Pollution Exclusion Clauses Bar Coverage for Claims Alleging Damage from Defective Chinese Drywall

December 31, 2012 | Insurance Coverage

Pollution exclusions in insurance policies issued to a homebuilder did not cover claims for damages associated with the supply and installation of allegedly defective Chinese drywall, the U.S. Court of Appeals for the Eleventh Circuit has ruled.  

The Case

KB Home, Inc., and KB Home Tampa, LLC, alleged that American Building Materials had supplied KB Home with defective gypsum drywall manufactured in China for installation in residential homes in Hillsborough County, Florida. According to KB Home, a consultant it retained determined that the drywall was emitting unusual amounts of sulfide gases that caused eye irritation, sore throat and cough, nausea, fatigue, shortness of breath, fluid in the lungs, and neurological harm.

KB Home sought coverage for homeowners’ claims against it, but the insurers contended that coverage for their claims was excluded by the pollution exclusions. The district court declared that the insurers had no duty to defend or indemnify KB Home, and it appealed.

The Circuit Court’s Decision

The Eleventh Circuit affirmed, finding that the alleged damage from the drywall was excluded from coverage under the policies’ pollution exclusions under both Massachusetts and Florida law.

As the circuit court explained, under Florida law, the sulfide gas allegedly released by the Chinese drywall fell within the definition of “pollutant” because it was a “gaseous … irritant or contaminant.” Additionally, it continued, the bodily injury and property damage alleged “would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape” of the pollutant.

Then, the Eleventh Circuit ruled, the damage allegedly caused by the Chinese drywall fell within the scope of the pollution exclusion as interpreted by Massachusetts courts, explaining that the unexpected emission of sulfuric gas was “the kind of release that a reasonable insured would understand as pollution.”

The case is Granite State Ins. Co. v. KB Home, Inc., No. 12-10979 (11th Cir. Jan. 3, 2013).

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