Chinese Drywall Insurance Coverage Possible

Drywall insurance coverage still possible

Duane Marsteller
January 3, 2011

A recent court ruling could close the door on homeowners insurance coverage of corrosive imported drywall, but attorneys say other, more-likely recovery avenues remain open.

Last month, a federal judge in New Orleans ruled that 10 home insurers do not have to pay drywall-related claims filed by Louisiana homeowners. Those homeowners' policies expressly excluded coverage of damage caused by faulty or defective material such as the corrosive drywall, U.S. District Judge Eldon Fallon said in his Dec. 16 ruling.

The Louisiana homeowners had argued the drywall was not faulty or defective because it conformed to its intended purpose, but nonetheless was hazardous. Fallon said the drywall did its job, but still "constitutes a faulty material" that is not covered by their policies.

The 50-page ruling is the first insurance-related decision by Fallon, who is overseeing hundreds of drywall-related lawsuits under a consolidated court proceeding. Those suits contend the drywall, much of it imported from China, emits sulfuric gases that damage electrical and air-conditioning components and causes health problems such as sore throats and watery eyes.

But the ruling will have a limited impact because it was based on Louisiana law and applies only to policies within that state, several attorneys in the case say.

"Every state has different laws regulating insurance policies and the courts of each state have interpreted those laws differently," Scott Weinstein, a Fort Myers attorney and one of the lead plaintiff attorneys in the federal case, wrote in an e-mail to the Bradenton Herald. "Judge Fallon's rulings are well-reasoned and have very narrow application to Louisiana homeowner's polices."

Attorneys noted that Fallon sided with homeowners in rejecting two exclusions that insurers have been using to deny drywall-related claims. Fallon rejected insurers' arguments that the drywall was not causing a physical loss and was not covered because of pollution exclusions.

"In the present cases, the Chinese-manufactured drywall has caused a 'distinct, demonstrable, physical alteration' of the plaintiffs' homes (the covered properties) by corroding the silver and copper elements in the homes, often to the point of causing total or partial failure in electrical wiring and devices installed in the homes, as well as by emitting odorous gases," Fallon wrote.

It was a hollow victory for the Louisiana homeowners, however. Fallon ruled in the insurers' favor because they can legally deny drywall-related claims based solely on the exclusions he upheld.

But it could end up indirectly benefiting homeowners across the country because it challenges a key argument of commercial insurers, according to Weinstein.

"This may indicate courts will find coverage against insurance companies issuing liability policies to builders and suppliers," he wrote. "These insurers have been relying on the 'pollution exclusion' when breaking their promises to their insured."

Those commercial policies are a better bet anyway for homeowners seeking compensation to replace damaged property and fix their homes, another lead plaintiff attorney said.

"That is the recovery source the plaintiffs are primarily looking to," said Hugh Lambert of New Orleans. "I don't think the homeowner policies ever were looked at as one of the main avenues for recovery."

http://www.bradenton.com/2011/01/03/2845602/insurance-coverage-for-chinese.html