Is My Drywall Chinese? - HB Litigation Conferences

“legally obligated to pay as damages” requirement is not met unless a judgment in a lawsuit
has been entered against the insured. See Certain Underwriters at Lloyd’s of London v.
Superior Court, 24 Cal. 4th 945, 961 (2001).
The second risk run by a contractor who settles with a homeowner involves the
standard requirement in a CGL insurance policy that the contractor obtain the insurer’s
consent before voluntarily making any payment to the homeowner or assuming any
obligation or incurring any expense. In light of this obligation, contractors who agree with
homeowners to remediate problems caused by Chinese drywall should do at least two things.
First, they should consult with counsel so that the remediation constitutes a settlement of the
homeowner’s claim against the contractor and not just a voluntary undertaking by the
contractor. As part of the settlement, the homeowners may be required to release all or part
of their claims against the contractor, and to assign to the contractor their rights to pursue
recovery against third parties, including the homeowners’ insurer. Second, the contractor
should notify its CGL insurer prior to making any repairs and seek the insurer’s consent to
the contractor’s action, Although the “consent to settle” requirement has been softened by
many states, which require the insurer to demonstrate that the insurer was materially
prejudiced by a violation of this requirement before it may deny coverage based on such a
violation, ideally the contractor should obtain the insurer’s consent before proceeding with
the repairs. If the insurer drags its feet and does not either grant or deny consent, the
contractor will have a strong argument that the insurer may not deny coverage on the basis of
the failure to obtain consent. The courts have not looked kindly on insurers who have
equivocated in response to an insured’s request for such consent.
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