Louisiana Court: Policy Exclusions Can’t Be Used to Deny Drywall Claims

A Louisiana court has rebuffed an insurance company’s use of the pollution exclusion and two other exclusions in an “all risk” homeowners insurance policy to deny claims resulting from so-called Chinese drywall.

Specifically, the Civil District Court in New Orleans Parish, in Simon Finger and Rebecca Finger versus Audubon Insurance Company, No. 09-8071, said Audubon’s “Pollution or Contamination” (POL), Gradual or Sudden Loss” (GSL) and “Faulty, Inadequate or Defective Planning” (FIDP) exclusions could not be used as “affirmative defenses” to deny coverage in the case.

The Fingers filed a claim related to damage caused by “off-gasing” from the drywall under their Audubon homeowners policy in June 2009. Audubon denied the claim the following month citing the exclusions listed above as reasons for the denial.

In the order describing its reasoning, the court asserted that under an “all risk” policy, an insured “has a ‘very light’ burden and must show only that damage” occurred. The onus, according to the court, is on the insurer to clearly define why claims are denied. In addition, “exclusions must be interpreted as narrowly as possible to provide maximum coverage for the insured,” the court said.

According to the court, the pollution “exclusion does not, and was never intended, to apply to residential homeowners claims for damages caused by substandard building materials.” The court additionally said that the “fact that Chinese drywall releases various gases into the home is not sufficient to qualify as a ‘pollutant’ under the pollutant exclusion.”

As to the GSL exclusion, the court said it “is designed to exclude expected losses,” and clarified that in preceding cases, Louisiana courts have found that “the purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen.” As such, coverage is required in this case.

The GSL exclusion disallows damage caused by corrosion, but the court said in this case, the corrosion caused “by the sulphurous gases released by the Chinese drywall is the loss, not the cause of the loss.”

The FIDP exclusion allows for denial of claims due to defective materials used in construction or remodeling. Here, however, the Chinese drywall is not defective within the meaning of Audubon’s exclusion, the court said. While Audubon does not “provide a useful definition of this exclusion,” under the court’s interpretation of the “plain language of the Audubon policy, the Chinese drywall ‘defect’ is not one that renders the drywall unable to perform the purpose of drywall.”

The court’s opinion was written by Judge Lloyd J. Medley on March 22, 2010.