In this multi-district litigation, the court considered the insurers' motions to dismiss plaintiffs' suits for alleged property damage caused by Chinese drywall.  In Re: Chinese Manufacture Drywall Products Liability Litigation, 2010 U.S. Dist. LEXIS 133497 (E.D. La. Dec. 16, 2010).  After determining there was coverage, the court considered several exclusions and the ensuing loss provisions in the various policies.  Ultimately, the court found no coverage and granted the motions to dismiss.

   Plaintiffs filed suit against the manufacturers, distributors, sellers and installers of Chinese drywall and their insurers.  Plaintiffs alleged the drywall emitted foul odors, and damaged metal and electronic elements and devices in their homes.     

   Considering the insurers' motions to dismiss and for judgment on the pleadings filed by several of the insurers, the court initially noted that the policies all defined "property damage" to include loss of use of tangible property.  Therefore, the damage caused by the Chinese drywall constituted a covered physical loss since the drywall prevented the Plaintiffs from fully using and enjoying their homes. 

   The Court then turned to the policies' exclusions.  First, the insurers failed to meet their burden to demonstrate that the damage caused by the Chinese drywall was a latent defect.  Second, the pollution and/or contamination exclusion was not applicable.  The Chinese drywall was not environmental pollution as contemplated by the Louisiana Supreme Court's analysis of the exclusion.  Moreover, the Plaintiff homeowners were not the typical polluters to whom the exclusion was intended to be directed.

   However, the court ruled that two exclusions were applicable.  First, damages were excluded because the Chinese drywall was faulty material.  The court found that "faulty material" constitutes a physical thing tainted by imperfection or impairment.  The court further noted that it was inconsistent to argue that Plaintiffs had suffered a loss due to the Chinese drywall, but that the drywall was not in any way faulty. The whole basis of the Plaintiffs' claims was that the Chinese drywall was faulty and rendered the homes unlivable.

   Second, the corrosion exclusion was applicable. Plaintiffs contended their loss was not caused by corrosion, but rather caused by the sulfur gases emitted by the Chinese drywall.  The court disagreed.  Plaintiffs' complaints alleged that the Chinese drywall released gases which caused corrosion to metallic and electrical components in their homes.  These allegations triggered the corrosion exclusion since the corrosion was responsible for the majority of losses suffered by Plaintiffs.

   Finally, the court turned to the ensuing loss provision.  The policies covered ensuing or resulting losses which (1) constitute covered losses, (2) were not excepted from coverage by any coverage exclusion.  Elsewhere, the court explained that the damage had to fall under the exclusion and the ensuing damage had to be a separable event, meaning the damage and the ensuing loss must be different in kind, not just degree.

   Here, Plaintiffs alleged that the gases emitted by the Chinese drywall caused (1) odors, and (2) corrosion of metal components and electrical wiring and devises.  The court found the odors were not ensuing because they were neither sufficiently different in kind from the losses caused by the Chinese drywall, nor the result of an extraneous event.  Further, the corrosion-related losses were not ensuing losses.  Even if the corrosion or corrosion-caused losses due to the Chinese drywall were ensuing or resulting losses, they would still not be covered because corrosion and corrosion-related losses were specifically excluded from coverage.

   Nevertheless, it was possible that in the future ensuing losses could occur.  Even the insurers conceded that if the corrosion caused by Chinese drywall resulted in a second accident, separable and different in kind, such as a fire, the losses therefrom would be covered as an ensuing loss.