Insurers win Chinese drywall coverage dispute

Source: www.businessinsurance.com, December 20, 2010
By: Jeff Casale

Insurers don’t have to pay a series of Chinese drywall-related homeowners’ claims, a federal judge ruled, hinging his decision on two policy exclusions.

On Dec. 16, U.S. District Court Judge Eldon Fallon in New Orleans granted 10 insurers’ motions to dismiss the claims in the case, In re: Chinese Manufactured Drywall Products Liability Litigation, ruling that coverage was barred under faulty materials and corrosion exclusions contained in the policies.

Noting that the policies do not provide definitions for “faulty” or “corrosion” and that neither term has been defined under Louisiana case law, Judge Fallon cited dictionary definitions of the words to support his ruling.

The Consumer Product and Safety Commission determined a link between Chinese drywall and corrosion of metal in homes where it has been installed as lawsuits were being filed in courts throughout the United States, but primarily in the southeast.

Judge Fallon wrote in his ruling that the Chinese-manufactured drywall contained in the plaintiffs’ homes constitutes “‘faulty materials’ as that term is used in their homeowners’ insurance policies, and thus, the loss therefrom is excluded from coverage.”

The homeowners had argued that the drywall was not “faulty” because it “functioned properly as drywall,” court papers say.

Judge Fallon wrote, however, that “although drywall serves its intended purpose as a room divider, wall anchor and insulator, the allegations in the complaints provide that the drywall emits foul-smelling odors and releases gases which damage silver and copper components in the home, including electrical devices, appliances and wiring.”

The drywall sheets, therefore, are “faulty because the materials of which they are composed.”

Judge Fallon also reviewed claims made by insurers that latent defect and pollution/contamination exclusions could apply to denial of coverage, however, he determined these exclusions did not apply.

A full copy of the judge’s order can be found at www.laed.uscourts.gov.

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