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The Pollution Exclusion: A Crack Appears in the Chinese Drywall Litigation

In a case which may set a important precedent for the entire Chinese Dry Wall product  liability litigation, a federal judge in Florida this week held that the insurance carrier for the supplier of CDW to a homebuilder had both a duty to defend and to indemnify the supplier for claims made by the builder.

The case, Auto-Owners Insurance Company  v. American Building Materials, Inc., KB Home Tampa, LLC and KB Home, Inc., No, 8:10-cv-313-T-24-AEP (M.D. Fl.), arose from a dispute between Auto-Owners, the insurance carrier,  American Building Materials, a supplier of CDW, and KB Home, the builder which purchased CDW from ABM.  Auto-Owners brought suit seeking a declaration that it owes no duty to defend or indemnify ABM in a related lawsuit brought by a homeowner whose home was built by KB Home with CDW supplied by ABM. 

The court found that there is coverage under ABM's insurance policy for the claims asserted in the underlying lawsuit and none of the exclusions to coverage asserted by Auto-Owners applied. 

The court first found that the policy's pollution exclusion did not bar coverage. "For the exclusion to apply, the alleged “pollutants” at issue in the underlying lawsuit must be “[a]t or from any site or location on which you or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations
. . . .”  the court found that the property damage arose from completed installation of drywall and did not arise while ABM was performing operations.

Next the court found that the exclusion for clean up and removal efforts did not apply because the underlying lawsuit did not demand for this kind of relief. 

The court also rejected the argument that the exclusion for recall costs was applicable, since  CDW has not actually been recalled from the market.  

Finally, the court held that the "your products" exclusion did not bar coverage.  The ABM drywall was no longer a good or product once it was installed.  At that point, it became "real property" and was not within the policy's definition of 'your product."  

Critically, because KB Home was listed as an additional insured in the Auto-Owners's policy, Auto-Owners duty to defend and indemnify extend to KB Home.  To the extent other builders were equally insistent with their subcontractors and are also identified as additional insured in their policies, this might mean the availability of a significant source of funding to resolve CDW case brought by homeowners against builder. 

Insurance company participation is critical for the ultimate resolution of the CDW crises. Auto-Owners brings home that the time is coming when the insurance carriers for the thousands of defendants in this litigation will finally start to provide relief to homeowners.  
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