Homeowners’ First-Party Chinese Drywall Property Claims Likely to Impact Third-Party Insurance Coverage

May 25, 2010

With the liability issue for Chinese drywall continuing around the country in the MDL matters in New Orleans, and other courts, homeowners are also pushing the issue with their insurance carriers. Two recent developments with first-party homeowners’ litigation are likely to impact third-party liability coverage due to courts’ interpreting various exclusions.

In Finger v. Audubon Insurance Company, a state court judge in Louisiana awarded homeowners coverage for their coverage of Chinese drywall claims under their homeowners’ policy. Judge Lloyd Medley, chief judge of the Orleans Parish Civil District Court, found that the pollution exclusion did not apply. He noted that such exclusion was intended to address environmental damage as opposed to damage from substandard building materials.

The judge also ruled that the “gradual or sudden loss” exclusion did not apply to Chinese drywall situations. He held that such exclusions are to protect insurers from gradual deterioration, which he found is not the case with defective drywall. Finally, the judge also rejected the insurer’s argument that its “faulty, inadequate or defective planning” exclusion applied. It is likely that the ruling will be appealed.

In another case, Travco Insurance Company v. Ward, now pending in the U.S. District Court in Norfolk, Va., the judge appears likely to certify questions to the Virginia Supreme Court for resolution. This case also deals with first-party coverage under a homeowners’ policy. During a hearing on the insurance carrier’s motion for summary judgment on coverage issues, Senior U.S. District Judge Robert Doumar expressed his view that exclusions could apply, but that the question should be decided by the Virginia’s Supreme Court.

Judge Doumar is likely to issue a decision on certifying the question(s) within a few weeks, according to comments he made from the bench. Virginia is one of the main battlefields for Chinese drywall cases with litigation on liability, property and coverage issues moving along quickly in federal and state courts.

Because pollution exclusions in homeowners’ policies are similar to third-party language, examinations on the first-party property cases are likely to have a huge impact on Chinese drywall cases around the country. Developers, builders, suppliers, and possibly manufacturers are certain to face continued coverage issues from their carriers. This is especially true with respect to the pollution exclusions in such policies, which would appear to be the first line of defense for insurers.

McGuireWoods’ insurance coverage attorneys are involved in coverage issues dealing with Chinese drywall usage. As noted in prior alerts, policyholders should be proactive in order to ensure themselves a chance at insurance coverage for such claims.

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