Chinese Drywall - “The Silent Hurricane”

Last week, National Underwriter Magazine’s Property & Casualty edition ran a story that attempted to tally the projected damages stemming from tainted drywall manufactured in China. The wallboard was used primarily in the Southeast United States in the construction of new homes between 2004 and 2007. A large majority of these homes are located in the hurricane-ravaged areas of Louisiana, Mississippi and Florida. Initial estimates hold the total amount of potentially contaminated drywall at “500 million pounds…installed in approximately 100,000 homes nationwide.” To date, the Consumer Product Safety Commission (CPSC) has recorded 608 claims of defective drywall through 21 states. Randy Noel, representing the National Association of Homebuilders (NAHB), recently testified before Congress that the cost of remediation may range from one third of the home’s value up to $100,000. That’s $10 billion without the legal fees.

“The most frequently cited issue is the smell of rotten eggs emanating from the drywall,” the article states. “Property damage claims include the failure of air conditioning units and corrosion of copper piping/coils, electrical wires and personal property such as furniture, fixtures & jewelry.”

As Scott Wolfe, Jr. and the team from the Wolfe Law Group at the Chinese Drywall Blog have consistently reported, there are serious insurance liability issues at stake. Primarily, would the defective drywall trigger an “occurrence” as defined by the commercial general liability policy held by most builders, developers and distributors of the tainted product? Secondly, would the insurance community invoke the pollution exclusion that is attached to each of these policies as a means to deny coverage? Lastly, do the affected homeowners have any immediate recourse to fix the damage that has been incurred to date and return home?

Leon Kellner, a Partner at the firm Dickstein & Shapiro, recently hosted a webinar entitled “The Chinese Drywall Problem: Minimizing the Impact on Insureds in the Construction Industry.” Mr. Kellner makes many intriguing and urgent points, none as important as the potentially disastrous economic impact of delaying the process through intensive litigation and class-actions. Compared to the detrimental effects of a carcinogen like asbestos that took decades to materialize into bodily injury claims, strontium sulphide (the contaminant in Chinese drywall) is here and now. To band together as an industry, the insurance community has the opportunity to stave off years of litigation and provide homeowners the means to remove and replace the tainted products in their walls. If the insurance community takes a “wait-and-litigate” position, then homeowners will suffer tremendous financial injury as they pay rent for a place to live as well as a mortgage on a home they can’t occupy that may also be under water due to the current housing crisis.

In commentary on the National Underwriter article, Rick Hollister CEI, CMR, CLI from Environmental Administrators reiterated to the insurance community what many of us already know and should have told our construction clients by now: Many of the insurance policies exclude coverage for “pollution” and every carrier will attempt to invoke this exclusion when presented with a claim. Thus, one of the most expensive items of repair; the cost of removing and replacing the drywall is likely not covered. If this is the case, a home owner may be left pursuing enormous damages from contractors, suppliers or manufacturers with little or no available insurance coverage.