Chinese Drywall Insurance Coverage Lawsuits Sure to Heat Up with First Court Ruling

March 29, 2010

It has been percolating for about a year, and now the U.S. District Court in Norfolk, Va., has issued its ruling in Builders Mutual Insurance Company v. Dragas Management Corporation, et al. The builder has lost coverage for “voluntary” remediation efforts to homes incorporating Chinese drywall for now, and the court also dismissed the builder’s bad faith claim. However, the policyholder has been given a chance to amend claims to take another run at coverage. This is believed to be the first ruling in the country concerning insurance coverage for Chinese drywall.

In April 2009, Builders Mutual sued its insured, Dragas, for a declaratory judgment to deny coverage related to Chinese drywall claims. Some homeowners had filed lawsuits against Dragas and some hadn’t. Dragas agreed to conduct remediation of the homes for owners, and those with lawsuits voluntarily dismissed their cases in state court.

Dragas sought Builders Mutual’s consent to pursue the remediation, but the carrier never responded. Dragas then sent the insurer a letter stating that it was interpreting Builders Mutual’s silence as consent. Builders Mutual and another insurer for Dragas, Firemen’s Insurance Company of Washington, D.C., pursued a denial of coverage since Dragas “volunteered” to fix the property.

The court ruled that Dragas’ efforts, while a commendable business decision for the benefit of its customers, are not covered by insurance because there was no legal obligation to undertake the work. As Judge Rebecca Beach Smith wrote, “Currently, Dragas has alleged no facts the extent to which the remediation plan has been executed or why it was undertaken at the juncture that it was.”

In addition, the court could not agree with the policyholder that it has a legal obligation to mitigate the damages to the homeowners, because Dragas did not allege any supporting facts for the contention. The court has given Dragas two weeks to amend its counterclaim and crossclaim against the insurers seeking coverage, including its claim for bad faith.

The ruling is extremely important to developers and contractors involved in Chinese drywall claims. Such businesses must proceed with caution in helping customers address the problems to ensure they also preserve their rights to insurance coverage. “Voluntary” efforts may make great business sense, but could obliterate any chance for having insurance cover the costs of such efforts.

McGuireWoods’ Insurance Coverage Counseling and Litigation Group assists policyholders involved in “defective” drywall claims.