Can Insurance Coverage be Destroyed by Fixing the Problem?
Recent decisions in a Chinese drywall case in Virginia highlight the challenges builders and contractors face in acting responsibly while preserving potential insurance coverage. The case points out that contractors need to know the terms of their policies.
The Case: Builder’s Mutual v. Dragas Management Dragas Management of Virginia Beach, Va., had multiple liability and umbrella policies with Builders Mutual Insurance Co. and Firemen’s Insurance Co. of Washington, D.C. The underlying liability policies all contained language which required 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 policies. It also indicated in writing it was planning on beginning a remediation plan and tendered the same to the insurers. Soon after, BMIC denied coverage and filed the declaratory judgment action. FIC 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.
Remediation and Resulting Arguments Despite the lack of insurance company contribution, Dragas initiated its remediation plan to remove, repair and replace the drywall. Four homeowner complaints were filed against Dragas. These claims were later voluntarily dismissed because of the remediation plan. Dragas conceded there were no other drywall-related cases pending.
In the declaratory judgment case, Dragas filed a counterclaim alleging it was entitled to recover damages under the BMIC policy. Dragas filed a cross-claim alleging the same as to FIC. The carriers filed motions to dismiss. The primary thrust of these motions was that Dragas voluntarily executed the remediation. The carriers argued that because Dragas sought recovery for voluntary repairs rather than damages awarded to claimants, they were not obligated to provide coverage.
Judge Rebecca Beach Smith of the U.S. District Court for the Eastern District of Virginia issued the opinion. The court agreed with the carriers that based on the allegations, Dragas’ remediation plan was voluntary and undertaken without legal obligation. The opinion emphasized that Dragas failed to allege specific threats of lawsuits or demands made by individual owners prior to remediation. She did provide a glimmer of hope to Dragas in granting it leave to amend its claims.
Motions to Dismiss: Round 2 Dragas filed its amended claims against BMIC and FIC and alleged more facts regarding the threats of claims by homeowners. BMIC and FIC again filed motions to dismiss. This time, Judge Smith ruled that Dragas alleged sufficient facts to survive a motion to dismiss. The court rejected a bright line test of requiring an actual lawsuit filing to trigger coverage. Instead, sufficient threats of claims may arguably be enough to trigger the “legal obligation to pay” threshold for limited purposes of a motion to dismiss.
Lessons Learned Common sense and good policy certainly suggest that builders should be encouraged to solve problems rather than let them fester and worsen. From a public-policy perspective, it makes no sense to require a party to make a situation worse in order to trigger legal obligations. Why should a party have to hope to get sued so that they can trigger an insurance policy?
Unfortunately, common sense and good policy are not always part of the equation, especially when it comes to contract and insurance policy interpretation. Parties need to know and understand their insurance coverage and where it arguably ends. If you have a significant problem and coverage is involved, this is an area to consult legal counsel. Also, understand that doing the right thing from a customer and business perspective may not be the right thing to trigger coverage.