Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

Frequent readers will know that we have talked about Chinese drywall litigation and issues quite a bit here.  One of the ugliest cases was a builder who proactively repaired drywall issues having its initial complaint against its insurers who did not provide a defense thrown out on motion to dismiss.  The court originally found that the complaint failed to state a claim because the builder had not been sued and in essence the builder voluntarily made repair efforts in violation of the insurance policies.

Happily for Dragas, the court gave it leave to amend and it did so, alleging more facts regarding the threats of claims by home owners.  Dragas' claim has now officially survived a motion to dismiss.  While this is far from a victory, it does provide a bit of comfort to builders that they are not simply stuck with no path forward for coverage unless sued. 

Common sense and good policy certainly suggest that builders should be encouraged to solve problems rather than let them fester and worsen in the hope that they eventually get sued and an insurance policy is triggered.  Virginia law, however, is driven by contract and statutory interpretation rather than equitable consideration of good policy by courts.  Insurance coverage on construction projects is highly complex and poorly understood.  Look forward to us engaging in further discussion of this important issue moving forward.

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There is big news in the world of Chinese drywall litigation.  First, various news sources including the Miami Herald reported a $2.5 million jury verdict on behalf of a homeowner couple against Banner Supply, the supplier of the drywall.  The verdict is reported to include not just loss of use of the home and repair costs, but also stigma damages for loss of value to the property.  The jury may have become inflamed by the supply company's actions after having been informed of complaints.  According to CBS4 in Miami:

According to documents entered into evidence, when Banner Supply notified its Chinese supplier about the complaints, the supplier replaced the distributor's inventory of Chinese-made drywall with American-made drywall. In return, Banner Supply allegedly signed a confidentiality agreement not to say anything about it to the government or its customers.

This verdict is well in excess of the total of the $2.6 million verdict awarded to seven Virginia families by a New Orleans federal judge in April.  In the New Orleans case, Virginia Lawyer's Weekly reported last week that the Chinese drywall manufacturer finally entered an appearance in the New Orleans case ... to file a notice of appeal of the $2.6 million verdict.  We will await the legal arguments with interest, but absent a pretty significant service of process problem, it seems pretty hard to appeal a verdict after the case is over.  That train has seemingly left the station, although there are plenty of other claims pending in the overall class action in New Orleans and elsewhere.  Even an appearance by the Chinese entity may provide some hope of a ability to recover some measure of compensation as opposed to getting a judgment against a judgment-proof entity.

Finding defendants with deep pockets is critical to claimants as the coverage posture on these claims appears quite shaky.  Per Virginia Lawyer's Weekly, a Norfolk federal judge recently ruled that there is no coverage under home owner' policies for such losses.  As we previously discussed, another Norfolk federal judge previously ruled that a builder had failed to state a claim for coverage under its liability policies.  That case is still pending with leave to amend having been granted, pending amended claims having been filed, and the parties still in the briefing stages of another round of motions to dismiss.

These cases continue to attract commentary and interest, and we have commented on them with some frequency.  In the words of one longtime friend and insurance defense/coverage guru I know well, "These case dwarf anything we have seen before in the construction industry products liability arena.  There are literally millions of implicated defendants and parties."  Even with insurance coverage hurdles and questions of collection of judgments abounding, we can expect this topic to continue echoing for years rather than weeks or months.

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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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So, here in the Washington, DC area we are buried under a couple feet of snow.  You know we have a lot of snow when the Lincoln Memorial steps have been transformed into a good tobogan run.  Unfortunately, so much snow means a ton of dead load placed on roof structures.  There are a number of roof collapses reported around the area.  So far, the major blessing is it appears that none of these events have led to any serious personal injuries.  You can definitely expect that these significant collapse events will trigger equally significant property damage claims, business interruption issues, and perhaps threaten the long-term viability of some businesses.  These events include:

• The roof of the Bailey's Crossroads Volunteer Fire Department collapsed
• A hangar roof at Dulles Airport fully collapsed, reportedly destroying several business jets
• The roof at a commercial strip store in Forestville, MD collapsed Saturday
• The roof at St. John School in Maryland collapsed, destroying six classrooms, the computer lab, library, and offices
• A storage warehouse in California, MD collapsed
• The scariest has to be the collapse of the Prince William Ice Center which happened with the building occupied with skaters; owners were able to clear all the occupants out when they observed a ceiling beam start to twist

Here is a news report on the Baileys Crossroads roof collapse from WJLA:

With the threat of more snow potentially on the way, the region may not have seen the last of these problems.  Building owners may face some significant hurdles to full recovery, including finding out the limitations of their insurance policies, facing problems with statutes of limitations and/or statutes of repose, and finding that responsible parties are casualties of the current economic crisis and thus are judgment proof.  All of these factors point to a few very important lessons:

• Know and understand your insurance coverage and its limitations before you have problems
• When shopping for insurance, evaluate risk and consider not just shopping for the lowest price; you may find that going cheap on insurance ultimately costs you far more
• Know and understand applicable statutes of limitations and statutes of repose prior to entering into design, construction, or property purchase agreements
• Factor in the impacts of these time limitation issues when you asses the appropriate levels and types of insurance your purchase
• Do your homework - conducting detailed inspections prior to purchase and properly evaluating the strength and credentials of your consultants and contractors is an investment of time and money, but it is worth it in the long run rather than face a catastrophic loss in the future

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