Eastern District of Virginia Dismisses Policyholder’s Claim for Insurance Coverage for Chinese Drywall Costs that Policyholder Incurred Voluntarily
July, 2010
In Builders Mutual Ins. Co. v. Dragas Management Corp., 2010 WL 1257298 (E.D. Va. 2010), the Federal District Court for the Eastern District of Virginia found that liability insurer owed no duty to defend or indemnify builder for costs the builder incurred voluntarily to remove defective Chinese drywall.
Facts
A. Background
The insured, Dragas, was a homebuilder who learned of potential third-party injury and property damage as a result of the installation of Chinese drywall by one of its subcontractors in over 70 homes built by Dragas.
Dragas sent letters to each of the 70 homeowners whose homes were suspected of containing Chinese drywall, requesting access to the home for inspection. Dragas received reports from the homeowners of various health symptoms and property damage alleged to have been caused by the defective drywall, including damage to a HVAC system, an exploding microwave, and various physical ailments.
At the same time that it sent letters to the homeowners, Dragas filed claims with its insurers for potential losses from the defective drywall. Dragas purchased five insurance policies relevant to the lawsuit – two commercial package liability policies and one umbrella policy from Builders Mutual and a commercial general liability policy and a commercial umbrella policy from Fireman’s Insurance Company of Washington, D.C. (“Firemens”). Dragas informed its insurers of its intention to begin remediation of the defective drywall. Dragas sent a subsequent letter to Builders Mutual indicating it was interpreting Builders Mutual’s failure to object to the remediation plan as an indication of its consent. Within the same week, Builders Mutual denied Dragas’ claim.
B. Procedural History
On April 23, 2009, several weeks after denying coverage, Builders Mutual filed a lawsuit seeking a declaration that it owes no duty to defend or indemnify Dragas for drywall-related claims. Builders Mutual included Firemens as a defendant. On July 9, 2009, Builders Mutual sent a letter to Dragas agreeing to defend Dragas for any drywall-related lawsuits, subject to a reservation of rights.
Dragas filed a counterclaim for declaratory relief and breach of contract against Builders Mutual seeking a declaration that Builders Mutual owed Dragas a duty to defend and indemnify.
Builders Mutual and Firemens filed motions to dismiss Dragas’ counterclaim and crossclaim. The district court found that under Virginia law Dragas failed to state a claim for breach of contract or for bad faith arising out of the insurers’ denial of coverage.
Analysis
In their motions to dismiss, the insurers argued that Dragas had not adequately pled that it was “legally obligated to pay” sums “as damages” since Dragas’ remediation plan was voluntary and undertaken without the legal obligation that would arise from a lawsuit or governmental regulatory action. The court recognized that the issue of whether an insured may incur a “legal obligation” to pay before a lawsuit has been filed against it had not been addressed before under Virginia law. The court also recognized that courts are split as to whether an insured can have a legal obligation to pay sums “as damages” if a third-party lawsuit has not been filed. The court found no decision in Virginia in which payments made voluntarily by an insured, in the absence of a lawsuit or regulatory action, were found to constitute “damages” within the meaning of the standard CGL policy language.
The court noted that Dragas alleged no facts regarding the extent to which the remediation plan had been executed or why it was undertaken at the juncture that it was. Dragas failed to allege any threats of lawsuits by individual homeowners, or even that specific demands were made by the homeowners before the plan was implemented. The court stated that there had to be some factual support for a legal obligation to remediate, other than a voluntary business decision by Dragas after initiating its own letter inquiry to homeowners.
The court stated that “while the court may agree that Dragas made an appropriate and well-conceived decision to remediate from a business decision, public relations, and moral standpoint, this court is not free to rewrite the [Builders Mutual] and [FIC] policies to further those ends.”
The court also rejected Dragas’ bad faith claim, finding that although Builders Mutual initially denied coverage, it did agree to defend Dragas to the extent lawsuits were filed against it with respect to the defective drywall. Further, the court noted that it had found that Dragas failed to state a claim for coverage with respect to the remediation costs and that a prerequisite to a claim for bad faith was coverage. Thus, the court dismissed Dragas’ bad faith claim.
Learning Point:
The policyholder must allege facts to support its allegation that it has a “legal obligation” to pay sums “as damages” per the terms of liability insurance policies. A voluntary remediation plan to take out defective Chinese drywall before a lawsuit has been filed does not constitute a “legal obligation” to pay sums “as damages.” Thus, the insurers had no duty to defend or indemnify the policyholder for the costs associated with the remediation plan.
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