Florida Court Finds No Coverage for Chinese Drywall Claim

In its recent decision in First Specialty Insurance Corp. v. Milton Construction Co., 2012 U.S. Dist. LEXIS 97972 (S.D. Fla. July 16, 2012), the United States District Court for the Southern District of Florida had occasion to revisit the issue of whether the total pollution exclusion applied to a class action lawsuit alleging harms caused by Chinese drywall.

The insured, Milton Construction Company, was named as a defendant in a class action brought by homeowners alleging property damage and bodily injury as a result of the use of Chinese drywall in condominiums manufactured by Milton.  While the underlying suit was brought in Louisiana, the condominiums at issue were built in Florida.  Milton sought coverage under successive general liability policies issued by First Specialty, each of which contained total pollution exclusions precluding coverage for loss “arising out of, in whole or in part, the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.”  First Specialty denied coverage to Milton under both policies on the basis of this exclusion.

After determining that Florida law governed the coverage dispute, the court looked to Florida law governing the total pollution exclusion.  Citing to the Florida Supreme Court’s seminal decision in Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Ins. Co., 711 So. 2d 1135 (Fla. 1998), the Milton court observed a consistently broad application of the total pollution exclusion in Florida, even to matters not traditionally thought to involve environmental or industrial pollution.  The court further observed that the decision in Deni served as the basis for decisions by the Southern District of Florida holding the exclusion applicable to Chinese drywall claims similar to those brought against Milton. See, e.g., Colony Ins. Co. v. Total Contracting & Roofing, Inc., 2011 U.S. Dist. LEXIS 120269 (S.D. Fla. Oct. 18, 2011); General Fidelity Ins. Co. v. Foster, 808 F. Supp. 2d 1315 (S.D. Fla. 2011).  The court found “these decisions well-reasoned and instructive,” explaining:

In this case, the sulfur compounds that exited the Chinese drywall allegedly caused "rapid sulfidation" to personal property, including home appliances, and "eye problems, sore throat and cough, nausea, fatigue, shortness of breath, fluid in the lungs, and/or neurological harm" to the homeowners. …  From these allegations, it is readily apparent that the drywall's release of sulfur compounds both contaminated and irritated people and things. Therefore, the sulfur compounds constitute "pollutants" and the Total Pollution Exclusion applies.

In reaching its decision, the court considered and rejected various arguments raised by Milton.  Among these assertions was that the underlying action did not specify whether the sulfur caused the loss or whether “it was in fact the Chinese Drywall that was causing the harm.”  The court concluded that on the contrary, the complaint clearly alleged that the installed drywall emitted injury-causing sulfur. The court also rejected Milton’s assertion that the exclusion “is overbroad and could lead to absurd results, if literally construed.”  In other words, Milton argued that the exclusion should be limited to traditional environmental pollution.  The court found this argument unavailing as well, explaining:

This argument is foreclosed by Deni Associates, wherein the Florida Supreme Court unequivocally stated: "[w]e cannot accept the conclusion reached by certain courts that because of its ambiguity the pollution exclusion clause only excludes environmental or industrial pollution." See Deni Associates, 711 So. 2d at 1138-39. … The cases upon which Milton relies, by contrast, apply Louisiana law, which is exactly the opposite of Florida's. In Deni Associates, the Florida Supreme held that the pollution exclusion was unambiguous, even while noting that a minority of jurisdictions, including Louisiana, had reached contrary conclusions. See Deni Associates, 711 So. 2d at 1137-39. Moreover, "the fact that different judges have reached different interpretations of similar policy language does not necessarily mean that the language is ambiguous."

Finally, the court rejected Milton’s argument that First Specialty had a duty to defend since it was possible that it would be required to perform destructive testing on the drywall, which could result in harm to other parts of the condos.  The court found that this argument made “no sense,” since the duty to defend is based solely on the allegations of the underlying complaint, which made no reference to destructive testing.  As the court explained “[i]f … the Louisiana plaintiffs have not sought compensation for destructive testing or cleanup, then obviously First Specialty would have no duty to defend against such non-existing allegations.”