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Insurance Law

Kyle N. Roehler on “The Storm of Coverage Questions Is Approaching—Will Contractors Be Covered for Chinese Drywall Claims?”

 By Kyle N. Roehler, Attorney, Foland Wickens Eisfelder Roper & Hofer, P.C.

In his article appearing in the July/August 2010 issue of Coverage, Mr. Roehler warns of the coming wave of insurance claims and ensuing coverage litigation over sulfur emissions from defective Chinese drywall. The article first reports on the extent to which Chinese drywall was installed in American homes and the potential harm it can cause. It then turns to an analysis of the coverage issues involved and how they may be resolved based on case precedents in the various jurisdictions.

An initial issue is whether the property damage caused by Chinese drywall constitutes an insurable "occurrence" under standard commercial general liability  policies.  Jurisdictions differ  on the key question  whether faulty construction lacks the necessary level of fortuity contemplated by the requirement that the occurrence be an "accident."

The article next considers whether and how Chinese drywall damage claims can fall under the "your work" and "your product" exclusions. Key factors here are the insured's position in the construction process and which part of the property at issue is damaged. Next the "sistership" exclusion is considered-this exclusion pertains to product, work or property that is withdrawn or recalled from the market or use because of suspected or known defects.

The article then turns to  the "epicenter" of the Chinese drywall coverage debate-the applicability of the "total pollution" exclusion.  The key  issues and case precedents in applying this exclusion are each examined:

  • Does a "total pollution" exclusion apply only to "traditional" environmental releases?
  • Is the hydrogen sulfide gas emitted from Chinese drywall a "pollutant"?
  • Are contained emissions "discharge," "dispersal," "release," "seepage," or "migration" in terms of contact with the environment.

Divergent court decisions are found with each issue. After surveying the diffuse judicial pronouncements on the subject, the article concludes, "Ultimately, we can anticipate that some contractors will find coverage for Chinese drywall-related claims under their CGL policies, while others will not."

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