Chinese Drywall Plaintiffs Suffer Insurance Setback

New Orleans, LAWhile victims of defective Chinese drywall are getting some satisfaction from lawsuit settlements, and repair funding from suppliers, distributors and contractors responsible for installing the defective product into scores of homes, a judge ruled a week before Christmas that there will be little help for homeowners through their existing insurance policies.

The 50-page ruling, by US District Court Judge Eldon Fallon, is a win for insurance companies attempting to limit their potential liability stemming from the China drywall debacle. Policyholders were hopeful that insurance policies would cover remedial repairs to their homes for problems caused by the defective drywall, together with relocation costs required in the process of living elsewhere until their homes—unfit for habitation—were made habitable again.

The ruling by Judge Fallon dashes most of those hopes. In his ruling, Judge Fallon noted that defective Chinese drywall is properly excluded from insurance coverage. At the same time, the corrosion damage generated by the faulty drywall triggers corrosion exclusion clauses in policies.

Judge Fallon offered policyholders a ray of hope in that damage to a home other than corrosion or odor—such as a fire—potentially caused by China drywall might be considered for compensation. However, it was the decision of the Court that as defective Chinese drywall was excluded from insurance coverage, so too was the manifestation of that defective material—namely, damage from corrosion and odor.

The Times-Picayune of New Orleans noted on December 18 that homeowners have no chance of recovering losses from their insurance policy for contents such as furniture, clothing or other personal possessions, due to restriction of perils under which such compensation is granted. Defective Chinese drywall is not one of those perils.

Relocation expenses cannot be recovered, the judge mused, because coverage for displaced homeowners incurring additional living expenses hinges on a policyholder suffering a covered loss. Again, defective Chinese drywall is not covered.

A total of 10 insurers brought forward motions in the consolidated multidistrict litigation involving the China drywall issue. While Judge Fallon did rule that defective Chinese drywall does, indeed cause physical loss to a home due to the corrosion of wiring and electronics—and that policy exclusions for latent defects, pollution and dampness don't apply—the remainder of his ruling rendered the foregoing small victories for the plaintiffs, moot.