Source: http://www.irmi.com, April 2013
By: J. Kent Holland Jr., Construction Risk.com LLC
Damages claimed by home owner, which were allegedly caused by Chinese drywall that was installed in his home, were excluded from coverage under his homeowners insurance policy pursuant to several exclusions, including the pollution exclusion.
When it received the home owner’s claim for damages from drywall, the insurer, Travco Insurance Company, denied the claim and filed suit, seeking a declaratory contract that the homeowners policy did not provide coverage for the losses claimed. The district court granted Travco summary judgment, finding that four different exclusions barred coverage. Upon appeal to the Fourth Circuit Court of Appeals, the court concluded that it could not decide the appeal without certifying a question to the Virginia Supreme Court to answer whether each of the four exclusions is unambiguous and reasonable in its form, scope, and application in light of the unusual nature of the losses involved.
The Virginia Supreme Court, in the decision of Travco Ins. Co. v. Ward, 736 S.E.2d 321 (Va. 2012), resolved the Fourth Circuit’s question by finding that all four exclusions were properly applied to exclude coverage for the alleged damages. The exclusions and the court’s reasoning are explained herein.
After purchasing a newly constructed home, the home owner obtained a homeowners insurance policy from Travco. Approximately 2 years later, the home owner experienced problems with the house and retained an expert, who determined that the problems were caused by Chinese drywall.
The home owner filed suit against the developer, builder, and drywall contractor. No explanation was provided in the instant court decision as to what resulted from the other litigation. After filing that suit, the home owner made a claim against his homeowners policy, which led to the court decision finding that several policy exclusions barred coverage.
In the suit against the builder, the home owner alleged that the Chinese drywall emitted various sulfide gases and/or toxic chemicals through “off-gassing” that created “noxious odors” and “caused health issues, damage, and corrosion.” He also alleged that his damages were caused because the home “was built with defective drywall.”
In the claim that was filed with Travco, the home owner asserted that the “drywall caused fumes and odors, health issues, and damage to the home’s air conditioning system, garage door, and flatscreen televisions.” He also submitted an expert report that noted damages to the heating, ventilation, and air-conditioning coils and other metallic surfaces in the home and noted that the damage was associated with sulfur emissions from the Chinese drywall.
Travco’s denial of coverage was based on the following policy exclusions:
The court addressed each of the above exclusions in its analysis, as discussed below.
The court determined that the damage caused by the drywall was the result of a latent defect in the drywall. In reaching that decision, the court rejected the home owner’s argument that the words “causes it to damage OR destroy itself” must be read to mean that the defect must both cause damage AND destroy the property. The court said that the home owner’s argument “violates basic rules of grammar and insurance contract construction.” (Author’s note: This shows the importance of exercising grammatical care when drafting policy language.)
Because it found there was no ambiguity in the latent ambiguity exclusion, the court stated that it “need not look beyond the plain meaning of the policy language to determine whether it excludes damage caused by the Chinese drywall from coverage.” The actual defect involve here, said the court, was the release of sulfuric gases in the drywall, and such future releases that occurred after installation of the drywall were not discoverable until 2 years after the owner lived in his house. The defect was thus “hidden or concealed, and not visible or apparent.”
A “latent defect” is one that, as previously defined by the court, is as follows: “A defect not manifest, but hidden or concealed, and not visible or apparent; a defect hidden from knowledge as well as from sight; specifically, a defect which reasonably careful inspection will not reveal; one which could not have been discovered by inspection.”
Applying that definition, the defect of the drywall in this case was determined to be “latent,” and the damages were, therefore, subject to the latent defect exclusion.
In construing this exclusion, the court cited Webster’s Dictionary definitions for each of the words “faulty,” “inadequate,” and “defective” and concluded that “the drywall is clearly defective” as even the home owner alleged in his complaint against the builder that the builder used “defective drywall,” and indeed “the drywall at issue in this case could not reasonably be said to perform its function because its sulfuric gases rendered the home uninhabitable.” For these reasons, the court held that this exclusion was applicable to bar the damages from recovery.
The home owner argued that this exclusion did not apply because the terms were not defined in the policy, and the damage was not caused by corrosion, but rather, the corrosion was itself the actual damage. He asserted that a reasonable insured would believe the corrosion exclusion was inapplicable because the loss was not caused by corrosion, and the term “rust” was ambiguous.
Looking again to the Webster’s Dictionary definitions, the court stated that “rust” is defined as “the reddish porous brittle coating that is formed on iron especially when chemically attached by moist air and that consists essentially of hydrated ferric oxide but usually contains some ferrous oxide and sometimes iron carbonates and iron sulfates—compare corrosion.” The word “corrosion” is defined as “the action, process, or effect of corroding: as … the action or process of corrosive chemical change not necessarily accommodated by loss of form or compactness; typically: a gradual wearing away or alteration by a chemical or electrochemical essentially oxidizing process (as in the atmospheric rusting of iron).”
Reading these definitions in conjunction confirms the clarity of the corrosion exclusion, said the court. It makes no difference whether the corrosion is “naturally occurring” or “other corrosion” and makes no difference whether it is “gradual” or sudden. In conclusion, the court held, “The term ‘loss’ … ’caused by’ … ‘rust’ or ‘other corrosion’, is unambiguous and when interpreted according to its plain meaning, encompasses the corrosion caused by the off-gassing of sulfur from the Chinese drywall…. Any such damage is excluded from coverage.”
The policy in question defined pollution as follows: “Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste….” Travco argued that the pollution exclusion applied because the sulfuric gas emanating from the drywall was an “irritant or contaminant” under the plain language of the policy. It also argued that the “sulfur gas” in the house was a contaminant because it was not “supposed to be” in the home and it caused harm.
As explained by the court, “The sulfuric gases moved from the drywall to the air in the home by way of ‘discharge, dispersal, seepage, migration, release, or escape.'” The court agreed with Travco that these terms are plain in meaning and sufficient to encompass the emission of gas from drywall. Finding that the pollution exclusion in the Travco policy was not overbroad or unreasonable, the court next determined that “sulfuric gases” from the drywall constituted a “solid, liquid, gaseous, or thermal irritant or contaminant” that was in the home as the result of “discharge, dispersal, seepage, migration, release, or escape.”
In reaching that decision, the court said, “It is beyond dispute that the sulfuric substance emanating from the drywall is gaseous.” Indeed, the court pointed to the complaint filed by the home owner wherein he asserted the presence of “odorous fumes in the residence,” described the gas as “toxic,” and alleged it caused “skin rashes,” “lesions,” “sinus congestion,” and “nosebleeds.” With those properties, the court found that the sulfuric gases from the drywall fell within the definition of “irritant or contaminant” as would be contemplated and commonly understood by a policyholder. Moreover, “reduced sulfur gas” is a pollutant per the relevant state and federal regulations cited by the court.
For all these reasons, the court held that the sulfuric gases from the drywall were a pollutant within the purview of the pollution exclusion.
In conclusion, Travco Insurance was held to have correctly denied coverage for the alleged damages based on all four exclusions.