Source: http://www.lexology.com, August 17, 2015
By: T. McRoy Shelley III, Rogers Townsend & Thomas PC
NEW NGC, INC. v. ACE AMERICAN INSURANCE CO., Dist. Court, WD North Carolina 2015 – Google Scholar.
Insurance carriers have been pretty successful in denying coverage for Chinese Drywall claims, even in jurisdictions where the “middle ground” approach has been used in construing an Absolute/Total Pollution Exclusion (that is, where courts have held only “traditional environmental pollution” is excluded under these provisions).
As I discussed in a 2014 article for the Environmental Claims Journal:
“Typical of this analysis are the Florida and Virginia courts who have addressed the Chinese drywall claims. In Granite State Ins. Co. v. Am. Bldg. Materials, 504 Fed. Appx. 815, 817-818 (11th Cir. Fla. 2013), the 11th Circuit Court of Appeals cited a number of Florida cases in denying coverage under a homeowner’s policy for damage caused by the release of sulfide gas from defective drywall. The court focused on the language of the Total/Absolute pollution exclusion:
The plain language of the pollution exclusions at issue in this appeal includes the damage from Chinese drywall. The sulfide gas released by the Chinese drywall falls within the definition of “pollutant” because it is a “gaseous . . . irritant or contaminant.” And the bodily injury and property damage alleged “would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape” of this pollutant.  (Id. at 818.)
The Court also addressed the central argument involved in cases where courts have followed the middle-ground approach in interpreting the Total/Absolute exclusion:
First, the defective drywall cannot be considered an “everyday activit[y] gone slightly, but not surprisingly, awry.” Second, the unexpected emission of sulfuric gas is the kind of release that a reasonable insured would understand as pollution. (Id.)
The Court was forced to address the middle ground approach because there was a question of whether Massachusetts or Florida law applied to these specific claims, and Massachusetts courts follow the middle ground approach.”
T. McRoy Shelley III (2014) Insurance Coverage for Environmental Claims: Current Litigation Issues in the United States, Environmental Claims Journal, 26:1, 4-26, DOI: 10.1080/10406026.2014.872957
(Let me know if you would like to receive a copy of the full article.)
In the current NC Case (linked above), the pollution exclusion was an updated version of the absolute/total provision:
This insurance does not apply to any injury, damage, expense, cost, loss, liability or legal obligation arising out of or in any way related to pollution, however caused.
Pollution includes the actual, alleged or potential presence in or introduction into the environment of any substance if such substance has, or is alleged to have, the effect of making the environment impure, harmful, or dangerous. Environment includes any air, land, structure or the air therein, watercourse or water, including underground water.
We shall have no duty to defend any suit arising out of or in any way related to pollution.
The District Court granted summary judgment to the carrier, holding that this language clearly applies to the alleged harm at issue, and none of the exceptions which North Carolina courts have applied to a total/absolute pollution exclusion were applicable.
One way to harmonize many of the cases interpreting pollution exclusion clauses (as some courts have explicitly noted) is to recognize the courts are applying some version of a “reasonable expectation” test (although some carriers and courts despise that phrase). For example, the District Court here specifically cited the fact that NGC purchased separate products-related pollution liability coverage from another carrier to support its conclusion that the pollution exclusion applied in these claims (although it did so in the context of an “if there were an ambiguity” analysis).
All of which should lead to the “reasonable expectation” there will be plenty of dispute over the application of these exclusions.