Posted on 21 Dec 2010
A federal court in New Orleans has ruled that insurance policies do not cover losses due to the destructive properties of Chinese drywall because of two policy exclusions. As a result, the motions of 10 insurers to dismiss consolidated litigation concerning the drywall were granted by U.S. District Court Judge Eldon Fallon.
The ruling represents a key decision in what has become a lengthy and contentious battle pitting the insurance companies against people who filed claims under their policies involving defective drywall.
Insurance companies have attempted to argue that numerous exclusions in the policies -- ranging from those dealing with pollution to ones relating to "dampness" -- mean that any losses related to Chinese drywall are not covered under homeowners' policies. Attorneys for the homeowners have been asserting that those exclusions have no business applying to Chinese drywall.
In his lengthy ruling, U.S. District Court Judge Eldon E. Fallon issued what amounted to a split decision -- finding in favor of the homeowners on some of the exclusions, and the insurance companies on others.
But given that an insurance company can prevail in such cases if even one of the exclusions applies, Fallon's finding that two exclusions hold up -- those related to corrosion and to faulty materials -- meant the drywall cases against the companies were dismissed.
Fallon ruled that contrary to the insurers' arguments, Chinese drywall was indeed causing a physical loss in affected homes.
In the present cases, the Chinese-manufactured dry- wall has caused a 'distinct, demonstrable, physical alteration' of the Plaintiffs' homes (the covered properties) by corroding the silver and copper elements in the homes, often to the point of causing total or partial failure in electrical wiring and devices installed in the homes, as well as by emitting odorous gases," Fallon wrote.
On the issue of whether Chinese drywall constitutes a "latent defect," Fallon ruled that it did not, noting that affected homeowners "were aware before the media reports that their homes contained a foul odor, their electrical wires and components were blackened, and their electrical devices and appliances were failing" and that "the damage caused by the drywall -- the odor, the blackened wires and metals -- are easily detectable through smell and sight."
On the pollution issue, publicly contentious since the drywall crisis emerged two years ago, Fallon also found for the homeowners, saying that "the Plaintiffs, who are home owners and occupants, do not constitute polluters under any sense of the word" and "pollution and/or contamination exclusions in the homeowners' insurance policies do not apply to the present cases."
But when it came to the corrosion-and-faulty-materials exclusions, Fallon found that the insurance companies' were right in asserting that they did apply to Chinese drywall. He also ruled that Chinese drywall was technically defective or "faulty."
"Although the drywall serves its intended purpose as a room divider, wall anchor and insulator, the allegations in the complaints provide that the drywall emits foul-smelling odors and releases gases which damage silver and copper components in the home, including electrical devices, appliances, and wiring," the judge wrote.
"Accordingly, the drywall is like the radioactive table bases and building components containing asbestos or lead which function for all practical purposes as table bases and building components, but are faulty because the materials of which they are composed."
Corrosion damage -- another exclusion claimed by the insurance companies -- also carried the day.
"The Insurers claim that Plaintiffs' allegations regarding the corrosion in their homes caused by the Chinese drywall invoke the corrosion exclusion. In response, the Plaintiffs contend that their loss is not caused by corrosion, but rather is caused by the sulfur gases emitted by the Chinese drywall, and thus, the corrosion exclusion is not triggered," Fallon wrote.
Fallon ruled that the claims "trigger the corrosion exclusion since the corrosion is responsible for the majority of losses suffered by the Plaintiffs. Thus, the homeowners' policies, whether they exclude from coverage loss caused by, consisting of, or the presence of corrosion, exclude from coverage the corrosion and corrosion related damages."
The judge also found that the corrosion damage in the home did not qualify as what is known as an "ensuring loss" -- essentially a second loss prompted by the original damage.
But he left the door open to future claims, saying that "even the Insurers concede that if the corrosion caused by Chinese drywall resulted in a second accident, separable and different in kind, such as a fire, the losses therefrom would be covered under the ensuing loss provisions."
"The Court does not seek to foreclose any future Chinese drywall-related ensuing loss claims under homeowners' insurance policies," Fallon wrote.
While the ruling is a victory for homeowners' insurers, commercial carriers who provided coverage to builders, suppliers, manufacturers and other defendants in the combined federal case remain in the litigation.