Contaminated Drywall May Lead to Years of Liability Litigati

(BestWire Services Via Acquire Media NewsEdge) The use of contaminated drywall imported from China is opening the type of rolling liability issue that will likely lead to years of litigation about insurance coverage.

An organization representing homebuilders said several lawsuits have already been filed over the drywall, which emits vapors of sulphur compounds that corrode metal, such as copper pipe, wiring and air-conditioning coils. Studies are under way to determine what the health effects may be. It also causes a strong smell of rotten eggs.

Enough of the drywall was shipped into the United States between since 2006 to construct 60,000 houses of 3,000 square feet each, according to insurance and construction industry members and government agencies that are investigating the problem.

U.S. builders turned to imported drywall because of shortages during the massive building boom that followed the devastation of hurricanes Katrina and Rita in 2005, those familiar with the problem have said.

While it is too soon to determine what kind of impact the contaminated drywall issue will have on rates for construction company policies, it seems certain to unleash years of litigation between homeowners, builders, drywall manufacturers, suppliers and installers, and insurance carriers, industry officials said.

�Brokers with homebuilder customers should be telling them that need to be looking a lot more carefully at everything that they�re doing,� said Rod Taylor, managing director of Aon Corp.'s Environmental Services Group. �And you need to be looking at your insurance policies. You might want to look at higher liability limits.� Taylor said he expects carriers to seek to use the standard pollution exclusion in builders� liability policies to rule out claims related to remediating the drywall problems. He also said larger builders may find their carriers taking very broad definitions of an occurrence � such as saying that building a 200-house development is one occurrence, rather than 200 separate occurrences. And it would not be a surprise to see new exclusions added to policies at renewal, he said.

Researchers are still determining the scope of the problem, and what will be required to remediate a contaminated drywall problem is still unclear.

�I think, at this point, it�s fair to say that there are still a lot of unknowns in this issue, including the scope of remediation necessary,� said David Jaffe, vice president for legal affairs of the National Association of Home Builders and a construction liability attorney. �We�re still learning about that. ... In terms of insurance, that's going to be played out in terms of the scope of coverage. It�s going to play out state to state, depending on how the courts determine liability.� Taylor said he believed tearing out all the contaminated drywall will ultimately be the only acceptable solution.

�They haven�t found health effects yet, but they�re still testing,� he said. �You have to imagine that if it corrodes copper, it�s not doing your lungs any good.� The high remediation costs will include substitute housing, and replacing any porous material or objects contaminated by the vapors, including furniture and clothing. �I�ve heard it estimated that the cost could rise to a third of the original construction cost,� he said.

Congressional legislation introduced last week, calling for a federal investigation into the contaminated drywall problem and a mandatory recall, said it is believed to have been distributed in at least 11 states.

But the scope of the problem could be far broader, said Sen. Ben Nelson, D-Fla., who co-sponsored the �Drywall Safety Act of 2009" with Sen. Mary L. Landrieu, D-La.

�I believe we�re going to see this is widespread,� Nelson said in a statement issued when the legislation was introduced. He said that �since 2006 more than 550 million pounds of it was imported to the U.S.� Florida and Louisiana have the highest numbers of complaints, according to the legislation. Other states with complaints to date include Virginia, North Carolina, South Carolina, Georgia, Mississippi and Texas.

Taylor said the problem appears to be �most acute in high humidity." �The scope of it is really not certain yet,� he said. �Some people claim that it�s in all the states, in Canada and in foreign countries, too.� NAHB has been alerting its members about the drywall issue since it first became public at the end of 2008, Jaffe said.

�We�ve gotten calls from builders all around the country,� Jaffe said. �I Googled it in response to the first calls in November, and came up with nothing. How many things can you Google nowadays and come up with nothing?� (By Alyn Ackermann, senior associate editor, BestWeek: Alyn.Ackermann@ambest.com) (c) 2009 A.M. Best Company, Inc.