Chinese Drywall Update: Insurance Companies Avoid Covering Homeowners~

Insurance issues create one of the more complicated battlegrounds in the ongoing saga of defective Chinese drywall installed in houses in coastal markets. With most homeowners carrying property and casualty loss insurance, and with most builders and sub-contractors carrying some sort of liability insurance, plaintiff's attorneys are hoping for some insurance company somewhere to end up holding the bag - even if the original Chinese manufacturing firms remain out of the reach of U.S. law. Insurance companies have other ideas, though, and they have been actively pursuing legal strategies to limit their exposure. In December, the insurance industry won a significant round in the battle with a favorable decision from Federal Judge Eldon Fallon. Ruling in consolidated litigation in New Orleans, the Judge let homeowners' insurance companies off the hook, reports the National Underwriter's online news service (" Policy Exclusions Upheld; Merged Chinese Drywall Cases Dismissed," by Chad Hemenway). Homeowners’ insurance policies typically contain language excluding certain types of damage, or causes of damage. In the case of Chinese drywall, the insurance companies are relying on a “corrosion exclusion,” which explicitly rules out insurance coverage for corrosion damage, whatever the corroded component and whatever the cause of the corrosion. The insurers argue that this language plainly applies to the drywall cases, and the judge agreed, writing that the drywall claims “trigger the corrosion exclusion since the corrosion is responsible for the majority of losses suffered by the plaintiffs.” It’s bad news for homeowners, notes the New Orleans Times-Picayune (“ Judges rules that insurance policies don't cover damage from corrosive drywall,” by Rebecca Mowbray). “While many people are now being helped by settlements with a major manufacturer and distributor of bad drywall,” the paper says, “Fallon's ruling on insurance cuts off a potentially important source of repair funding for homeowners whose houses are not fit for habitation or sale until they're remediated.” Conversely, it’s a win for the insurance companies — but it’s not the only risk the insurance industry faces. Liability insurance policies carried by builders or subs may also apply, and those waters appear to be murkier. And it’s too soon to call that one yet — at least, that’s what a judge ruled in one case this month, National Underwriter reports (“ Judge Denies Insurer’s Attempt To Stop Policy Coverage For Drywall,” by Chad Hemenway). National Union Fire Insurance Company of Pittsburgh proactively went to court for a summary judgment about its umbrella coverage policy covering drywall contractor F. Vicino Drywall. Florida-based Vicino is facing 17 lawsuits over Chinese drywall, but judge Alan Gold says there’s no controversy yet over the umbrella coverage — because we don’t know yet whether Vicino will lose its drywall cases, or whether the company’s other insurance coverage will fall short of covering its losses. Said the judge, “The parties’ liabilities at this time are merely contingent and may never materialize.” When the issue is ripe for judgment, Judge Gold said, National Union can come back to court with its arguments.