I'm in the process of buying a house, and the seller of the house has put drywall on the fireplace surround and on the interior of the firebox. It looks like a decorative fireplace (complete with candelabra). They insist that it is a working fireplace, but I am not familiar enough with fireproof drywall and the concept of having any type of "drywall" inside the fireplace makes me cringe. I want to come over with a bottle of wine and have them build me a roaring fire to prove me wrong. Are my instincts correct?
BTW, the home inspector did say that the drywall would have to come down. By putting on the surround, the owners apparently covered up the vents for the heatilator box.
Type "X" or Type "C" Drywall is used in fire-rated assemblies. It is not fire-proof per se - but provides a period of fire resistance to the assembly it is built on. Having drywall near your fireplace is fine. Having it in the fireplace is not, unless it is a completely non-functioning fireplace. Even then I'd be wary.