Lumber Liquidators’ latest woe: Insurers denying coverage

Dwight Burdette | Wikipedia

Flooring retailer Lumber Liquidators, already facing a flood of lawsuits and investigations over allegations of high levels of formaldehyde in some of its products, has yet another problem, CNBC has learned: the company's insurance carriers are refusing coverage for the debacle.

The revelation comes in court documents filed in a state court in Wisconsin, where Lumber Liquidators has sued nine insurance carriers for breach of contract over the denials.

"These Defendants have wrongfully refused to defend (Lumber Liquidators) in accordance with the terms of commercial general liability insurance policies they issued," says the lawsuit, filed on April 27 in Dane County Circuit Court in Madison.

Lumber Liquidators fights to restore reputation
Lumber Liquidators fights to restore reputation

The suit asks the court to order the carriers to provide coverage. It also seeks unspecified damages, claiming essentially that the disputes have hamstrung the company's efforts to deal with the mounting formaldehyde woes.

"As a result of these disagreements, [Lumber Liquidators] faces substantial uncertainty in determining its entitlement to a defense, or to indemnification for any judgments or settlements under the policies," the suit says.

Read MoreLowe's halts sales of Chinese flooring over formaldehydeconcerns

The insurance companies, which include units of Travelers Companies, Liberty Mutual Group and CNA Group, have not yet responded to the allegations in court. Spokespeople contacted by CNBC had no immediate comment, saying they were unfamiliar with the case. All cited general policies against commenting on litigation.

Claims against Lumber Liquidators have been piling up since a report March 1 on the CBS News program "60 Minutes" alleged the company had been knowingly selling Chinese laminate flooring with high levels of formaldehyde, a carcinogen. Last week, amid growing pressure, Lumber Liquidators halted sales of the flooring in question, but not before getting hit with more than 100 lawsuits. And the company notes in its case against the insurance companies, "additional lawsuits continue to be filed."

Lumber Liquidators says with each lawsuit, it notified its insurance carriers as their policies required. Each time, the complaint says, the insurers denied coverage within weeks, even though "no exceptions, exclusions or limitations in the policies preclude coverage for the underlying lawsuits."

The complaint does not specify the value of the policies, but each lawsuit potentially seeks millions of dollars in damages and could cost millions more to defend.

Read MoreLumber Liquidators to halt Chinese laminate sales

In its most recent quarterly filing with the Securities and Exchange Commission on April 29, the company said it was setting aside $10 million in connection with a U.S. Department of Justice investigation of its foreign sourcing, but it did not quantify its potential exposure from the lawsuits—with or without insurance coverage.

However, the company warned: "Our insurance coverage and self-insurance reserves may not cover future claims."

The filing also cautioned that adverse outcomes from the scandal "could negatively affect our operations, financial condition and liquidity and impair our ability to grow or sustain our business."