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Chinese Drywall Ruled an “Insurable Loss”

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Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001...

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Reviewed byJoel Ohman
Founder, CFP®

UPDATED: Mar 13, 2020

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Sounds like great news…right? Well, it depends on whether you’re the homeowner or the home builder.

A judge recently handed down a decision in Federal Court that basically states the losses associated with the Chinese drywall debacle can be classified as “sudden, accidental physical loss.”

This classification is very important in insurance circles, as insurance policies will typically only cover losses of this type (in contrast to losses that are not “sudden, accidental physical losses).”

If property damage occurs to insured property over a long period of time (long term water leak or simply deterioration), or was intentional (caused by the insured or by another party), an insurer will not cover it. Period.

In terms we can all understand, this means homeowners and builders may not have to “eat” all of the losses.

Instead, someone’s insurance company will likely be on the hook – exactly whose insurance company might get stuck with the tab is where it gets interesting.

Why This Isn’t Good For Homeowners

Even though the drywall damage is considered “insurable,” many homeowner’s insurance policies specifically exclude coverage for “faulty materials” used in construction or “corrosion damage,” which are certainly the causes of the damage.

The idea here is that the companies who built the homes (or any other property) should be using materials that last!

So homeowners will likely have a more difficult time convincing the courts to force their homeowner’s insurance company to pay for these insurance claims as a result of the ruling.

Remember, the ruling states this is an insurable loss, but because it’s insurable, the insurance policy is the contract that dictates coverage and payments…and it excludes this particular peril from coverage.

Hope for Home Builders

The companies that built these homes may benefit from the ruling because they have commercial general liability insurance policies to protect them against claims arising out of their completed operations.

Since it has been determined that this is an “insurable” loss, home builder’s insurance policies may have to respond to these claims.

Commercial liability policies don’t often contain the same exclusions as personal homeowner’s insurance policies, meaning there is likely coverage available for these claims…especially since homeowner’s insurance companies look to be off the hook on this one.

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