District Court Holds Pollution Exclusion Bars Coverage for Chinese Drywall Claims

Nationwide Mut. Ins. Co. v. The Overlook LL (E.D.Va., May 13, 2011)

This coverage disputed arises out of an underlying property damage claim caused by Chinese drywall. Overlook, LLC is a real estate developer that operated in Richmond, Virginia. Overlook has developed a complex known as the “Overlook Townhouse.” One of the units was purchased by Mr. Ricky Edmonds. After Overlook determined that various homes were constructed with Chinese drywall, Overlook undertook efforts to “work with” homeowners and remediate the affected homes. Overlook, however, did not repair the home owned by Mr. Edmonds as Mr. Edmonds had refused Overlook’s offer and instead simply filed suit.

Overlook sought coverage under a number of policies issued by Nationwide. The insurer agreed to provide a defense under a reservation of rights. While the respective policies presented some differences, each policy contained a pollution exclusion. Nationwide sought a declaration that it owned Overlook no defense or indemnity for claims arising out of the Edmonds action, in addition to seeking declaration that it was not required to provide coverage in connection to the Overlook property coverage claims.

With regard to the duty to defend, the court looked to the “Eight Corners” rule by which a court reviews the allegations of the complaint and the terms of the policy. In doing so, the court noted that Edmonds alleged that the drywall in his home was defective and emitted various sulfide gases and other toxic chemicals. In comparing these allegations to the language of the pollution exclusion, the court concluded, “As a result, Edmonds' allegations in his complaint regarding the movement of the sulfide gases satisfy the discharge, dispersal, seepage, migration, release or escape requirement of the Pollution Exclusion.10.”

The resulting inquiry was whether the sulfide gas constituted a “pollutant.” The court rejected the argument that the term pollutant was ambiguous, and instead held that the underlying complaint’s allegations fall squarely within the scope of the exclusion. As a result, Nationwide was not required to provide a defense to Overlook in response to the Edmonds suit.

The court did, however, deny Nationwide’s motion with respect to the duty to indemnify Overlook for losses involving other homes as there was insufficient discovery as to how the damage to the “non-Edmonds” home occurred.

For a copy of the decision, click here

Brian Biggie and Michael Glascott