The Application of Pollution Exclusions to Defective Drywall Claims

In 2010, courts began to address whether homeowners' insurance policies provide coverage for Chinese drywall claims. These bellwether cases may provide insight on whether courts will uphold the application of various exclusions in liability policies at issue, particularly the pollution exclusion. Considering similar facts and similar policy language, courts in two states have already reached opposing decisions on whether pollution exclusions in homeowners' policies bar coverage for defective drywall claims.

Louisiana Law

In Re Chinese Manufactured Drywall

Most recently, a federal district judge in Louisiana determined last month that, under Louisiana law, the pollution exclusions in “all risk” homeowners' policies at issue did not bar coverage for defective drywall claims. In Re Chinese Manufactured Drywall Products Liability Litigation, MDL No. 2047, 2:09-md-02047, slip op. at 29 (E.D. La. Dec. 16, 2010). (The district court also concluded, inter alia, that the alleged damages constituted a “physical loss” under the policy language that was “direct,” “accidental,” and “sudden”; that the insurers failed to meet their burden of showing that the “latent defect” exclusions barred coverage, noting that it was a “close call” under Louisiana law; that the “faulty materials” exclusions barred coverage for the loss; that losses from corrosion were barred by the “corrosion” exclusions in the policies; and that the “ensuing loss” provisions did not restore coverage for any present losses.) In these consolidated cases, the court considered the application of various exclusions that precluded coverage for losses caused by pollution and/or contamination. Some of the homeowners' policies excluded “coverage for loss caused by '[d]ischarge, dispersal, seepage, migration, or release or escape of pollutants,' unless such is caused by a covered peril,” and further defined pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.” Id., slip op. at 23. Other policies did not cover loss “consisting of or caused by ' vapors, fumes, acids, toxic chemicals, toxic gasses, toxic liquids, toxic solids, waste materials or other irritants, contaminants or pollutants,” or “loss caused by contamination, pollution, smog, or industrial or agricultural smoke.” Id. Other policies contained similar language. Id.

Applying Doerr Analysis

The court, noting the policies' “expansive” definitions of “pollution and contamination,” applied the Louisiana Supreme Court's analysis in Doerr v. Mobil Oil Corp., 774 So.2d 119, 134 (La. Dec. 19, 2000), which involved the application of a total pollution exclusion in a commercial liability policy to claims of water contamination from oil refinery discharges. In Re Chinese Manufactured Drywall, 2:09-md-02047, slip op. at 25. The court explained that the Doerr court found that the “general purpose” of the pollution exclusion clause is to “exclude coverage for environmental pollution.” Id., slip op. at 26. The court concluded that a Doerr analysis applied to cases involving homeowners' policies and any pollution and/or contamination exclusion, based on the Doerr court's statement that “'[t]he applicability of a total pollution exclusion in any given case must necessarily turn on several considerations.'” Id., slip op. at 27. The court declined to follow the cases relied upon by the insurers, because those cases applied Texas and Virginia law. Id., slip op. at 27, n. 3.

Applying the criteria set out in Doerr, the court determined that the exclusions did not bar coverage for the defective drywall claims. In Re Chinese Manufactured Drywall, 2:09-md-02047, slip op. at 27. First, the court considered whether the policyholders were “polluters” under Doerr, which considers a “wide variety of factors,” including the “nature of the insured's business, whether that type of business presents a risk of pollution, whether the insured has a separate policy covering the disputed claim, whether the insured should have known from reading the exclusion that a separate policy covering pollution damages would be necessary for the insured's business, who the insurer typically insures, any other claims made under the policy, and any other factor the trier of fact deems relevant to this conclusion.” Id., slip op. at 28, citing Doerr, 2000-0947, at pp. 25-26, 774 So.2d at 135. The court found that the policyholders, as owners and occupants, did not “constitute polluters under any sense of the word.” In Re Chinese Manufactured Drywall, 2:09-md-02047, slip op. at 28.

Next, the court applied the Doerr analysis to determine what constitutes a “pollutant,” and found that “whether the Chinese drywall is a pollutant is at best factually determinative and not a clear legal question.” Id., slip op. at 28. Under Doerr, the “trier of fact should consider the nature of the injury-causing substance, its typical usage, the quantity of the discharge, whether the substance was being used for its intended purpose when the injury took place, whether the substance is one that would be viewed as a pollutant as the term is generally understood, and any other factor the trier of fact deems relevant to that conclusion.” Id., slip op. at 28. The court distinguished parallels to lead paint and asbestos on the basis that defective drywall primarily causes property damage, rather than personal injury or death. Id., slip op. at 28-29. The court, considering the nature of defective drywall and “whether it is viewed as a pollutant,” determined that the drywall is not a “typical pollutant,” but that the sulfur contained and released by the drywall may be a pollutant. Id., slip op. at 29.

Lastly, the court considered whether there was a “discharge, dispersal, seepage, migration, release or escape,” under the Doerr analysis which “consider[s] whether the pollutant was intentionally or negligently discharged, the amount of the injury-causing substance discharged, whether the actions of the alleged polluter were active or passive, and any other factor the trier of fact deems relevant.” Id., slip op. at 29. Applying this analysis to the policy language, the court found that the “sulfur gases [were] discharged or released by the Chinese drywall,” but that the other considerations, which pertained to the “actions of an alleged polluter in releasing a substance,” did not apply. Id., slip op. at 29. The court thus concluded that the pollution and contamination exclusions did not bar coverage for the defective drywall claims, because the homeowners were not polluters and the defective drywall did not cause “environmental pollution.” Id., slip op. at 29-30.

Finger, Simon, et al.

Similarly, in Finger, Simon, et al. v. Audubon Insurance Co., No. 2009-08071 (Civ. Dist. Ct. La., Orleans Parish Mar. 22, 2010), a state district court, also applying Louisiana law, determined that a “Pollution or Contamination” exclusion could not be used to deny coverage under a homeowners' “all risk” policy for defective drywall claims. Id., slip op. at 5. (The court also granted the homeowners' motion to strike the insurer's affirmative defenses based on the “Gradual or Sudden Loss” exclusion and the “Faulty, Inadequate or Defective Planning” exclusion. Finger, slip op. at 1.) In that case, the insurer had listed the pollution exclusion in its letter denying the homeowners' claim and relied on that exclusion, among others, as one of its affirmative defenses in its Answer. Id., slip op. at 1. The exclusion provided, in part, that the policy would “not cover any loss, directly or indirectly, regardless of any cause or event contributing concurrently or in any sequence to the loss, caused by the discharge, dispersal, seepage, migration or release or escape of pollutants,” or “the cost to extract pollutants from land or water, or the cost to remove, restore, or replace polluted or contaminated land or water.” Id., slip op. at 4. The insurer subsequently filed an Amended Answer, omitting the pollution exclusion as an affirmative defense, because an endorsement had deleted the exclusion from the policy. Id., slip op. at 2. The court nonetheless addressed the exclusion. Id.

In granting the homeowners' motion to strike the pollution exclusion as an affirmative defense, the court applied Doerr, stating that the pollution exclusion “does not, and was never intended, to apply to residential homeowners [sic] claims for damages caused by substandard building materials.” Finger, slip op. at 5. The court also referred to a determination of the Louisiana Department of Insurance that a “'pollution incident' under a pollution exclusion in homeowners' policies only refers to an incident which causes 'environmental damage,' or 'injurious [to the environment, not the claimant] presence in an [sic] upon the land, the atmosphere, or any watercourse or body of water of solid, liquid, gaseous or thermal contaminants, irritants or pollutants.'” Id., citing Advisory Letter No. 97-01 Commissioner of Insurance, State of Louisiana (June 4, 1997). The court, in reaching its decision, applied Doerr to conclude that the sulfuric acids released by defective drywall do not constitute “pollutants” under the exclusion, and finally found that the exclusion did not apply because it was deleted by the amendatory endorsement. Finger, slip op. at 5. (It remains unclear whether Louisiana courts will apply the pollution exclusion in disputes under commercial insurance policies, as opposed to homeowners' policies.)

Virginia Law

Travco Insurance Co.

Contrary, in Travco Insurance Co. v. Ward, Civ. No. 2:10cv14, 2010 U.S. Dist. LEXIS 54387 (E.D. Va., Norfolk Div. June 3, 2010), a federal district court, applying Virginia law, determined that a pollution exclusion in a homeowner's policy did bar coverage for defective drywall claims. (The court also found, applying Virginia law, that the homeowner suffered a “direct physical loss” under the policy; that coverage was excluded by the latent defect, faulty materials, corrosion, and pollution exclusions; and that the ensuing loss provisions did not reinstate coverage for the homeowner's current losses. Travco, 2010 U.S. Dist. LEXIS 54387, at *3.) That policy excluded coverage for the “[d]ischarge, 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 under Coverage C [for personal property],” and further defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Travco, 2010 U.S. Dist. LEXIS 54387, at **5-6.

The court, noting the “'absolute fragmentation of authority'” in applying pollution exclusions, determined that Virginia falls into the “camp ' of courts” that refuse to read the plain language of the pollution exclusions as applying solely to “traditional environmental pollution.” Travco, 2010 U.S. Dist. LEXIS 54387, at *45, citing Porterfield v. Audobon Indem. Co., 856 So. 2d 789, 800 (Ala. 2000), Apana v. TIG Ins. Co., 574 F.3d 679, 682 (9th Cir. 2009), and Bituminous Cas. Corp. v. Sand Livestock Systems, Inc., 728 N.W.2d 216, 221 (Iowa 2007). The court thus determined that it must apply City of Chesapeake v. States Self-Insurers Risk Retention Group, Inc., 628 S.E.2d 539 (Va. 2006), which applied the pollution exclusion to bar coverage for the release of toxic trihalomethanes into a municipal water supply. Travco, 2010 U.S. Dist. LEXIS 54387, at *45-46. The court declined to limit that court's ruling to “traditional environmental pollution,” noting that two courts had since applied the Virginia Supreme Court's holding in City of Chesapeake to bar coverage for the release of indoor pollutants, specifically to epoxy sealant fumes and residential heating oil discharges. Id. at **47-48. The court stated the holding of City of Chesapeake as applying the pollution exclusion when the “harm [is] caused by the release of a pollutant,” thus indicating its conformity to Virginia's basic insurance construction principles that “no court can 'insert by construction, for the benefit of a party, a term not express in the contract.'” Id. at *49, citing Baldwin v. Baldwin, 603 S.E.2d 172, 176 (Va. 2004). In doing so, the court further stated that it “neither endorse[d] nor reject[ed] City of Chesapeake's holding as a matter of policy,” and that the policyholder's “interpretation may be more consistent with the historical development of pollutant exclusions in insurance law” and “may present a well-reasoned method for reigning in potentially broad pollutant exclusion clauses.” Travco, 2010 U.S. Dist. LEXIS 54387, at *49. The court concluded, however, that it was bound to follow City of Chesapeake under its diversity jurisdiction. Travco, 2010 U.S. Dist. LEXIS 54387, at *50.

Applying City of Chesapeake

Applying City of Chesapeake, the court therefore determined that a “'[d]ischarge, dispersal, seepage, migration, release or escape of pollutants'” occurred because the undisputed facts showed that the Chinese drywall discharged and dispersed sulfuric gas into the residence. Travco, 2010 U.S. Dist. LEXIS 54387, at *50. The court rejected the policyholder's “creative” argument that a discharge or dispersal did not occur because the Chinese drywall did not move, and referred instead to the discharge and dispersal of the sulfuric gas from the drywall, which it compared to the chipping, flaking, and dust of lead in paint. Id. at **50-51.

Similarly, the court also rejected the policyholder's argument that the defective drywall was not a “contaminant or pollutant,” concluding that “[w]hile the Drywall itself may not be a pollutant, the gases it releases are.” Id. at *51. The court stated the undisputed facts demonstrate that the defective drywall released sulfuric gases, which are recognized as pollutants under state and federal law. Id. Furthermore, the court stated that the policy's “broad” pollutant definition included “'any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste,'” and concluded that “[under any reasonable definition of these terms, the gases released into the ' [residence qualify as irritants and contaminants." Id. at *52. The court additionally noted, citing Hastings Mut. Ins. Co. v. Safety King, Inc., 778 N.W.2d 275 (Mich. App. 2009), that the sulfuric gas was a "contaminant" because it was "not 'supposed to be' in the Residence and [had] harmed Defendant and the components of his home,” and that the sulfuric gas was an “irritant” because it caused physical irritation, specifically, nosebleeds. Travco, 2010 U.S. Dist. LEXIS 54387, at ** 52-53.

Conclusion

Although not conclusive, given that the cases involved homeowners' policies and will likely face appeal, these cases may provide some insight on the issues concerning coverage for defective drywall claims based on the plain language of the pollution exclusions in the policies at issue. Despite similar policy language and similar claims, the likelihood of success in enforcing the application of the pollution exclusion, at least in homeowners' defective drywall claims, will greatly depend on whether the jurisdiction where the claims are brought favors enforcing contract language as written, or reads a “traditional environmental pollution” requirement into the exclusion.

Alicia Ritter worked as an associate at the Washington, DC law firm of Wiley Rein LLP, where she specialized in complex insurance litigation. She has participated as counsel in well-known coverage cases such as Pilkington N. Am., Inc. v. Travelers Cas. & Sur. Co., 112 Ohio St.3d 482, 2006-Ohio-6551, Employers Ins. of Wausau v. Tektronix, Inc., 211 Or. App. 485, 156 P.3d 105 (2007), and Scottsdale Ins. Co. v. MV Transp., 115 P.3d 460 (Cal. 2005), and currently writes on insurance litigation for nationwide publications. This publication is not intended to provide legal advice.

In 2010, courts began to address whether homeowners' insurance policies provide coverage for Chinese drywall claims. These bellwether cases may provide insight on whether courts will uphold the application of various exclusions in liability policies at issue, particularly the pollution exclusion. Considering similar facts and similar policy language, courts in two states have already reached opposing decisions on whether pollution exclusions in homeowners' policies bar coverage for defective drywall claims.

Louisiana Law

In Re Chinese Manufactured Drywall

Most recently, a federal district judge in Louisiana determined last month that, under Louisiana law, the pollution exclusions in “all risk” homeowners' policies at issue did not bar coverage for defective drywall claims. In Re Chinese Manufactured Drywall Products Liability Litigation, MDL No. 2047, 2:09-md-02047, slip op. at 29 (E.D. La. Dec. 16, 2010). (The district court also concluded, inter alia, that the alleged damages constituted a “physical loss” under the policy language that was “direct,” “accidental,” and “sudden”; that the insurers failed to meet their burden of showing that the “latent defect” exclusions barred coverage, noting that it was a “close call” under Louisiana law; that the “faulty materials” exclusions barred coverage for the loss; that losses from corrosion were barred by the “corrosion” exclusions in the policies; and that the “ensuing loss” provisions did not restore coverage for any present losses.) In these consolidated cases, the court considered the application of various exclusions that precluded coverage for losses caused by pollution and/or contamination. Some of the homeowners' policies excluded “coverage for loss caused by '[d]ischarge, dispersal, seepage, migration, or release or escape of pollutants,' unless such is caused by a covered peril,” and further defined pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.” Id., slip op. at 23. Other policies did not cover loss “consisting of or caused by ' vapors, fumes, acids, toxic chemicals, toxic gasses, toxic liquids, toxic solids, waste materials or other irritants, contaminants or pollutants,” or “loss caused by contamination, pollution, smog, or industrial or agricultural smoke.” Id. Other policies contained similar language. Id.

Applying Doerr Analysis

The court, noting the policies' “expansive” definitions of “pollution and contamination,” applied the Louisiana Supreme Court's analysis in Doerr v. Mobil Oil Corp. , 774 So.2d 119, 134 (La. Dec. 19, 2000), which involved the application of a total pollution exclusion in a commercial liability policy to claims of water contamination from oil refinery discharges. In Re Chinese Manufactured Drywall, 2:09-md-02047, slip op. at 25. The court explained that the Doerr court found that the “general purpose” of the pollution exclusion clause is to “exclude coverage for environmental pollution.” Id., slip op. at 26. The court concluded that a Doerr analysis applied to cases involving homeowners' policies and any pollution and/or contamination exclusion, based on the Doerr court's statement that “'[t]he applicability of a total pollution exclusion in any given case must necessarily turn on several considerations.'” Id., slip op. at 27. The court declined to follow the cases relied upon by the insurers, because those cases applied Texas and Virginia law. Id., slip op. at 27, n. 3.

Applying the criteria set out in Doerr, the court determined that the exclusions did not bar coverage for the defective drywall claims. In Re Chinese Manufactured Drywall, 2:09-md-02047, slip op. at 27. First, the court considered whether the policyholders were “polluters” under Doerr, which considers a “wide variety of factors,” including the “nature of the insured's business, whether that type of business presents a risk of pollution, whether the insured has a separate policy covering the disputed claim, whether the insured should have known from reading the exclusion that a separate policy covering pollution damages would be necessary for the insured's business, who the insurer typically insures, any other claims made under the policy, and any other factor the trier of fact deems relevant to this conclusion.” Id., slip op. at 28, citing Doerr, 2000-0947, at pp. 25-26, 774 So.2d at 135. The court found that the policyholders, as owners and occupants, did not “constitute polluters under any sense of the word.” In Re Chinese Manufactured Drywall, 2:09-md-02047, slip op. at 28.

Next, the court applied the Doerr analysis to determine what constitutes a “pollutant,” and found that “whether the Chinese drywall is a pollutant is at best factually determinative and not a clear legal question.” Id., slip op. at 28. Under Doerr, the “trier of fact should consider the nature of the injury-causing substance, its typical usage, the quantity of the discharge, whether the substance was being used for its intended purpose when the injury took place, whether the substance is one that would be viewed as a pollutant as the term is generally understood, and any other factor the trier of fact deems relevant to that conclusion.” Id., slip op. at 28. The court distinguished parallels to lead paint and asbestos on the basis that defective drywall primarily causes property damage, rather than personal injury or death. Id., slip op. at 28-29. The court, considering the nature of defective drywall and “whether it is viewed as a pollutant,” determined that the drywall is not a “typical pollutant,” but that the sulfur contained and released by the drywall may be a pollutant. Id., slip op. at 29.

Lastly, the court considered whether there was a “discharge, dispersal, seepage, migration, release or escape,” under the Doerr analysis which “consider[s] whether the pollutant was intentionally or negligently discharged, the amount of the injury-causing substance discharged, whether the actions of the alleged polluter were active or passive, and any other factor the trier of fact deems relevant.” Id., slip op. at 29. Applying this analysis to the policy language, the court found that the “sulfur gases [were] discharged or released by the Chinese drywall,” but that the other considerations, which pertained to the “actions of an alleged polluter in releasing a substance,” did not apply. Id., slip op. at 29. The court thus concluded that the pollution and contamination exclusions did not bar coverage for the defective drywall claims, because the homeowners were not polluters and the defective drywall did not cause “environmental pollution.” Id., slip op. at 29-30.

Finger, Simon, et al.

Similarly, in Finger, Simon, et al. v. Audubon Insurance Co., No. 2009-08071 (Civ. Dist. Ct. La., Orleans Parish Mar. 22, 2010), a state district court, also applying Louisiana law, determined that a “Pollution or Contamination” exclusion could not be used to deny coverage under a homeowners' “all risk” policy for defective drywall claims. Id., slip op. at 5. (The court also granted the homeowners' motion to strike the insurer's affirmative defenses based on the “Gradual or Sudden Loss” exclusion and the “Faulty, Inadequate or Defective Planning” exclusion. Finger, slip op. at 1.) In that case, the insurer had listed the pollution exclusion in its letter denying the homeowners' claim and relied on that exclusion, among others, as one of its affirmative defenses in its Answer. Id., slip op. at 1. The exclusion provided, in part, that the policy would “not cover any loss, directly or indirectly, regardless of any cause or event contributing concurrently or in any sequence to the loss, caused by the discharge, dispersal, seepage, migration or release or escape of pollutants,” or “the cost to extract pollutants from land or water, or the cost to remove, restore, or replace polluted or contaminated land or water.” Id., slip op. at 4. The insurer subsequently filed an Amended Answer, omitting the pollution exclusion as an affirmative defense, because an endorsement had deleted the exclusion from the policy. Id., slip op. at 2. The court nonetheless addressed the exclusion. Id.

In granting the homeowners' motion to strike the pollution exclusion as an affirmative defense, the court applied Doerr, stating that the pollution exclusion “does not, and was never intended, to apply to residential homeowners [sic] claims for damages caused by substandard building materials.” Finger, slip op. at 5. The court also referred to a determination of the Louisiana Department of Insurance that a “'pollution incident' under a pollution exclusion in homeowners' policies only refers to an incident which causes 'environmental damage,' or 'injurious [to the environment, not the claimant] presence in an [sic] upon the land, the atmosphere, or any watercourse or body of water of solid, liquid, gaseous or thermal contaminants, irritants or pollutants.'” Id., citing Advisory Letter No. 97-01 Commissioner of Insurance, State of Louisiana (June 4, 1997). The court, in reaching its decision, applied Doerr to conclude that the sulfuric acids released by defective drywall do not constitute “pollutants” under the exclusion, and finally found that the exclusion did not apply because it was deleted by the amendatory endorsement. Finger, slip op. at 5. (It remains unclear whether Louisiana courts will apply the pollution exclusion in disputes under commercial insurance policies, as opposed to homeowners' policies.)

Virginia Law

Travco Insurance Co.

Contrary, in Travco Insurance Co. v. Ward, Civ. No. 2:10cv14, 2010 U.S. Dist. LEXIS 54387 (E.D. Va., Norfolk Div. June 3, 2010), a federal district court, applying Virginia law, determined that a pollution exclusion in a homeowner's policy did bar coverage for defective drywall claims. (The court also found, applying Virginia law, that the homeowner suffered a “direct physical loss” under the policy; that coverage was excluded by the latent defect, faulty materials, corrosion, and pollution exclusions; and that the ensuing loss provisions did not reinstate coverage for the homeowner's current losses. Travco, 2010 U.S. Dist. LEXIS 54387, at *3.) That policy excluded coverage for the “[d]ischarge, 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 under Coverage C [for personal property],” and further defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Travco, 2010 U.S. Dist. LEXIS 54387, at **5-6.

The court, noting the “'absolute fragmentation of authority'” in applying pollution exclusions, determined that Virginia falls into the “camp ' of courts” that refuse to read the plain language of the pollution exclusions as applying solely to “traditional environmental pollution.” Travco, 2010 U.S. Dist. LEXIS 54387, at *45, citing Porterfield v. Audobon Indem. Co. , 856 So. 2d 789, 800 (Ala. 2000), Apana v. TIG Ins. Co. , 574 F.3d 679, 682 (9th Cir. 2009), and Bituminous Cas. Corp. v. Sand Livestock Systems, Inc. , 728 N.W.2d 216, 221 (Iowa 2007). The court thus determined that it must apply City of Chesapeake v. States Self-Insurers Risk Retention Group, Inc. , 628 S.E.2d 539 (Va. 2006), which applied the pollution exclusion to bar coverage for the release of toxic trihalomethanes into a municipal water supply. Travco, 2010 U.S. Dist. LEXIS 54387, at *45-46. The court declined to limit that court's ruling to “traditional environmental pollution,” noting that two courts had since applied the Virginia Supreme Court's holding in City of Chesapeake to bar coverage for the release of indoor pollutants, specifically to epoxy sealant fumes and residential heating oil discharges. Id. at **47-48. The court stated the holding of City of Chesapeake as applying the pollution exclusion when the “harm [is] caused by the release of a pollutant,” thus indicating its conformity to Virginia's basic insurance construction principles that “no court can 'insert by construction, for the benefit of a party, a term not express in the contract.'” Id. at *49, citing Baldwin v. Baldwin , 603 S.E.2d 172, 176 (Va. 2004). In doing so, the court further stated that it “neither endorse[d] nor reject[ed] City of Chesapeake's holding as a matter of policy,” and that the policyholder's “interpretation may be more consistent with the historical development of pollutant exclusions in insurance law” and “may present a well-reasoned method for reigning in potentially broad pollutant exclusion clauses.” Travco, 2010 U.S. Dist. LEXIS 54387, at *49. The court concluded, however, that it was bound to follow City of Chesapeake under its diversity jurisdiction. Travco, 2010 U.S. Dist. LEXIS 54387, at *50.

Applying City of Chesapeake

Applying City of Chesapeake, the court therefore determined that a “'[d]ischarge, dispersal, seepage, migration, release or escape of pollutants'” occurred because the undisputed facts showed that the Chinese drywall discharged and dispersed sulfuric gas into the residence. Travco, 2010 U.S. Dist. LEXIS 54387, at *50. The court rejected the policyholder's “creative” argument that a discharge or dispersal did not occur because the Chinese drywall did not move, and referred instead to the discharge and dispersal of the sulfuric gas from the drywall, which it compared to the chipping, flaking, and dust of lead in paint. Id. at **50-51.

Similarly, the court also rejected the policyholder's argument that the defective drywall was not a “contaminant or pollutant,” concluding that “[w]hile the Drywall itself may not be a pollutant, the gases it releases are.” Id. at *51. The court stated the undisputed facts demonstrate that the defective drywall released sulfuric gases, which are recognized as pollutants under state and federal law. Id. Furthermore, the court stated that the policy's “broad” pollutant definition included “'any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste,'” and concluded that “[under any reasonable definition of these terms, the gases released into the ' [residence qualify as irritants and contaminants." Id. at *52. The court additionally noted, citing Hastings Mut. Ins. Co. v. Safety King, Inc. , 778 N.W.2d 275 (Mich. App. 2009), that the sulfuric gas was a "contaminant" because it was "not 'supposed to be' in the Residence and [had] harmed Defendant and the components of his home,” and that the sulfuric gas was an “irritant” because it caused physical irritation, specifically, nosebleeds. Travco, 2010 U.S. Dist. LEXIS 54387, at ** 52-53.

Conclusion

Although not conclusive, given that the cases involved homeowners' policies and will likely face appeal, these cases may provide some insight on the issues concerning coverage for defective drywall claims based on the plain language of the pollution exclusions in the policies at issue. Despite similar policy language and similar claims, the likelihood of success in enforcing the application of the pollution exclusion, at least in homeowners' defective drywall claims, will greatly depend on whether the jurisdiction where the claims are brought favors enforcing contract language as written, or reads a “traditional environmental pollution” requirement into the exclusion.

Alicia Ritter worked as an associate at the Washington, DC law firm of Wiley Rein LLP, where she specialized in complex insurance litigation. She has participated as counsel in well-known coverage cases such as Pilkington N. Am., Inc. v. Travelers Cas. & Sur. Co. , 112 Ohio St.3d 482, 2006-Ohio-6551, Employers Ins. of Wausau v. Tektronix, Inc., 211 Or. App. 485, 156 P.3d 105 (2007), and Scottsdale Ins. Co. v. MV Transp. , 115 P.3d 460 (Cal. 2005), and currently writes on insurance litigation for nationwide publications. This publication is not intended to provide legal advice.