Virginia Supreme Court Ends Chinese Drywall Debate

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We are pleased to report that the Virginia Supreme Court has tacked down – or, more appropriately, “drywall-ed in” – the issue of whether a pollution exclusion in a property insurance policy precludes coverage for Chinese drywall claims under Virginia law. In the recent en banc decision of Travco Insurance Co. v. Larry Ward, No. 120347 (Va. Nov. 7, 2012), the court held that sulfuric gas emitted from defective drywall constituted a “pollutant,” and, therefore, the pollution exclusion in a homeowners’ policy barred coverage for a claim for damages allegedly resulting from Chinese drywall.

The procedural history of the Travco case is crucial to understanding the import of the court’s decision. In May 2009, homeowner Larry Ward (Ward), began experiencing problems with his newly constructed Virginia Beach home and discovered that the home contained defective Chinese drywall. Ward filed a claim with his homeowners’ carrier, Travco Insurance Company (Travco), alleging that the drywall installed in his home emitted sulfide gases and toxic chemicals, which created noxious odors and caused health issues and property damage. Travco denied Ward’s claim and brought a declaratory judgment action in federal court in Virginia, in which it claimed the alleged damage was excluded from coverage by the terms of Ward’s homeowners’ policy, specifically, the policy exclusions for: (1) pollutants; (2) faulty, inadequate or defective materials; (3) latent defect; and (4) rust or other corrosion. In June 2010, the district court held that the policy did not provide coverage and granted Travco summary judgment. Ward promptly appealed the ruling to the U.S. Circuit Court of Appeals for the Fourth Circuit, arguing the exclusions in the policy were ambiguous and overbroad. With regard to the pollution exclusion, he argued it was inapplicable because the process by which elemental sulfur is emitted from the drywall does not constitute a “discharge” as that term is used in the pollution exclusion. The court of appeals, in turn, certified to the Virginia Supreme Court a question regarding whether each of the four exclusions was unambiguous and reasonable.

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