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Eleventh Circuit Holds No Duty to Defend or Indemnify Product Manufacturer in Chinese Drywall Litigation

Blogs, Insurance Coverage

Yesterday, the United States Court of Appeals for the Eleventh Circuit held that pollution exclusions in several insurance policies excluded coverage for damage allegedly caused by Chinese drywall, securing a victory for insurers over building products manufacturers. Granite State Insurance Company v. American Building Materials, Inc., No. 12-10979, 2013 WL 28430 (11th Cir., Jan. 3, 2013). A copy of the decision is available here.

KB Homes, a general contractor, purchased large quantities of drywall from American Building Materials. After receiving complaints from numerous homeowners years after construction was complete, KB Homes’ consultant determined that the drywall KB Homes installed was emitting sulfide gases. As the construction and building products industry is well-aware, various entities have concluded that drywall manufactured in China has been found to emit compounds which allegedly lead to premature corrosion of copper wire (among myriad other alleged damages). Both KB Homes and American Building were named as defendants in several class actions that were eventually consolidated and moved to the MDL Docket in the Eastern District of Louisiana.

Granite State and New Hampshire Insurance Company insured American Building Materials from 2007 through 2010. All policies contained pollution exclusions which excluded coverage for bodily injuries or property damage which occurred due to the release of pollutants (which the Granite State defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”).

Granite State and New Hampshire filed actions in federal court, seeking declaratory judgments that they had no obligation to defend or indemnify either KB or American Building for any damages due to the Chinese drywall. On summary judgment, the District Court held that the insurers had no duty to defend or indemnify KB Homes or American Building. The Eleventh Circuit’s opinion concerned choice of law issues – the insurers had argued that Florida law applied to the dispute, while KB Homes argued that Massachusetts law applied to the interpretation of the policy exclusion. Ultimately it did not matter – the Eleventh Circuit held that either under the law of Florida or Massachusetts, the result was the same. According to the Eleventh Circuit, sulfide compounds emitted from Chinese drywall are “pollutants,” and thus there was no coverage.

Insurance issues are always dicey, and products manufacturers operating on a national scale face the difficulties inherent in subtle differences in the law among the places they do business. The attorneys at GL are experienced in building products issues, and will be closely following the evolution of Chinese drywall litigation, as well as other issues facing building products manufacturers.