Chinese Drywall Losses Continue for Policyholders

July 1, 2010

The federal court in Norfolk, Va., continues to serve as the epicenter of insurance coverage cases involving Chinese drywall – and not for the benefit of policyholders. Judge Robert Doumar recently issued a ruling that will make the fight for insurance coverage harder for policyholders. See Travco Insurance Co. v. Ward, Case No. 2:10-cv-14 (U.S. District Court for the Eastern District of Virginia, Norfolk Division). While Travco involves a first-party homeowner’s policy, its implications are much broader.

In the ruling, Judge Doumar held that installation of defective drywall was a “direct physical loss” under terms of the insurance contract. The loss is covered. However, he further found that several exclusions apply to ultimately nix coverage for the drywall.

The judge ruled that four separate exclusions also apply to deny coverage to the policyholder at issue. The court held that the following exclusions apply to the homeowner’s claim: (1) latent defect, (2) faulty materials, (3) corrosion, and (4) pollution. The most important of the exclusions revolves around the pollution exclusion. As discussed in previous alerts, a fragmented patchwork of court opinions exists interpreting the pollution exclusion clause. Judge Doumar ultimately ruled that the broad interpretation applies and prevented coverage for Chinese drywall under the insurance policy at issue.

The pressure on policyholders continues to mount, in light of the more recent jury verdict in Miami awarding a couple $2.5 million in damages for Chinese drywall. The verdict broke out the award as: $1.7 million for loss of enjoyment; $494,000 for remediation; and a whopping $170,000 for temporary housing and moving costs. Now the question becomes – where is the money going to come from to pay such verdicts, if insurance coverage does not exist?

If insurers have any say about it, the money is not coming from them. The proof is that, on the heels of Judge Doumar’s ruling, another insurer has filed a coverage action in the same court. Evanston Insurance recently filed a declaratory judgment action against real estate developers caught up in the multidistrict Chinese drywall litigation in New Orleans, but it filed the case in Norfolk. See Evanston Insurance Co. v. Harbor Walk Development LLC, et al., Case No. 2:10-cv-00312 (U.S. District Court for the Eastern District of Virginia, Norfolk Division). In light of Judge Doumar’s ruling in Travco, it’s no wonder Evanston chose this venue for its filing. The Richmond Division of this court just transferred its own Chinese drywall coverage action to Norfolk as well. See Nationwide Mutual Insurance Co., et al. v. CG Stony Point Townhomes, LLC, et al.

In short, pressure is mounting for policyholders to address coverage issues and liability sooner than later for Chinese drywall claims.

McGuireWoods’ Insurance Coverage Team handles Chinese drywall claims for policyholders. For more information, please contact: