Is My Drywall Chinese? - HB Litigation Conferences

that claims based on Chinese drywall may be asserted against them. Such notice is required
by the CGL policy not just when the contractor is actually sued but also when the contractor
learns of circumstances that are reasonably likely to result in such a suit. A contractor who
fails to give such notice runs the risk that its insurer will deny coverage on the grounds of late
notice (although many states prohibit an insurer from denying coverage on such grounds
unless the late notice has resulted in material prejudice to the insurer).
In addition, a contractor who desires to respond to homeowner complaints regarding
Chinese drywall should be mindful that its CGL policy imposes obligations on the contractor
who intends to seek insurance coverage for the cost of repairs. A contractor who agrees with
a homeowner to remediate defective Chinese drywall before a judgment is entered against
the contractor, or before a suit is even filed against the contractor, runs two risks. The first
relates to the CGL policy’s insuring agreement, which requires the insurer to pay “those
sums that the insured becomes legally obligated to pay as damages.” Some insurers have
argued that a contractor who settles with a homeowner before a judgment is entered against
the contractor or before a lawsuit is filed against the contractor is not “legally obligated” to
pay damages. Most courts have rejected this argument. See, e.g., Wanzek Const., Inc. v.
Employers Ins. of Wausau, 667 N.W.2d 473, 477 (Minn. 2003) (lawsuit not required to be
filed against contractor). A few courts, however, have held that a lawsuit must be filed
against the insured before the insured’s settlement with the claimant can satisfy the “legally
obligated to pay as damages” requirement. See, e.g., San Diego Housing Commission v.
Industrial Indemnity Co., 68 Cal. App. 4th 526, 543 (1998) (lawsuit required); Zurich Ins.
Co. v. Carus Corp., 689 N.E.2d 130, 134 (Ill. App. 1997) (lawsuit required). But see Central
Illinois Light Co. v. Home Ins. Co., 795 N.E.2d 412, 422-23, 425, 429-30 (Ill. App. 2003)
(lawsuit not required). In addition, at least one court has gone so far as to conclude that the
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