Insurance exclusions for Chinese drywall damages: an area of law in flux June 11, 2010

In what is being thought of by many legal experts as a “small victory” for insurers, the ruling last week is sparking much conversation.  (View the source article here: “Drywall damage not covered for Va. Beach man, from The Virginian-Pilot, provided by hamptonroads.com)

U.S. District Judge, Robert G. Doumar ruled last week that the policy which existed between a homeowner and TravCo. Insurance Company does not cover damages caused by defective Chinese drywall.  The problematic issue for the homeowner in the case was reportedly specific exclusions that were in the policy.  While the case might be disheartening upon first glance for homeowners across the country, this area of law is in flux, as courts are coming down on both sides regarding this particular issue.

The homeowner in this case requested his insurance company fix his Chinese drywall problem.  His appliances were malfunctioning and other electronics were corroding and ceasing to work.  According to the Pilot, legal experts believe the decision is binding only on this specific homeowner’s situation and policy.  There is the chance that other courts in other jurisdictions may very well rule differently on insurance policies and their relation to Chinese drywall damage.

The insurance companies facing mounting claimants pointing to dangerous drywall are paying close attention to how case law develops.  While insurance companies involved in litigation will presumptively utilize this case to their advantage, other cases exist where the judge has sided with homeowners.  For example, a recent case in Louisiana ruled that the homeowner’s policy did have to cover the damages his home sustained resulting from Chinese drywall, because the exclusions in the policy were not meant to disallow persons from filing claims regarding products that cause or “emit” pollution.   Compare this with the case relied upon in the instant case by Judge Doumar – a case allowing avoidance of liability because the contaminants in a water supply came from another source – and it seems to be apparent that that case involved a much less scrupulous contaminant.  Chinese drywall, unlike water, would enable the maker, distributor, builder, even possibly insurer to be more likely to know of the defect.  In addition, defective drywall causes harm by its emission; invisible particles disperse through the air, whereas contaminated water only produces its effects once “used” voluntarily.

Regarding the uncertainty of law in this area, the Virginian-Pilot noted how Judge Doumar expressed the ambiguities: “The judge acknowledged that the exclusions used by the insurer to deny coverage had been the subject of numerous court cases and that different courts in different states had reached different conclusions.” (click here for source article).

Norfolk attorney Richard J. Serpe represented the homeowner in this case and plans to appeal.  He told the Pilot that “”The language of these policies is so confusing that you’re going to have a dozen judges going off in different directions,” Serpe said. “Under Virginia law, an ambiguity goes in favor of the policy holder.”