Chinese Drywall Insurance Coverage Update: A Tale of Two Pollution Exclusions

On March 2, Auto-Owners Insurance Company dropped its Eleventh Circuit appeal of a Middle District of Florida decision granting summary judgment to its policyholder on defense and indemnity coverage for Chinese drywall liabilities.  The district court’s opinion, authored by Judge Susan Bucklew in Tampa, denied Auto-Owners’ summary judgment motion seeking to avoid coverage obligations based on the pollution exclusion, and granted the summary judgment motion brought by Auto-Owners’ policyholder, American Building Materials, Inc. (“ABM”).  You can read a copy of the May 17, 2011 decision here.  The decision (we’ll call it ABM I) involved coverage for claims asserted against ABM by KB Home, Inc. and its Tampa subsidiary, related to Chinese drywall installations.  Auto-Owners dropped its appeal after reaching a settlement with ABM.

Seven months after Judge Bucklew’s decision in ABM I, New Hampshire Insurance Company, and its subsidiary, Granite State Insurance Company, made out considerably better in its case against the same policyholder, also arguing for application of the pollution exclusion, and also in front of Judge Bucklew of the Middle District.  In a December 5, 2011 decision, Judge Bucklew granted summary judgment in favor of Granite State, finding that the pollution exclusion applied to exclude coverage for KB Home’s claims related to the same Chinese drywall installations.  You can read that decision (ABM II) here.  ABM II is currently on appeal to the Eleventh Circuit.

So why did Judge Bucklew grant the policyholder summary judgment in the first case and then grant the insurer summary judgment in the second?  I previously discussed differences in the interpretation of the pollution exclusion in key Chinese drywall battleground states in my Risk & Insurance article entitled, “Have Pollution Exclusions Hit a Wall?“.  I have also previously discussed how Florida has some of the worst law in the nation interpreting the pollution exclusion, and how insurers have targeted Florida for coverage actions involving Chinese drywall and the pollution exclusion.  See “Drywall Cases Hinge On Exclusions,” Business Insurance, February 6, 2011.

ABM I was decided under Florida law.  In ABI II, the insurer urged the court to apply Florida law but it applied Massachusetts law.  Given that the outcome of ABI I was favorable to the policyholder under Florida law and ABI II was unfavorable under Massachusetts law, the insurance industry’s preference for Florida law in Chinese drywall coverage actions clearly was not the decisive factor.

The outcomes were different due to differing policy language.  ABI I involved an Absolute Pollution Exclusion whereas ABI II involved a Total Pollution Exclusion.   Despite the misconception that these two pollution exclusions are functionally the same, they are in fact very different.  The Absolute Pollution Exclusion itself has many variants.  In the case of ABI I, the Absolute Pollution Exclusion only applied to releases of “pollutants” during the policyholder’s operations.  Since Chinese drywall releases gasses after it is put to its intended use (i.e., it is a completed operations loss), the court in ABI I determined that the exclusion did not apply.

In contrast, the Total Pollution Exclusion at issue in ABI II stated that coverage was excluded for any damage “which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.”  There are no variants to the Total Pollution Exclusion and little wiggle room.  It is short and deadly to policyholders in Florida and many other jurisdictions, including Massachusetts.

The fact that we are even talking about Chinese drywall as “pollution” may seem bizarre.  To any normal person it is.  But in the world of insurance coverage, policy exclusions take on a life of their own based on the twisted interpretations insurers give them.  I will not repeat my rant regarding the injustices that have resulted from some courts’ literal application of the pollution exclusion (for that you can see my previous blog post here).  But I will say this: all companies in Florida should insist on the removal of the Total Pollution Exclusion from their policies.

Many insurers have scaled back their use of the Total Pollution Exclusion in favor of older, narrower pollution exclusions like the Absolute Pollution Exclusion or the Sudden and Accidental Pollution Exclusion.  There is a difference and companies should pay attention to the pollution exclusion that is on their policy.

For any business that deals with “pollutants” of any kind, and by “pollutants” the insurance industry means “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste” (yes, you read that right, anything that can irritate or contaminate or that has a chemical composition is a “pollutant”), then please consider buying pollution coverage to protect your company in the event your insurer decides to play the pollution card.

As we have seen with Chinese drywall, the larger the exposure, the more likely the insurance industry will find an exclusion to clobber its policyholders over the head with.  The  Total Pollution Exclusion is an awfully big stick to put in your insurer’s good hands, despite how good a neighbor it may claim to be.

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