By: Richard E. Guttentag, Esq., Stearns, Roberts & Guttentag, L.L.C.

An insurer’s duty to defend its insured depends solely on the facts and legal theories alleged in the claims brought against the insured in a lawsuit, bringing the lawsuit within the policy coverage.

In First Specialty Insurance Corp. v. Milton Construction Company, 2012 WL 2912713 (S.D.Fla. 2012), a general contractor (“Contractor”) and others were sued in a class action suit by homeowners for property damage and personal injuries allegedly caused by the Contractor’s construction of condominium units with defective Chinese drywall in Miami, Florida. The homeowners alleged in their Complaint that sulfur compounds exited the Chinese drywall and entered the air, causing rapid sulfidation and damage to personal property, such as air conditioning and refrigerator coils, faucets, utensils, electrical wiring, copper, electronic appliances and other metal surfaces and property. The homeowners also alleged that the release of the sulfur compounds caused personal injury resulting in eye problems, sore throat and cough, nausea, fatigue, shortness of breath, fluid in the lungs, and/or neurological harm.

The Contractor was insured under two commercial general liability policies, which provided coverage to the Contractor for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which the insurance applies”. However, the policies also contained a “Total Pollution Exclusion” endorsement, providing in relevant part:

“This insurance does not apply to:

(1) Bodily injury, property damage, personal injury . . . caused by or arising out of, in whole or in part, the actual, alleged, or threaten discharge, dispersal seepage, migration, release, or escape of pollutants at any time.

Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste.”

After the homeowners filed their action, the Contractor requested its insurer to defend and indemnify it in the defective Chinese drywall litigation. However, the insurer took the position that there was no duty to defend or indemnify the Contractor under the terms of the policies due to, in part, the Total Pollution Exclusion provision. The insurer filed an action seeking a declaratory judgment that the insurance policies do not require it to defend and indemnify the Contractor.

An insurer’s duty to defend depends solely on the facts and legal theories alleged in the pleadings and the claims against the insured. Thus, an insurer’s duty to defend its insured against a legal action arises when the complaint alleges facts that fairly and potentially bring the suit within the policy coverage. If it is determined that there is no duty to defend, then a finding that there is no duty to indemnify is required because the duty to indemnify is narrower than the duty to defend. Therefore, the Court explained that it must look to the allegations of the Complaint compared with the coverage afforded under the insurance policies to determine whether the insurer has a duty to defend or indemnify the Contractor.

The Court looked at the homeowners’ allegations in the complaint, which alleged that the homeowners suffered personal injuries and property damage caused by sulfur compounds exiting the defective Chinese drywall and entering the air. Florida courts, following the Florida Supreme Court decision of Deni Associates of Florida, Inc. v. State Farm Fire & Casualty Insurance Co., have found that allegations pertaining to the release of sulfur gases from defective Chinese drywall clearly fell within pollution exclusions virtually identical to the pollution exclusion in the Contractor’s policies. Accordingly, the Court concluded that it was apparent that the drywall’s release of sulfur compounds from the Chinese drywall both contaminated and irritated people and property. Therefore, the Court held that the sulfur compounds constitute “pollutants” and the Total Pollution Exclusion applied such that the Contractor’s insurer had no duty to defend or indemnify the contractor in the homeowners’ action against the contractor.

This case demonstrates that a contractor’s insurer’s duty to defend the contractor against an action is dependent on whether the complaint alleges facts that fairly and potentially bring the suit within the policy coverage.

About the Author: Richard E. Guttentag is a partner with Stearns, Roberts & Guttentag, L.L.C., and is Board Certified in Construction Law by the Florida Bar. Mr. Guttentag exclusively in construction law including construction lien claims and defense, payment and performance bond claims and defense, bid protests, construction contract preparation and negotiation, and construction and design defect claims and defense. He can be reached for consultation at [email protected].

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