First Speciality Insurance Corporation v. Milton Construction Company

Filing 18

ORDER granting 12 Motion for Summary Judgment. See ORDER for details. This case is CLOSED. Signed by Judge Robert N. Scola, Jr. on 7/16/2012. (jky)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
Case No. 12-20116-Civ-SCOLA
FIRST SPECIALTY INSURANCE CORP.,
Plaintiff,
vs.
MILTON CONSTRUCTION COMPANY,
Defendant.
_________________________________________/
ORDER ON MOTION FOR SUMMARY JUDGMENT
THIS MATTER is before the Court upon the Plaintiff’s Motion for Summary Judgment
[ECF No. 12], filed by First Specialty Insurance Corporation (“First Specialty”). For the reasons set
forth below, this Motion is granted.
Introduction
In this action, First Specialty seeks a declaration that it has no duty to defend or indemnify
Milton Construction Company (“Milton”) under two insurance policies in a Chinese drywall class
action lawsuit pending in the United States District Court for the Eastern District of Louisiana. Milton
has been sued by homeowners in the Louisiana action for property damage and personal injuries
allegedly caused by Milton’s construction of condominium units with defective Chinese drywall. First
Specialty asserts in the Complaint that it has no duty to defend or indemnify Milton in the Louisiana
action because, among other reasons, the applicable policies contain a Total Pollution Exclusion
endorsement that bars coverage here. First Specialty now seeks summary judgment on the basis of the
Total Pollution Exclusion.
Statement of Facts1
In 2008, Milton and a number of other defendants were sued in a putative class action in the
Eastern District of Louisiana for property damage and personal injuries allegedly caused by defective
Chinese drywall. See Block v. Gebrueder Knauf Verwatungsgesellschaft, K.G., et al., Case No. 111363 (E.D. La., filed June 8, 2008). The plaintiffs with claims against Milton in that action are all
residents and homeowners at the San Lorenzo Condominium in Miami, Florida.
1

Consistent with Federal Rules of Civil Procedure 56, these facts are undisputed and material, and construed in
the light most favorable to Milton, as the nonmoving party.

All of the allegations against Milton in the Louisiana action arise out of the allegedly defective,
and unreasonably dangerous, drywall and the harmful effects of the sulfur compounds that allegedly
exited the drywall, causing property damage and personal injuries. Specifically, the plaintiffs allege
that sulfur compounds exited the Chinese drywall, 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.” La. Compl. ¶¶ 25, 26. The release of the
sulfur compounds also allegedly “caused personal injury resulting in eye problems, sore throat and
cough, nausea, fatigue, shortness of breath, fluid in the lungs, and/or neurological harm.” Id. ¶¶ 27, 30.
During the relevant time periods, Milton was insured under two commercial general liability
policies issued by First Specialty. The policies provided insurance coverage to Milton 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.” Policy at 1 (Form CG 00 01 10 01). Both policies also
contained a Total Pollution Exclusion endorsement, stating in relevant part as follows:
This insurance does not apply to:
(1) “Bodily injury,” “property damage,” personal injury,” or
“advertising injury” caused by or arising out of, in whole or in
part, the actual, alleged, or threatened discharge, dispersal
seepage, migration, release, or escape of pollutants at any time.
(2) Any loss, cost, or expense arising out of any:
(a) request, demand, or order that any Insured or others
test for, monitor, clean up, remove, contain, treat,
detoxifying, or neutralizing or in any way responding to,
or assessing the effects of pollutants.
Pollutants means any solid, liquid, gaseous, or thermal irritant or
contaminant including smoke, vapor, soot, fumes, acid, alkalis,
chemicals, and waste. Waste includes material to be recycled,
reconditioned, or reclaimed.
See Total Pollution Exclusion (Endorsement FSIC-3381).
After the Louisiana action was filed, Milton requested that First Specialty defend and
indemnify it in the defective Chinese drywall litigation. First Specialty took the position, however,
that there is no duty to defend or indemnify under the terms of the policies due to, in part, the Total
Pollution Exclusion provision. To that end, First Specialty filed this action seeking a declaratory
judgment that the insurance policies do not require it to defend and indemnify Milton. This matter is
now ripe for determination on summary judgment.

Legal Standard
Under Federal Rule of Civil Procedure 56, “summary judgment is appropriate where there ‘is
no genuine issue as to any material fact’ and the moving party is ‘entitled to a judgment as a matter of
law.’” See Alabama v. North Carolina, 130 S. Ct. 2295, 2308 (2010) (quoting Fed. R. Civ. P. 56(a)).
Where the record as a whole could not lead a rational trier of fact to find in the nonmovant’s favor,
there is no genuine issue of fact for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 587 (1986). “[O]nce the moving party has met its burden of showing a basis for the motion, the
nonmoving party is required to ‘go beyond the pleadings’ and present competent evidence designating
‘specific facts showing that there is a genuine issue for trial.’” United States v. $183,791.00, 391 F.
App’x 791, 794 (11th Cir. 2010) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)). Thus,
the nonmoving party “may not rest upon the mere allegations or denials of his pleadings, but [ ] must
set forth specific facts showing that there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248 (1986) (citation omitted). “Summary judgment is particularly suited to cases of
insurance coverage because the interpretation of a written contract is a matter of law to be decided by
the court.” Int’l Ship Repair & Marine Servs., Inc. v. N. Assur. Co. of Am., 2011 WL 5877505, at *4
(M.D. Fla. Nov. 23, 2011).
Legal Analysis
The Court finds that First Specialty is entitled to summary judgment because, under the Total
Pollution Exclusion endorsement, it has no duty to defend or indemnify Milton in the Louisiana action.
A. Choice of Law
At the outset, the Court must determine what body of law to apply to this scope of insurance
dispute. In diversity actions, such as this one, choice of law questions are resolved by reference to the
forum state’s law. See Rando v. Gov’t Emps. Ins. Co., 556 F.3d 1173, 1176 (11th Cir. 2009). “Florida
is the forum state for the present action, so Florida’s conflict-of-law rules will govern.” Valley Forge
Ins. Co. v. Olem Shoe Corp., 2011 WL 3652561, at *1 (S.D. Fla. Aug. 19, 2011) (Cooke, J.). “With
regard to insurance contracts, Florida follows the ‘lex loci contractus’ choice-of-law rule, which
‘provides that the law of the jurisdiction where the contract was executed governs the rights and
liabilities of the parties in determining an issue of insurance coverage.’” Rando, 556 F.3d at 1176.
Thus, as both parties agree, Florida substantive law applies to this declaratory judgment action because
First Specialty delivered the insurance policies to Milton in Florida. See State Farm Mut. Auto. Ins.
Co. v. Roach, 945 So. 2d 1160, 1163 (Fla. 2006).

B. Insurer’s Duty to Defend and Indemnify
“The duty to defend depends solely on the facts and legal theories alleged in the pleadings and
[the] claims against the insured.” Lawyers Title Ins. Corp. v. JDC (Am.) Corp., 52 F.3d 1575, 1580
(11th Cir. 1995). Thus, “an insurer’s duty to defend its insured against a legal action arises when the
complaint [in the underlying case] alleges facts that fairly and potentially bring the suit within
policy coverage.” See Jones v. Fla. Ins. Guar. Ass'n, Inc., 908 So. 2d 435, 442-43 (Fla. 2005).
A “determination that the insurer has no duty to defend requires a finding that there is no duty to
indemnify.” See Trailer Bridge, Inc. v. Ill. Nat’l Ins. Co., 657 F.3d 1135, 1146 (11th Cir. 2011). This
is because “the duty to indemnify is narrower than the duty to defend and thus cannot exist if there is
no duty to defend.” WellCare of Fla., Inc. v. Am. Int’l Specialty Lines Ins. Co., 16 So. 3d 904, 906
(Fla. 2d DCA 2009). Therefore, the Court must look to the allegations in the underlying Louisiana
action as compared with the coverage afforded under Milton’s insurance policies to determine whether
First Specialty has any duty to defend or indemnify Milton. See Gen. Fid. Ins. Co. v. Foster, 808
F. Supp. 2d 1315, 1319 (S.D. Fla. 2011) (Moore, J.).
C. Applicability of Total Pollution Exclusion
Whether First Specialty has a duty to defend Milton in the Louisiana action turns on the
applicability and effect of the Total Pollution Exclusion endorsement. The Louisiana plaintiffs allege
that they suffered damages and injuries caused by sulfur compounds that exited the defective Chinese
drywall and entered the air. See La. Compl. ¶¶ 25-30. The parties disagree over whether, through
these allegations, the plaintiffs in the Louisiana action are seeking to hold Milton liable for personal
injuries and/or property damage caused by the alleged “discharge, dispersal, seepage, migration,
release, or escape of pollutants” (i.e., “any solid, liquid, gaseous, or thermal irritant or contaminant”),
such that the Total Pollution Exclusion would negate the duty to defend or indemnify. See Total
Pollution Exclusion (Endorsement FSIC-3381).
The seminal Florida case on pollution exclusions in insurance policies is Deni Associates of
Florida, Inc. v. State Farm Fire & Casualty Insurance Co., 711 So. 2d 1135 (Fla. 1998). In that case,
the Florida Supreme Court addressed whether a pollution exclusion applied to two separate incidents,
one involving indoor air contamination caused by an accidental ammonia spill inside a commercial
building, and another involving two bystanders who were accidentally sprayed with insecticide near a
citrus grove. Id. at 1136-37. In both instances, the insurers disputed coverage based upon a pollution
exclusion that barred liability for any injury or damage “arising out of the actual, alleged or threatened
discharge, dispersal, release or escape of pollutants,” with “pollutants” meaning “any solid, liquid,
gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acides, alkalines,

chemicals and waste.” Id. at 1137. In considering this pollution exclusion, the Florida Supreme Court
rejected the suggestion that it was ambiguous. Id. at 1138. The court also rejected the argument that
the provision should apply only to environmental or industrial pollution, because nowhere in the
policies did such a limitation appear. Id. This result, while following the majority rule, is contrary to
the law of some jurisdictions, including Louisiana. Id. In applying the pollution exclusion to the facts
of the case, the Florida Supreme Court found it “clear that the incidents at issue were excluded from
coverage under the respective insurance policies.” Id. at 1141. The court reasoned that both ammonia
fumes and insecticides were “irritants” or “contaminants” and, as such, “pollutants” under the policies.
Id.
Following Deni Associates, courts in the Southern District of Florida have found allegations
pertaining to the release of sulfur gases from defective Chinese drywall clearly within pollution
exclusions virtually identical to the one in this case. For example, in Colony Insurance Co. v. Total
Contracting & Roofing, Inc., 2011 WL 4962351 (S.D. Fla. Oct. 18, 2011) (Seitz, J.), the district court
found an insurer had no duty to defend or indemnify a contractor in Chinese drywall litigation because
a pollution exclusion unambiguously applied:
The Policies are clear and unambiguous and preclude coverage for liability related to
hazardous materials and/or pollutants, which the Policies define as gaseous irritants or
contaminants. The allegations of the Smiths’ MDL Complaint demonstrate that all of
their damages and injuries arise from the “sulfides and other noxious gases” released
from the Chinese manufactured drywall. That the “sulfides and other noxious gases”
constitute irritants or contaminants under the Policy is readily apparent. . . . [T]hese
“sulfides and other noxious gases” caused damage to property (corroding electronic
appliances, electrical wiring and metal surfaces in their home) and personal injuries
(eye irritation, sore throat and cough, nausea, fatigue, shortness of breath, fluid in the
lungs, and/or neurological harm). Thus, it is inescapable that the “sulfides and other
noxious gases” released by the Chinese manufactured drywall in the Smiths’ residence
plainly qualify as gaseous irritants and contaminants. . . . Moreover, the “sulfides and
other noxious gases” are gaseous irritants and contaminants and therefore fall squarely
within the broad definition of “pollutants” provided in the Policies.
Id. at *4-*5.
Likewise, in General Fidelity Insurance Co., cited above, the district court found a pollution
exclusion unambiguously applied to allegations of damage caused by sulfur compounds released from
defective Chinese drywall. See Gen. Fid. Ins., 808 F. Supp. 2d at 1320-21. The court’s decision
hinged on the fact that the sulfide gases and compounds released from the drywall allegedly caused
irritation and contamination, thereby bringing such gases within the definition of “pollutants” under the
policy exclusion:

The Amended Complaint states that the presence of the excessive amounts of sulfur and
strontium cause “damage and corrosion” including the “pitting and/or tarnishing” of
metals. . . . [T]he excessive elements have also caused “respiratory problems, sinus
problems, eye problems, and nosebleeds.” The presence of the excessive amounts of
sulfur and strontium obviously irritates and contaminates. It causes “pitting and/or
tarnishing.” In other words, their presence corrupts the metals. [The] description of
bodily injuries, “respiratory problems, sinus problems, [and] eye problems,” though
vague, cannot escape the inference that the elements caused irritation or inflammation.
. . . The [Chinese drywall] here is defective and its components obviously cause
irritations and contamination – [the homeowner] pled these particular effects in her
Amended Complaint. . . . Thus, the injuries and damage sustained from the drywall are
within the policies’ Pollution Exclusion. [This insurer] has no duty to defend or
indemnify.
Id. (citations omitted).
The Court finds these decisions well-reasoned and instructive.

In this case, the sulfur

compounds that exited the Chinese drywall allegedly caused “rapid sulfidation” to personal property,
including home appliances, and “eye problems, sore throat and cough, nausea, fatigue, shortness of
breath, fluid in the lungs, and/or neurological harm” to the homeowners. La. Compl. ¶¶ 26-30. From
these allegations, it is readily apparent that the drywall’s release of sulfur compounds both
contaminated and irritated people and things. Therefore, the sulfur compounds constitute “pollutants”
and the Total Pollution Exclusion applies.
In an effort to avoid this result, Milton makes several unavailing arguments. First, Milton
suggests that “First Specialty’s Motion for Summary Judgment should be denied because the
underlying action has not alleged whether the sulfur itself has contributed to the property damage and
bodily harm or whether it was in fact the Chinese Drywall that was causing the harm.” Resp. at 4.
This argument fails to persuade. The Louisiana plaintiffs do not contend that they suffered property
damage and personal injuries simply because cheap, inferior drywall from China was used in the
construction of their homes. That is, they do not claim that the drywall, just sitting there, led to the
damages and injuries complained of. Instead, the Louisiana plaintiffs plainly allege that the damage
and injuries were caused when the sulfur compounds exited the drywall. La. Compl. ¶ 26. The Court
therefore rejects Milton’s argument that there is some doubt as to the source of the harms alleged.
Next, Milton contends that the Total Pollution Exclusion is ambiguous, relying principally
upon Louisiana decisions.2 Resp. at 5-8. Milton contends that the Total Pollution Exclusion is
2

In addition to the Louisiana cases, Milton also relies upon Auto-Owners Insurance Co. v. American Building
Materials, Inc., 820 F. Supp. 2d 1265, 1269 (M.D. Fla. 2011). But that decision involved a pollution exclusion containing
different language. Milton concedes as much. Resp. at 9. Milton cannot establish that the Total Pollution Exclusion is
ambiguous here by reference to a case that dealt with a significantly different policy exclusion. See Mark D. LoGalbo,
Applying the Pollution Exclusion: Liability Coverage for Chinese Drywall Claims, 54 No. 5 DRI FTD 22 (May 2012).

overbroad and could lead to absurd results, if literally construed; therefore, it must be ambiguous.
Id. at 11-12. According to Milton, the exclusion should be limited to bar coverage for environmental
or industrial pollution only, as Louisiana courts have found. Id. This argument is foreclosed by Deni
Associates, wherein the Florida Supreme Court unequivocally stated: “[w]e cannot accept the
conclusion reached by certain courts that because of its ambiguity the pollution exclusion clause only
excludes environmental or industrial pollution.” See Deni Associates, 711 So. 2d at 1138-39. Milton
also argues that it would be “very illogical” to find the Total Pollution Exclusion unambiguous “where
other courts have held that the exact same language . . . was in fact ambiguous.” Resp. at 5, 12.
Milton incredulously asks, “how can [First Specialty] in this case argue that the language included in
the [Total Pollution Exclusion] is unambiguous when other courts have held exactly the opposite?”
Resp at 5. The answer is, First Specialty can make such an argument because it accords with Florida
law. The cases upon which Milton relies, by contrast, apply Louisiana law, which is exactly the
opposite of Florida’s. In Deni Associates, the Florida Supreme held that the pollution exclusion was
unambiguous, even while noting that a minority of jurisdictions, including Louisiana, had reached
contrary conclusions. See Deni Associates, 711 So. 2d at 1137-39. Moreover, “the fact that different
judges have reached different interpretations of similar policy language does not necessarily mean that
the language is ambiguous.” Eastpointe Condo. I Ass’n, Inc. v. Travelers Cas. & Sur. Co. of Am., 379
F. App’x 906, 909 (11th Cir. 2010); see also Office Depot, Inc. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa., 734 F. Supp. 2d 1304, 1315 (S.D. Fla. 2010) (Marra, J.). Under Florida law, the Court
finds the Total Pollution Exclusion is unambiguous in this case. It contains very similar, if not
virtually identical, language to the provision found unambiguous in Deni Associates. The policy
exclusion is also substantial identical to the provisions at issue in Colony Insurance Co. and General
Fidelity Insurance Co., wherein the district courts also found no ambiguity. Milton’s attempt to
manufacture an ambiguity by relying on Louisiana law fails.
Finally, Milton argues that the Total Pollution Exclusion does not negate the duty to defend
because “[t]he underlying action makes no demand that anyone conduct destructive testing to
determine the severity and prevalence of Chinese drywall at the project.” Resp. at 13. Milton states
that, as a general contractor, it “would be involved in destructive testing and demolition in order to
remove the alleged Chinese drywall which could cause damages to other areas.” Id. According to
Milton, “[i]n light of the fact that the underlying action does not request compensation for any
destructive testing, or cleanup as a result of the destructive testing, this Court should find that First
Specialty has a duty to defend Milton in the underlying action.” Id. This argument makes no sense.
The duty to defend is decided by reference to the allegations of the underlying action. If, as Milton

contends, the Louisiana plaintiffs have not sought compensation for destructive testing or cleanup, then
obviously First Specialty would have no duty to defend against such non-existent allegations. The
Court therefore rejects this argument as well.3
Conclusion
For the reasons set forth above, the Court finds that the Total Pollution Exclusion applies such
that First Specialty has no duty to defend or indemnify Milton in the underlying Louisiana action.
Accordingly, it is hereby ORDERED and ADJUDGED that First Specialty’s Motion for Summary
Judgment [ECF No. 12] is GRANTED. The Clerk shall CLOSE this case.

DONE and ORDERED in chambers, at Miami, Florida on July 16, 2012.

________________________________
ROBERT N. SCOLA, JR.
UNITED STATES DISTRICT JUDGE
Copies to:
U.S. Magistrate Judge
Counsel of Record

3

Milton seems to have borrowed this argument from Auto-Owners, wherein the court found that the pollution
exclusion did not bar coverage for cleanup and removal efforts. Resp. at 13 (citing Auto-Owners Ins. Co., 820 F. Supp. 2d
at 1271). As already noted, however, Auto-Owners involved a differently worded policy exclusion. Further, while perhaps
imprecisely articulated, this Court reads Auto-Owners as merely stating, unremarkably, that where the underlying lawsuit
did not seek relief for cleanup and removal efforts, the insurer could not argue for application of a pollution exclusion to
such non-existent allegations.