hazard. The Nav-Its exclusion also defined “pollutant” to include “any solid, liquid, gaseous, or thermal irritant or contaminant,” and defined “pollution hazard” to mean “an actual exposure or threat of exposure to the corrosive, toxic or other harmful properties of any 'pollutants' arising out of the discharge, dispersal, seepage, migration, release or escape of such 'pollutants.'” The carrier refused to defend or indemnify its insured, and the insured sought a declaration of the carrier's obligations. The New Jersey Supreme Court determined that the pollution exclusion did not bar coverage:
 
“We have reviewed the development of the pollution exclusion to assist our interpretation of the pollution exclusion in the Selective policy. Based on that review, we are confident that the history of the pollution-exclusion clause in its various forms demonstrates that its purpose was to have a broad exclusion for traditional environmentally related damages.
 
“Notably, we have not been presented with any compelling evidence that the pollution exclusion clause in the present case, when approved by the Department of Insurance, was intended to be read as broadly as Selective urges.” (citations omitted) (emphasis added).
 
(citations omitted)