Thoughts on construction law from Christopher G. Hill, Virginia construction lawyer, LEED AP, mediator, and member of the Virginia Legal Elite in Construction Law

Good Deeds Still Going Punished? (Dragas Part III)

Lewis F. Powell, Jr. U.S. Courthouse, Richmond...
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If you recall, a bit over a year ago I posted regarding the Builders Mut. Ins. Co. v. Dragas Management Corp. litigation in the Eastern District of Virginia federal court. Back in May of 2010, the Court dismissed a suit by a contractor that voluntarily created a remediation plan relating to Chinese drywall found in the homes it constructed. In that suit, the contractor, Dragas, sued its insurance carrier which had denied it coverage. The Court reasoned that no evidence or factual support was shown that any litigation or threatened litigation preceded the voluntary remediation. In Dragas II, the Court denied the motion to dismiss because the contractor plead enough facts to survive the motion to dismiss.

Just when you, as a contractor, may have thought that you could use the Dragas opinions as some protection should you decide to “do the right thing” and fix issues, think again. In Dragas III, the court once again dismissed the contractor’s case. The court reasoned that:

[t]he mere threat of litigation, without more, constitutes a “legal obligation to pay” under the insurance policies, and sums paid because of these “threats” cannot thereby constitute damages which the insurer must bear.

The Virginia court further stated that without a strict liability statute, settlement, final judgment or some other “coercive legal obligation,” Dragas had no legal obligation to undertake remediation. Therefore, the CGL policies did not apply.

In short, the Court essentially reinstated the Gordian Knot/catch-22 for builders seeking to give good customer service. As discussed by Tim Hughes (@timrhughes) relating to Dragas II, this decision puts Virginia contractors in the unenviable position of fixing a problem and risking their insurance coverage or waiting for a lawsuit (possibly friendly, possibly otherwise) before moving forward with any fix. While this seems to be a perverse result (i. e. a disincentive to correct problems), it is presently the law in the Eastern District of Virginia, and construction contractors and lawyers alike should review the opinion (linked above).

Because of decisions like this one, contractors and other construction professionals in Virginia would be wise to be sure that they understand their insurance coverage and that they consult with an experienced construction lawyer prior to undertaking any remedial actions.

UPDATE: See the great response from Tim Hughes relating to this same case.

As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.

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11 Responses to Good Deeds Still Going Punished? (Dragas Part III)

  1. Christopher,

    Great article. Glad to see you are reporting on this issue. For a case that went the other way, take a look at Desert Mountain Properties LP v. Liberty Mutual FIre Ins. Co, 225 Ariz. 194, 236 P.3d 421 (2011). Arizona’s Supreme Court affirmed a more detailed Court of Appeals decision rejecting the carrier’s denial of coverage based on the “voluntary payment” exclusion, finding that the insured developer was undertaking necessary repairs for which it was legally responsible to avert a potential suit by multiple homeowners. The court also rejected the “your work”, contractual liability, and known loss exclusions in this case arising on a contractor’s CGL policy form. Coverage was limited, however, to the resulting damage, not repair of the insured’s own faulty work.

  2. Hey Chris – you managed to prod me back into blogging motion bud! Thanks for the shout out … actually having a conversation with some folks regarding a patch, we will see if it goes anywhere.

    http://www.valanduseconstructionlaw.com/2011/06/articles/litigation/fixing-the-construction-problem-apparently-does-eliminate-insurance-coverage/
    Timothy R. Hughes recently posted..Virginia Clarifies Economic Loss Rule, and Why This Case May MatterMy Profile

  3. Hey, the good news is (pardon my irony), Dragas might still get sued for loss of value in the property. Apparently, there is good science to back the argument that remediated homes suffer a continued loss of market value … who’s gonna pay me for that, the buyer may ask?

    John Kilpatrick of Greenfield Advisors is a leading researcher on this issue. He has a white paper posted at this link, worth perusing:

    http://api.ning.com/files/Vvg9QMUk-jcmQ2jSroOWJWPDgV6Dz7mmAIzG6sdY*q6BYIf1HWFHftP9p*PmZxe9QZ0yfc3ZfZKyhGR9mStYL*B7GBNjpJoC/ChineseDrywall.pdf

    Ted

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