All Risk Property Insurance — Is damage caused by Chinese Drywall Covered

Can anyone claim that they read their homeowner’s insurance policy before they had a claim to submit? That’s what I thought. I don’t know whether Larry Ward read his before he had a claim, but he’s read it now, and so have several judges and numerous lawyers. Based on a recent decision from the U.S. Court of Appeals for the Fourth Circuit, the judges and clerks of the Virginia Supreme Court will be reading it too.

Ward submitted a claim to his property insurance carrier when he discovered that his new home was suffering damage from Chinese Drywall. The carrier denied his claim and filed a declaratory judgment action in federal court for the Eastern District of Virginia (the “Rocket Docket” for those not familiar with it). The district court granted summary judgment in favor of the carrier and Ward appealed. The Fourth Circuit did not affirm or reverse. Instead, the court concluded that the case involved unsettled questions of Virginia law, and certified the question to the Virginia Supreme Court.

More, after the jump.

The policy is an all risk policy on a standard form. It covers all risk of direct physical loss to the property covered by the policy. Sounds easy, right? If your property is damaged, you’ve got coverage.

Not so fast, says the carrier. After issuing a broad coverage grant, the policy chips away at the coverage by excluding damage caused by several specific “causes of loss.” The district court agreed that the damage by Chinese drywall triggered these exclusions. The Fourth Circuit, noting Ward’s argument that they are ambiguous, concluded that Virginia law is unsettled on the point. The court accordingly asked the Virginia Supreme Court to answer this question:

1. For purposes of interpreting an “all risk” homeowners insurance policy, is any damage resulting from this drywall unambiguously excluded from coverage under the policy because it is loss caused by:
(a) “mechanical breakdown, latent defect,
inherent vice, or any quality in property that causes it to damage itself”;
(b) “faulty, inadequate, or defective materials”;
(c) “rust or other corrosion”; or (d) “pollutants,” where pollutant is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke,
vapor, soot, fumes, acids, alkalis,
chemicals and waste?

For what it’s worth, an intermediate appellate court in Louisiana found that the exclusions apply under Louisiana law. You can see that opinion here.