Chinese Drywall Litigation Stinks for Policyholders

March 24, 2010

In a fairly recent trend, developers, general contractors and subcontractors are being sued based on the installation of drywall manufactured in China.

Property owners are suing for remediation, property damage and personal injuries. This underlying litigation involves tort allegations as well as contract and indemnity claims arising from the propensity of Chinese drywall to offgas sulphur and noxious gases – allegedly injuring other components of the affected buildings and their inhabitants. The litigation is centered in the U.S. District Court for the Eastern District of Louisiana, where the Judicial Panel on Multidistrict Litigation is sending the federal cases.

In the wake of this rash of suits, a wave of coverage litigation is swelling across the United States. Insurers are aggressively pursuing declaratory judgment actions to deny the construction entities insurance coverage for the underlying lawsuits. The coverage litigation arises from defendants’ need for a defense and indemnity in the underlying tort litigation, and from property owners’ need to fix the property damage caused by the Chinese drywall.

Insurers are responding to property owner claims on the basis of a variety of exclusions including those for pollution, rust and corrosion, and defective materials or workmanship. Some insurers are even going so far as to assert that there is no direct loss, or that the incorporation of the drywall is excluded as not constituting an “occurrence.” Companies involved in construction, primarily residential, along the East Coast since Hurricane Katrina should be on high alert for claims coming from property owners.

McGuireWoods’ insurance coverage attorneys are currently involved in two pieces of coverage litigation over Chinese drywall usage. It is clear that the underlying lawsuits and coverage litigation are on the rise. It is clear that policyholders should be proactive in order to ensure themselves of having a chance at insurance coverage for such claims.