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Chinese Drywall Damages

Chinese Drywall Damages Alleged, Excluded From Homeowner's Policy Coverage

Dennis Wall
June 16, 2010

In the first ruling of its kind, a Federal Court applying Virginia law has held that the damages claimed in that case as a result of Chinese Drywall, would be covered but are excluded under at least four (4) Exclusions in the Homeowner's Insurance Policy at issue.  The case is Travco Insurance Co. v. Ward, Download Travco Insurance Co. v. Ward (E.D. Va. Case No. 2.10cv14, Order and Opinion on Motion for Summary Judgment Filed June 3, 2010) also published as 2010 WL 2222255 (E.D Va. June 3, 2010)(Westlaw subscription required to access Westlaw).

   Here is a concise summary of the major holdings of the Court in that case:

First, winning the battle but losing the war.

   1.  The Chinese Drywall Damages alleged in that case constituted "direct physical loss" as required for Coverage under the Homeowner's Policy.  Travco Insurance Co. v. Ward, 2010 WL 2222255 *8 (E.D. Va. June 3, 2010).

Second, winning one battle but still losing the war.

   2.  The Homeowner's Policy contained several standard Exclusions reviewed by the Court.  The first of these was a "latent defect" Exclusion.  The Court applied a legal rule that a latent defect under this Exclusion must be an integral part of the damaged property because of its own design, manufacture or construction.  This requirement is "intrinsic" to the latent defect Exclusion, the Court held.  For that reason, "it is clear that the damage to Defendant's air conditioner and the damage to his garage door were not caused by a latent defect."  Accordingly, such damage was not excluded by the latent defect Exclusion (although the Court would hold that such damage is excluded by other Exclusions).  However, the damage to the residence itself was an excluded loss caused by a latent defect, the Court heldId. at *11.

Third and long:  Losing the war.  Period.

   3.  The "faulty materials" Exclusion applied to exclude the Chinese Drywall Damages alleged.  This Exclusion "can apply even when the property in question may be serving its intended purpose."  Id. at *13.

   4.  The Homeowner's Policy's "corrosion" Exclusion also applied to exclude the Chinese Drywall Damages alleged.  Any contact with a corrosive agent is ordinarily enough for this Exclusion to be applied by the Courts, the Travco Court held.  "Based on the foregoing, the Court finds that the claimed losses to the structural, mechanical, and plumbing components of the Ward Residence to be excluded by the corrosion exclusion."  Id. at *14-*15.

   5.  An apparently "Total" Pollution Exclusion, reproduced on page *15, was also applied by the Court.  "Although the Drywall itself may not be a pollutant, the gases it releases are.  There is no dispute that the Chinese Drywall has released sulfur gases into the Ward Residence....  Both state and federal authorities recognize reduced sulfur gases as pollutants."  Id. at 18.

   6.  Finally, there was no covered "ensuing loss" under the Homeowner's Policy on the Damages Claims alleged in this case.  The Court held:

   The ensuing loss provisions in the Policy only provide coverage for a loss if three conditions are met.  First, the loss must be "ensuing."  Second, the loss cannot be "excluded by any other provision" in the Policy.  Finally, if the loss ensues from an original loss excluded by the latent defect, corrosion, or pollutant exclusion, the loss must be a loss to "property described in Coverages A and B."   Applying the language of the Policy to the facts at hand, the Court finds that the ensuing loss provisions are not applicable ....

Id. at *19.

   Following these holdings, the Federal Court granted the Homeowner's Insurance Company's motion for summary judgment, in part, and entered a Final Declaratory Judgment accordingly.

   More decisions can be expected shortly.

http://insuranceclaimsissues.typepad.com/insurance_claims_and_issu/2010/06/chinese-drywall-damages-alleged-excluded-from-homeowners-policy-coverage.html

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