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

Author:Mr Colin Hite and H. Carter Redd
Profession:McGuireWoods LLP

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...

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