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Florida Construction Law Update

Insurer’s Total Pollution Exclusion Valid According to U.S. Southern District of Florida Court

Posted in Construction, Contractors, Insurance

Due to the use of Chinese drywall in construction projects, there has been an advent of class action litigation against contractors and suppliers of Chinese drywall for personal injuries and property damage.  Recently, insurers have started the process to deny coverage for the contractors who installed Chinese drywall.

Since the mid‐1980s virtually all Commercial General Liability (CGL) policies have contained some form of the total or absolute pollution exclusion.  The Total Pollution Exclusion endorsement eliminates virtually all coverage for pollution incidents, including those retained in the standard commercial general liability (CGL) policy despite its “absolute” pollution exclusion.

For example, the three Insurance Services Office, Inc. total pollution exclusion endorsements remove coverage for bodily injury or property damage that “would not have occurred in whole or part but for” a pollution incident.  The Insurance Service Office introduced the “total” pollution exclusion endorsement in 1988.

Generally, a “total” pollution exclusion can be characterized as any post‐“sudden and accidental” pollution exclusion which does not limit the exclusion to certain enumerated circumstances and, instead, precludes coverage for any and all exposure to pollutants.  The case law has defined “pollutants” to include carbon monoxide, lead paint, asbestos, biological pollutants, odor from compost, chemical fumes, welding rods, dirt and rocks, salt water, and gasoline.

With the recent advent of Chinese Drywall litigation, insurers are now looking to the Total Pollution Exclusion endorsement to deny coverage, both as to the duty to defend, and to indemnify.

In the recent case of First Specialty Insurance Corp. v. Milton Construction Company, [1] the U.S. District Court for the Southern District of Florida held that the insurer had no duty to defend its insured in a putative class action in the Eastern District of Louisiana for property damage and personal injuries allegedly caused by defective Chinese drywall.[2]  All of the allegations against Milton in the Louisiana action arose out of the allegedly defective, and unreasonably dangerous, drywall and the harmful effects of the sulfur compounds that allegedly exited the drywall, causing property damage and personal injuries.[3]

The United States District Court held that Florida law applied over the Louisiana law cited by the homeowner.  The United States District Court based its opinion on the Florida Supreme Court case of Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Insurance Co., 711 So. 2d 1135 (Fla. 1998).  In this seminal case, the Florida Supreme Court addressed whether a pollution exclusion applied to two separate incidents, one involving indoor air contamination caused by an accidental ammonia spill inside a commercial building, and another involving two bystanders who were accidentally sprayed with insecticide near a citrus grove.

In considering this pollution exclusion, the Florida Supreme Court rejected the suggestion that it was ambiguous.  The court also rejected the argument that the provision should apply only to environmental or industrial pollution, because nowhere in the policies did such a limitation appear.

This result, while following the majority rule, is contrary to the law of some jurisdictions, including Louisiana.  In applying the pollution exclusion to the facts of the case, the Florida Supreme Court found it “clear that the incidents at issue were excluded from coverage under the respective insurance policies.”  The court reasoned that both ammonia fumes and insecticides were “irritants” or “contaminants” and, as such, “pollutants” under the policies.

The District Court, following Deni Associates, noted that other courts in the Southern District of Florida have found allegations pertaining to the release of sulfur gases from defective Chinese drywall clearly within pollution exclusions virtually identical to the one in this case.

Therefore, the District Court held that the sulfur compounds constitute “pollutants” and the Total Pollution Exclusion applies.  The Court further noted that the homeowner’s attempt to manufacture ambiguity by relying on Louisiana law fails.

The impact of this decision will likely mean that insurers will continue to pursue declaratory actions to enforce Total Pollution Exclusion endorsements and to deny insurance coverage for defense and indemnity for those whose policies contain such endorsements.  The upcoming coverage decisions at the forefront of these court opinions will be interesting to observe for those with an interest in Chinese drywall litigation.


 

 

 

[1] First Specialty Insurance Corp. v. Milton Construction Company, U.S. District Court, Southern District of Florida, Case No. 12,20116-Civ-Scola, July 16, 2012, Robert N. Scola, Jr. Judge, 23 Fla. L. Weekly Fed. D366a

 

[2] See Block v. Gebrueder Knauf Verwatungsgesellschaft, K.G., et al., Case No. 11-1363 (E.D. La., filed June 8, 2008).

 

[3] Specifically, the plaintiffs alleged that sulfur compounds exited the Chinese drywall, causing “rapid sulfidation and damage to personal property (such as air conditioning and refrigerator coils, faucets, utensils, electrical wiring, copper, electronic appliances and other metal surfaces and property.” La. Compl. ¶¶ 25, 26. The release of the sulfur compounds also allegedly “caused personal injury resulting in eye problems, sore throat and cough, nausea, fatigue, shortness of breath, fluid in the lungs, and/or neurological harm.” Id. ¶¶ 27, 30.