Virginia Builder Fixing Drywall Without Lawsuit Gets No Insurance Coverage
As reported yesterday by Virginia Lawyer's Weekly, a Virginia federal judge has ruled that a builder who remediated 70 homes constructed with Chinese drywall was not entitled to insurance recovery of the remediation costs. This case is a painful reminder of how even positive, proactive business decisions can translate to tremendous liability risks, particular where interpretation of contracts and insurance occurs under Virginia law.
Judge Rebecca Beach Smith of the US District Court for the Eastern District of Virginia (Norfolk Division) issued the opinion. Dragas Management Corp. had multiple liability and umbrella policies with Builders Mutual Insurance Company and Firemen's Insurance Company of Washington, D.C. The underlying liability policies all contained language which obligated the insurers to pay damages which the builder became legally obligated to pay because of bodily injury or property damage.
Dragas received reports of health symptoms and property damage from various owners. It filed claims on its various insurance policies. It also indicated in writing it was planning on beginning a remediation plan and tendered the same to the insurers. Soon after, BMIC flat denied coverage and rapidly filed a declaratory judgment action. FIC rapidly denied coverage as well. In June 2009, BMIC sent a new letter agreeing to defend Dragas against drywall related lawsuits subject to a reservation of rights.
Four home owner complaints were filed against Dragas. These claims were later voluntarily dismissed because of the Dragas voluntary remediation plan. Dragas conceded there were no other drywall related cases pending.
The court agreed with the insurance carriers that based on the allegations, Dragas' remediation plan was voluntary and undertaken without legal obligation. Dragas may have a glimmer of hope in that leave to amend was granted and the opinion emphasized that it failed to allege even specific threats of lawsuits by individual owners or specific demands made by owners prior to remediation.
There are a host of policy and business reasons to encourage parties to proactively respond to complaints and voluntarily remediate problems. This case stands as a cautionary tale that such plans may run seriously awry when placed into the context of tightly written insurance policies.
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Wow, another case of reading the language of the contract (possibly correctly) but resulting in a disincentive for builders to fix problems, at least in the drywall context. I have mixed feelings on this one.
I generally am very pro-contract, but reacted pretty negatively to this result. It sounds like the builder was doing the right thing and placed the carrier on notice of their intentions. The case is silent on whether the carrier objected to the remediation scope ... if they did not, it sure feels like "gotcha" to me.
Maybe on an amended pleading Dragas will plead some more facts to flesh this out and get over the hump. If a lawsuit is required to trigger a defense, that is pretty much a disaster for the home building industry.
Good post Tim. Most states will construe the insured's obligations under an insurance policy very broadly. The insured has a duty to cooperate, give prompt notice, and provide sufficient information to enanble the insurer to fulfill its duty to investigate the claim. While I admire the contractor's proactive efforts to remedy a potentially dangerous condition, such unilateral action can not preempt the insurers right to invertigate to see if there is coverage under the policy.
Thanks for the visit and comment Ron, nice to see you here!
Substantively, I would generally agree that unilateral action should not deprive a carrier of its rights. Here, the facts of the case seems to suggest the contractor was facing imminent sigificant problems, needed to respond to a serious situation rapidly, developed and transmitted a fix, requested a reply, got no response, sent another note indicating it was assuming their was consent, and then got a coverage denial.
I find it pretty hard on those facts to find the type of unilateral action often seen in the cases. The case read most conservatively basically forces the contractor to push the case into litigation and hope (hope!) the carrier will cover or at least defend the case.
We will likely be coming back soon to the scope of CGL insurance coverage for construction defects ... many people do not understand the limitations on insurance coverage that vex the construction industry depending on what state's law applies to a case.