Chinese Drywall
Recently we’ve seen an escalation of questions regarding the insurance coverage implications of chinese drywall. Everyone is familiar with the press being given to claims involving drywall shipped from China between 2004-2007, much of the demand following Hurricane Katrina. In this article, we’ll explore potential coverages under homeowners, commercial property, and CGL forms.
|
Recently we’ve seen an escalation of questions regarding the insurance coverage implications of chinese drywall. Everyone is familiar with the press being given to claims involving drywall shipped from China between 2004-2007, much of the demand following Hurricane Katrina. In this article, we’ll explore potential coverages under homeowners, commercial property, and CGL forms. Recently we’ve seen an escalation of questions regarding the insurance coverage implications of chinese drywall. Everyone is familiar with the press being given to claims involving drywall shipped from China between 2004-2007, much of the demand following Hurricane Katrina. It’s been estimated that about a quarter million homes, condos, apartments, and businesses may be affected by these drywall installations in states that include Alabama, Arizona, California, Colorado, Florida, Georgia, Louisiana, Maryland, Nevada, New Jersey, New Mexico, North Carolina, South Carolina, Virginia, and Texas. Allegedly various sulphur compounds were incorporated into the drywall during gypsum mining or drywall manufacturing process and gaseous emissions from these substances may be enhanced by heat and/or humidity, as reflected by the number of states in the South or along coastal areas. The drywall cannot be repaired by chemical treatment or application of paint of covering…it has to be replaced. Direct property damage includes corrosion of copper plumbing piping, natural gas fittings, air conditioning coils, and electrical wiring, outlets, appliances, and electronic equipment by gasses emitted by drywall. Indirect damages include the cost of living elsewhere during renovation for the removal of the drywall and the diminished value (loss of market value) if the building is sold. In addition there have been some allegations of bodily injuries or physiological symptoms such as nausea, headaches, nose bleeds, watery eyes, sinus infections, and exacerbation of respiratory conditions such as asthma and sleep apnea. At least four class action lawsuits against manufacturers, distributors and contractors, complicated by widespread layers of additional insured coverages, have been filed. The primary Chinese manufacturer reportedly has no insurance. Claims are being filed with homeowners and commercial property insurers on a first-party basis by home and building owners and by building materials suppliers and contractors on a third-party basis under CGL policies. In this article, we’ll limit our discussion to first-party insurance coverages under ISO homeowners and commercial property forms and third-party coverages under the ISO CGL policy. First Party Coverages…HO and CP PoliciesIf coverage is to be found among standardized property forms, it would need to be those that are written on a special causes of loss basis, not named perils. Below are the “likely suspects” under the current ISO HO 00 03 homeowners form and their CP 10 30 commercial property causes of loss form. We’ll briefly examine each of these exclusions and comment regarding the likelihood of the exclusion applying to Chinese drywall claims. Homeowners
This HO-3 (and HO-5) exclusion is an unlikely candidate for denying a Chinese drywall claim given that the included terms generally apply to long-term damage that naturally occurs with use. For more on “wear and tear” exclusions, check out this VU article.
This exclusion, at best, could only be applied to the drywall itself, not any collateral damage caused to wiring, piping, etc. Even so, the insurer would be hard-pressed to consider “inherent vice” since that generally applies to the natural tendency of property to self-destruct under certain conditions (e.g., rubber tire dry rot), not the reduction in value due to the introduction of a foreign, corrupting substance. As for latent defect, that too is generally considered a property of the substance itself and not a condition that arises from faulty construction or workmanship. However, case law may vary depending on individual circumstances and it’s conceivable that some courts could uphold these exclusions with regard to loss of the drywall.
The “other corrosion” component component of this exclusion sounds precisely like the type of damage being reported to wiring, piping, etc. in the vicinity of the drywal, so it’s likely this exclusion could be cited to exclude collateral damage to property other than the drywall itself.
Whether the gaseous sulphur compounds released by the drywall constitute a “pollutant” depends on the jurisdiction. A diverse body of case law exists on whether this type of pollution exclusion is intended to apply principally to environmental/industrial types of pollution or if it has a broader application. In general, the latter appears to be the case around the country though, again, there are specific jurisdictional variations. Damage to property caused by the following is excluded except that ensuing damage, if not otherwise excluded, is covered:
This exclusion is the most likely one that would apply to the drywall itself, given that its defective nature appears to be a product of faulty construction and the material (drywall) itself is clearly defective. As for any ensuing loss coverage for nearby property such as wiring or piping, the “corrosion” exclusion would probably preclude coverage there. Commercial Property
This exclusion in the ISO CP 10 30 effectively combines the first three exclusions listed above in the HO-3 policy and the discussion above applies here as well.
This pollution exclusion is identical to that cited above in the homeowners discussion and the same arguments apply.
Likewise, as with the pollution exclusion, this defective construction exclusion is identical to that in the homeowners program and the discussion above applies here. Third Party Coverages…CGL PolicyNow that we’ve all but determined that first-party claims are unlikely to be honored due to one or more exclusions, let’s turn our attention to claims that are being made against suppliers and contractors. Specifically, we’ll examine the insuring agreement and several potential exclusions under the current ISO CGL policy. When examining the insuring agreement of the CGL, the first issue is whether damage arising from this “defective construction” constitutes an “occurrence.” Courts vary in their interpretations. Some courts would almost certainly consider damage to the drywall to not be an “occurrence” but most would probably accept the damage to other property such as wiring and piping as being an “occurrence.” For an extremely detailed examination of these issues, check out the VU article “The ‘No Occurrence’ CGL Claim Denial” which includes a state-by-state listing of known case law on this subject. As for exclusions, these are the ones most likely to be cited: Pollution BI and PD exclusion f. Applicability of this exclusion depends whether the claim involves an ongoing operation or a completed operation. It appears that most claims are based on the drywall product or damage that arises after operations are completed. That being the case, the pollution exclusion is generally not applicable to products and completed operations exposures. Ongoing Operations PD exclusions j.(5) and j.(6).
In most cases, it does not appear that the damage arises out of the contractor’s operations but rather out of a defect in the product being installed. Too, we’re typically dealing with a completed operation, so j.(5) wouldn’t apply anyway.
There is no indication that drywall installations involve any faulty workmanship or “incorrect performance.” The work appears to be done properly except that a defective product has been used. Products and Completed Operations PD exclusions k. and l.
This exclusion should remove coverage for the manufacturers and suppliers with regard to products claims.
This exclusion should apply to the drywall contractor whether the claim is based on the workmanship or the product given that “your work” included the materials (drywall) used in the job. However, because of the subcontractor exception, a general contractor’s CGL policy should respond to claims where the drywall was installed by a subcontractor, presuming the CG 22 94 or CG 22 95 endorsements have not been used. Impaired Property PD exclusion m.
This exclusion should apply to the cost to renovate installations of defective drywall, though it wouldn’t apply to property (e.g, corroded wiring) that has been physically injured. To summarize, it appears as though there is no first-party coverage for this exposure and very limited coverage, if any, for the third-party exposure. However, as Dalton said in Road House, “Opinions vary.” Therefore, we ran this by the VU faculty and got the following observations: Response 1My personal take is that there is little to no coverage anywhere. I am sure the legal industry will have a field day with this one and our industry will rely on policy language to show no coverage. The class action suits will probably result in some good pay days however not much in the way of indemnification to the homeowners. Response 2First thing that comes to mind is the pollution exclusion on the contractor’s GL. I also think that the Special Cause of Loss in commercial would exclude the damage under exclusion 2L, discharge or release of pollutants. Wouldn’t the HO3 have the same issue? There is coverage under the GL with the work site exception for loss from fumes inside of a building caused by the insured’s work. It is the exception, ii, to part d. of the GL pollution exclusion. We were talking about it in class today. Response 3In my opinion the HO does not cover this. There would be coverage if a neighbor got sick from this under liability but that is a stretch. Another question—does the Contractor and Manufacturer have coverage under their CGLs? If it is a “straight GL” with the standard pollution exclusion the answer is yes as it is a products/completed operations loss (it is not nor has it ever been an absolute pollution exclusion). Resulting damage is covered but not the product or work itself. Loss of USE to the house would also be covered. There is an occurrence here (many actually). The problems, of course, will be if there is a “standard” GL or will there be a Total Pollution Exclusion Endorsement (CG 21 49) attached and will they say the loss was caused by a pollutant? My guess is that yes the carriers will say that the cause of the loss is a pollutant and if that is true all loss would be excluded by the CG 21 49. Even if it is a standard GL my guess is that it will take a LONG time for carriers to agree to coverage. Response 4The cost to replace the defective drywall would likely be excluded as caused by “inherent vice” or “latent defect.” If the drywall causes other ensuing loss, particularly water damage from failed plumbing, the ensuing loss would be covered. That’s true of both building and personal property on an HO-5. In an HO-3, only ensuing named perils, like water damage from the plumbing, would be provided for personal property. Response 5Under the HO-3 building coverage, the hurdle is the exclusion of “…latent defect, inherent vice, or any quality in property that causes it to damage or destroy itself.” That would seem to rule out the deterioration of the drywall itself. If the drywall gives off fumes that cause corrosion of wires, pipes, or other building elements, that would be ruled out by the corrosion exclusion. Response 6I understand no coverage under Section I due to A. 2. c. (6), but where is an applicable exclusion that would eliminate coverage for BI to a guest on the premises. If you argue there’s no liability, that’s one thing, but I think there is liability coverage for bodily injury. The claim for damage is against the importer of the drywall, or others in the stream of commerce that supplied the materials, including the builder. The GCs policy should cover damage. The drywall company could be pursued for damaged caused by the drywall. If the drywall causes damage to other property – such as the destruction of copper pipes and wiring – the corrosion exclusion may not apply since the cause is the negligent manufacture and installation of the drywall. The bodily injuries suffered by visitors – if the owner knows the air in his house is toxic – would, at the least, require a defense. I’d make the claim and see if the insurer has the courage to deny. The loss to the drywall, being an inherent vice, would probably not be covered. Response 7A quick review would appear that several issues would exclude coverage, including the corrosion and defective construction exclusions in HO and CP policies. Last Updated: April 23, 2010 |
Copyright © 2025, Big “I” Virtual University. All rights reserved. No part of this material may be used or reproduced in any manner without the prior written permission from Big “I” Virtual University. For further information, contact nancy.germond@iiaba.net.
