Deni Strikes Again: Total Pollution Exclusion Eliminates Coverage For Chinese Drywall Claims

The Florida Supreme Court’s decision in Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Insurance Co., 711 So.2d 1135 (Fla. 1998) continues to haunt Florida policyholders with Total Pollution Exclusions in their general liability policies.  This time it was Southern District of Florida Judge Robert Scola’s July 16, 2012 decision in First Specialty Insurance Corp. v. Milton Construction Co., Case No. 12-cv-20116, relying on Deni to deny coverage to a contractor facing Chinese Drywall liabilities.

The declaratory judgment action arose out of one of hundreds of lawsuits consolidated in the Chinese Drywall multi-district litigation in the United States District Court for the Eastern District of Louisiana.  The contractor was sued in a class action by residents and homeowners of the San Lorenzo Condominium in Miami.  The lawsuit contained standard allegations regarding the harmful effects of sulfur emitted from Chinese Drywall used by the contractor during construction.  The contractor’s insurer brought a declaratory judgment action seeking a determination that it did not owe a duty to defend or indemnify the contractor.

The contractor’s policies contained a Total Pollution Exclusion, which stated that the insurance did not apply to:

(1) “Bodily injury,” “property  damage,” personal injury,” or “advertising injury” caused by or arising out of, in whole or in part, the actual, alleged, or threatened discharge, dispersal seepage, migration, release, or  escape of pollutants at any time.

(2) Any loss, cost, or expense arising out of any:

(a) request, demand, or order  that any Insured or others test for, monitor, clean up, remove, contain, treat, detoxifying, or neutralizing or in any way responding to, or assessing the effects of pollutants.

Pollutants means any solid, liquid,  gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals, and waste. Waste includes material to be recycled, reconditioned, or reclaimed.

The court held that the Total Pollution Exclusion eliminated all coverage for the contractor’s liabilities related to the installation of Chinese Drywall.  Relying almost exclusively on Deni, Judge Scola held that the Total Pollution Exclusion was unambiguous, and applied to exclude all coverage for Chinese Drywall-related liabilities.  Judge Scola cited recent SDFL decisions in General Fidelity Ins. Co. v. Foster, 808 F. Supp. 2d 1315 (S.D. Fla. 2011) and Colony Insurance Co. v. Total Contracting & Roofing, Inc., 2011 WL 4962351 (S.D. Fla.  Oct. 18, 2011), which both came to a similar conclusion of non-coverage.

Judge Scola rejected the policyholder’s arguments that the Total Pollution Exclusion was ambiguous.  The judge held that Florida courts have determined the Total Pollution Exclusion to be unambiguous, despite holdings to the contrary of a majority of courts in other states.  Judge Scola also refused to follow the Middle District of Florida’s ruling in Auto-Owners Insurance Co. v. American Building Materials, Inc., 820 F. Supp.2d 1265 (M.D. Fla. 2011), on the basis that the policy at issue in the Auto-Owners case contained an Absolute Pollution Exclusion rather than a Total Pollution Exclusion.  (For a discussion of the Auto-Owners case, and the differences between the Absolute Pollution Exclusion and the Total Pollution Exclusion, see my previous blog post.)

The decision in Milton Construction is yet another reminder that Florida is among the worst, if not the worst, jurisdiction in the country to litigate insurance coverage cases involving the pollution exclusion.  Although in recent months insurers increasingly have sought to settle Chinese Drywall construction defect cases (see Hazy Outlook May Push More Insurers To Settle Drywall Claims,” Insurance Law360, June 21, 2012) decisions like Milton Construction give insurers reasons to refuse to settle Florida homeowners’ claims, even when they are spending millions to settle claims in other parts of the country.

The misguided and minority view of Florida courts that Chinese Drywall is “pollution” is an unfortunate outcome of strict constructionist judicial principles that put insurance jargon ahead of common sense and policyholders’ reasonable expectations of coverage.  The ultimate losers in this battle are the people of Florida who have been impacted by Chinese Drywall, and who will not be fairly compensated by homebuilders and contractors who cannot afford to pay claims without insurance coverage.