With dismissal, builder on hook for drywall repairs

A federal judge has ruled that The Dragas Cos.' insurer is not responsible for reimbursing the builder for the cost of remediating homes built with Chinese-made drywall.

Judge Rebecca Beach Smith of the U.S. District Court in Norfolk dismissed claims filed by Virginia Beach-based Dragas that its insurance policy with Builders Mutual Insurance Co. covered the remediations and that the insurer acted in bad faith by denying their claim without an investigation.

The Dragas Cos. has spent more than $5 million to repair 73 condos in Chesapeake and Virginia Beach made with the wallboard, which emits a noxious gas that, government agencies have found, corrodes electrical appliances. Some homeowners also contend that it causes respiratory illness.

That cost did not include the expense of relocating homeowners while the remediations were taking place, a process that began nearly a year ago.

Smith ruled that Dragas had not proven that it was legally obligated to pay - either by a legal decision or a government action - a necessary condition for coverage of their insurance claim. Builders Mutual and

Fireman's Insurance Co., which also took part in the suit, argued that Dragas' decision to remediate the homes was voluntary.

"While this court may agree that Dragas made an appropriate and well-conceived decision to remediate from a business, public relations, and moral standpoint, this court is not free to rewrite the... policies to further those ends," Smith wrote in the opinion filed Wednesday.

Dragas had contended that they were legally obligated, but the judge said they gave no evidence to support that claim. Smith gave the company two weeks to file an amendment to its claims to show it had been legally obligated to remediate the condos.

Dragas' attorney Kristan B. Burch declined to comment on whether the company would file an amendment.

The judge still must rule on whether Builders Mutual is responsible for paying any damages that could arise from suits against Dragas over the drywall and whether the insurer is responsible for defending the builder in those lawsuits, even though Builders Mutual indicated last summer it would defend Dragas against lawsuits.

Four suits had been filed against Dragas last June in Chesapeake Circuit Court, but all were dropped without a settlement because the builder had begun the remediation process.

Richard A. Nagareda, a law professor at Vanderbilt University and an expert on large-scale civil cases, said Dragas might have made a strategic error in undertaking the remediation before making sure their insurer would reimburse them.

"They've gotten themselves into a bind," Nagareda said. "Insurance coverage plays a huge role in litigation strategy. Any business decision you make in response to litigation or in anticipation to litigation needs to be done in close consultation with the insurer. You've got to make sure that the insurer is going to back you."

Dragas executives met several times with Builders Insurance before filing their claim last year and shared its plans for remediation, according to court filings.

The company sent a letter to Builders Insurance on April 1, 2009, stating that the builder interpreted the insurance company's failure to object an indication of consent. Five days later, Builders Mutual denied Dragas' claim and on April 23 filed a suit against the builder asking for a judge to affirm their decision.

The insurance suit had been put on hold for four months starting in October while the U.S. Judicial Panel on Multidistrict Litigation weighed whether the lawsuit should be transferred to a federal court in New Orleans to be tried with hundreds of other Chinese drywall cases.

The panel decided last month to keep the suit in Norfolk, in part because there were no suits by home-owners against Dragas.

While Smith's decision is one of the first insurance rulings involving the drywall, her opinion did not address whether the section of the insurance policy called a "total pollution exclusion" could be used to deny drywall coverage. The pollution exclusion is at the center of many Chinese drywall insurance suits.

At least 150,000 sheets of Chinese-made wallboard were imported by a local construction supplier in 2006. That's enough to build more than 300 homes. The drywall since has been found in housing developments across the region.

Josh Brown, (757) 446-2318, josh.brown@pilotonline.com