A federal court judge in Louisiana has rendered a decision that is bad news for owners of homes with defective Chinese drywall and good news for home builders facing claims for the costs of replacing defective drywall in homes they built.

U.S. Judge Eldon Fallon of the eastern district of Louisiana ruled in December that the foul-smelling, metal-corroding drywall does qualify as a sudden, accidental, physical loss that would be covered under homeowners’ policies. However, the homeowners’ policies contain exclusions that prevent it from being a covered loss.

Specifically, many of the homeowners’ polices have clauses that exclude coverage for faulty materials or corrosion damage. Fallon said those two exclusions apply and, therefore, the homeowners insurance companies that have such exclusions can deny payment for damages and repairs related to the drywall.

In the ruling, Judge Fallon did rule out other exclusions that insurance companies said also excluded the drywall damage from coverage, including the latent-defect, pollution and/or contamination, and dampness-exclusion clauses in some policies.

While the ruling was bad news for homeowners seeking insurance compensation, it had aspects that were good news for builders, said Stephen R. Mysliwiec, an attorney at DLA Piper who represents builders in product liability, construction defect, and insurance coverage cases.

“Judge Fallon's ruling may make it more difficult for homeowners to persuade courts that they should be covered under homeowner policies, but his ruling helps builders seeking coverage under their general liability policies,” he said.

The fact that the judge ruled that the drywall causes an accidental, physical loss should make it easier for builders seeking to recover repair costs under their own liability policies, he said. Since builders’ liability policies don’t typically have the exclusions of coverage for faulty workmanship or corrosion in their policies, they stand more of a chance to collect on their policies.

“In a builder’s general liability policy you don’t find exclusions for corrosion and faulty workmanship,” Mysliwiec said.

Fallon’s ruling was based on Louisiana law, but Mysliwiec thinks it is likely that other judges across the country will be influenced by it.

“It’s so well written, and Judge Fallon has so much respect around the country that I think his opinion will have an impact beyond Louisiana,” Mysliwiec said.

In fact, a number of the defective Chinese drywall cases in federal courts around the country have already been consolidated in Judge Fallon’s court.

“What it means is that a builder may be more likely to obtain insurance funds to make the repairs to the extent that the culpable manufacturer (of the drywall) does not step up and make the repairs,” Mysliwiec said.

A major manufacturer of defective drywall, Knauf Plasterboard Tianjin, stepped up in October and agreed to a preliminary settlement and will remediate 300 homes built with 95% or more Knauf drywall.

Teresa Burney is a senior editor for BUILDER magazine. 

Learn more about markets featured in this article: New Orleans, LA.