Is My Drywall Chinese? - HB Litigation Conferences

Introduction
Contractors, including general contractors, subcontractors, and remodelers, who are
sued by homeowners for damages caused by defective Chinese drywall will seek a defense
and indemnity for such suits under their commercial general liability (“CGL”) insurance
policies. 1 Insurers are expected to deny coverage under such policies on a number of
grounds, including the so-called absolute pollution exclusion. It will likely take years for the
courts to sort through the coverage issues that will be generated by claims for coverage
arising out of defective Chinese drywall. As discussed below, it is likely that some
contractors, under the law of some states, will obtain coverage -- while other contractors will
not. The main determinants of coverage will be: (i) the state in which the suit for insurance
coverage is filed, (ii) which state’s law is held to be applicable to the insurance coverage
dispute, and (iii) which iteration of the absolute pollution exclusion is included in the
insurance policy at issue. The following is an overview of the factors that will determine
whether contractors are covered by their CGL policies for liability arising out of Chinese
drywall.
I. “Property Damage” Caused by an “Occurrence”
To obtain coverage for any construction defect claim, a contractor must demonstrate
that the allegedly defective construction has caused “property damage” caused by an
“occurrence,” as those terms are used in the CGL policy’s insuring agreement. “Property
damage” is defined to mean physical injury to tangible property or loss of use of property
1 This paper uses the term "Chinese drywall" since that is the term that is most
commonly used in the media and by relevant parties. We note, however, that this issue may
turn out not to be a Chinese drywall problem but rather one that is shared by drywall
manufactured in the United States. This aspect of the problem will only be clarified once the
scientific cause of the problem is determined.
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