Thousands of homeowners are smelling a rotten egg odor emanating from their walls. Just the result of a teenager’s prank gone awry?

No, it’s no prank. It’s 600 million pounds of drywall imported from China after the 2004–2005 hurricane seasons. Homeowners claim that Chinese drywall emits noxious sulfur odors, which are especially pungent when exposed to the heat and humidity common to the southern regions of the United States.

Florida is home to almost half of the estimated 100,000 homes constructed with Chinese drywall; although, complaints have emerged in more than two dozen other states, including Louisiana, Alabama, Mississippi, and Texas, to name a few. Hundreds of these suits have been transferred and consolidated to a federal court in Louisiana. Homeowners report that defective drywall has damaged electrical components, corroded wiring and caused major home appliances to fail, resulting in costly repairs and major headaches. Many have also experienced breathing problems, nausea, headaches and sore throats, allegedly from prolonged exposure to the odors. A number of homeowner lawsuits name the drywall manufacturers and some domestic builders as defendants.

Litigation on coverage for defective drywall claims is in its early stages, and both homeowners and commercial general liability (CGL) policies are being considered in the courts. Does the damage caused by the alleged defects in the drywall constitute an “occurrence”? If so, do pollution or “your work” exclusions apply? Get ready for debate, and potentially a debacle, as insurers and insureds duke it out in the courts.

Occurrences and Your Work
Courts widely accept that a CGL policy does not warranty the quality of construction. Instead, it insures against the risk of an accident or occurrence. They have often defined an accident as anything that happens that is unexpected, unusual and fortuitous. Clarifying “occurrence” is a stickier wicket.

A majority of decisions have found that damage confined to the contractor’s product and due to nonconforming performance is not an occurrence that triggers coverage. This is because the damage flowed naturally from deficient workmanship and, therefore, is not fortuitous. Notwithstanding, a minority has held that those same damages do qualify as an occurrence because the contractor intended to perform adequately and never expected harm to occur, even if the damage flowed from the deficient workmanship.

Some courts have interpreted an occurrence to be based upon the specific, resulting property damage at issue. For example, if the property damage resulting from defective workmanship goes beyond the builder’s work product, such as to other portions of the property, an insured’s argument for coverage may be bolstered.

The question of qualifying defective drywall as an occurrence often arises simultaneously with consideration of the “your work” exclusion. A typical faulty workmanship exclusion could contain the following or similar language: “We do not pay for loss caused by or resulting from faulty or inadequate… design… workmanship, construction or materials used in construction.”