Chinese drywall and the CGL form
By David Thamann
Today, the insured can face claims based on a wide variety of exposures. Whether the commercial general liability (CGL) coverage form will apply to such claims depends to a great degree on how the form's exclusions are interpreted. Of course, these interpretations are the ultimate domain of the courts, but this article offers an opinion on the effect of some of the CGL form's exclusions on one of the current hot topic exposures facing insureds and insurers, claims arising from Chinese drywall.
The Chinese drywall claims, which are now beginning to churn through the courts, typically focus on property damage claims (although some bodily injury claims can also arise). Fumes given off by the drywall allegedly cause corrosion to pipes and electrical systems in the buildings where the drywall has been installed. Is the CGL form applicable to these claims? A review of the CGL exclusions shows that the pollution exclusion and the business risk exclusions can have an effect on coverage for the Chinese drywall claims.
The pollution exclusion applies to bodily injury (BI) or property damage (PD) arising out of the dispersal, seepage, or escape of pollutants, under certain conditions. One of these conditions is that the dispersal or escape be at or from any premises or location that is or was at any time owned or occupied by any insured. Presuming that the drywall vapors are pollutants, if the insured contractor, for example, owns the location where he constructs a house or building in which he installs Chinese drywall, a case can be made that the exclusion prevents coverage. Of course, if the contractor has never owned the premises or location, this part of the pollution exclusion is moot.
As for the other parts of the pollution exclusion, it should be pointed out that some coverage applies for BI and PD arising out of the named insured's products and completed operations. This is so because the standard pollution exclusion does not contain language explicitly excluding products and completed operations exposures; some coverage is therefore inferred. So, if the insured contractor has finished his work and the building owner later complains about pollution damage from drywall vapors, the pollution exclusion cannot be used to deny the claim.
The business risk exclusions (these do not apply to BI claims) consist of several parts, not all of which would be applicable to a Chinese drywall claim. For example, the part referring to "that particular part of real property" on which the named insured is performing operations is not applicable to completed operations; thus, any PD claim would have to be made while the insured contractor is still installing the drywall, and this is not the usual scenario. Another example would be the damage to "your (named insured) product". Drywall that the insured sells or handles is the insured's product, but, by definition, "your product" does not include real property, and once the drywall is installed in the building, it is real property.
This leaves the "damage to your work" exclusion and the "damage to impaired property or property not physically injured" exclusion.
The "damage to your work" exclusion would prevent coverage for PD to the drywall itself if the drywall corroded or fell apart (just, for example, as the exclusion would prevent coverage for the collapse of a wall that the insured had built). Moreover, the exclusion would prevent coverage for damage to pipes and electrical work done by the insured since the exclusion applies to PD to "your work" arising out of it or any part of it.
For those insured contractors concerned with this exclusion, the key to bypassing it is the subcontractor exception. The exclusion does not apply to damage to work performed by a subcontractor, or to damage to the named insured's own work arising out of the subcontractor's work. So, if a subcontractor has installed the defective drywall, any resulting PD claim against the general contractor (GC) will be covered by the GC's CGL form.
The damage to impaired property exclusion is not one to be overlooked when it comes to Chinese drywall claims. The purpose of the exclusion is to prevent coverage for PD to property that has not been physically injured arising out of a defect or dangerous condition in the named insured's product or work. In other words, if the drywall makes the building uninhabitable, this exclusion would prevent coverage for the PD claim against the named insured. Note, however, that this exclusion applies only if the building can be restored to use by the replacement or removal of the named insured's product or work. This means that if the building can be again made habitable by the removal of the defective drywall, the exclusion will apply. But, if the building cannot be used again even after the drywall has been removed and replaced by non-defective drywall, the impaired property exclusion is not applicable to the PD claim.
One last exclusion should be discussed -- exclusion (n), the recall of products, work, or impaired property exclusion. This exclusion prevents coverage for damages claimed for any expense incurred by the named insured or others for the recall, inspection, repair, replacement, removal, or disposal of the named insured's product or work if such product or work is withdrawn from use because of a known or suspected defect or dangerous condition. In other words, if the claimant has his building gutted and the drywall removed, the expenses for such action will not be paid by the named insured's CGL form.
Just a quick mention of coverage B (personal and advertising injury liability0 and coverage C (medical payments) in relation to Chinese drywall exposures. Coverage B requires the definition of personal and advertising injury to be met in order to apply. A quick perusal of the various parts of that definition does not show any connection with a possible Chinese drywall claim. As for coverage C (BI claims only), expenses for a BI claim are subject to all of the coverage A (BI and PD liability) exclusions (such as the pollution exclusion), plus any BI expense included within the products-completed operations hazard. And, since most, if not all, Chinese drywall BI claims will be included in this hazard, medical payments coverage will not be a factor.
General liability coverage for Chinese drywall claims faces many obstacles which many courts will spend many years trying to untangle. Insureds, insurers, and claimants alike should be prepared for a long haul.
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