In addition, one lawmaker has called for the declaration of a "state of emergency" in Florida, while introducing federal legislation seeking an outright ban on further imports–all of which could have insurance implications, the lawyers said.

"Once you say 'class action' [and] 'construction defect,' those [accounts] are guaranteed to go into the E&S marketplace," said Nan Meyer, managing director of products liability for Markel Corp. in Deerfield, Ill., responding to the question of whether product liability risks of drywall suppliers and construction liability risks for builders or contractors that installed drywall are most likely residing in the standard or E&S markets.

"I think it was in the standard market. I think it's now in the E&S market," she said, noting that such accounts "now require a bit more attention to craft" coverage solutions.

Likewise, new businesses sprouting up to screen and inspect homes for the presence of Chinese drywall and to remediate damage could become underwriting opportunities for specialty insurers, she predicted.

"We would evaluate the risk as we do any new type of opportunity," Ms. Meyer said. "If we can understand it, we can underwrite it, and we can oftentimes be the solution for these new types of companies that come out into the world."

Such businesses offering services to homeowners are easily located on the Internet by typing the words "Chinese drywall" into any search engine, as are plaintiffs' law firms.

Attorneys are "moving quickly and efficiently" to process as many claims in the Southeast as they can, Mr. Horst said during the webinar, displaying an example of one ad from a South Florida firm. In addition to free inspections and legal consultations, the firm offered a five-step Chinese drywall investigation book–already in its "third edition," Mr. Horst noted.

Providing some background information to listeners, Mr. Horst explained that in the wake of Hurricane Katrina in 2005 and the storms that preceded it in 2004, there was a shortage of domestic drywall, fueling a huge market for imported substitutes from China.

In moist and hot climates like Florida's, the drywall is giving off what people generally refer to as "a rotten egg smell," and houses that have the drywall have seen corrosion in electrical wiring, air conditioning components and other appliances, he reported. In addition, homeowners are alleging health issues such as nosebleeds and respiratory problems.

While the science is still in its infancy, the Florida Department of Health has posted conclusions of a hygienist's initial report on its Web site stating that there is a "distinct difference" between Chinese and U.S. drywall, and that the Chinese drywall has a unique sulfur odor when exposed to extreme heat and moisture.

The report, however, noted that both the drywall outer paper and the gypsum core released sulfur compounds upon testing, suggesting there are possible causes of gas emissions and the observed aftereffects aside from the drywall itself. These include the treatment of the drywall or the outer paper with an insecticide before it entered the United States, or contaminants in the adhesive binding the paper to the drywall.

The department, which had received 65 complaints about Chinese drywall in February, reported just over 150 in early April, with the figure vaulting to over 300 by late April.

WHO'S AT RISK?

Lawsuits alleging property damage and health impacts have so far targeted the manufacturer Knauf Gips, a German company with Chinese operations (known as Knauf Tianjin), and distributors, Mr. Horst said, noting that the firm's review of court dockets combined with an Internet search has turned up 28 lawsuits–24 in Florida and Louisiana and the others in Alabama and Mississippi.

Plaintiffs are mostly homeowners, although construction and supply companies have sought indemnification in at least two cases, he said–adding that many of the cases have been brought as class actions.

One notable individual action has been brought by homebuilder Lennar, which voluntarily began repairing homes that have defective drywall. Lennar filed suit in the 11th Judicial Circuit Court of Florida against Knauf Gips, Knauf Tianjin, six Florida suppliers and a dozen drywall installers.

Lennar sued Knauf Gips for vicarious liability and negligence, the suppliers for breach of implied warranty, and the installers for breach of contract and breaches of express and implied warranty.

The suit includes excerpts of the warranty provisions in Lennar's contracts with its installer subcontractors, which state Lennar may elect to repair defective work or materials in the event the subcontractors fail to do so, and backcharge or withhold repair costs from the subcontractors.

In addition to repair costs, Lennar seeks reimbursement of costs to relocate homeowners to temporary housing while repairs are performed, "as well as damages for loss of goodwill and reputation."

"We are witnessing the likely beginning of a litigation explosion," Mr. Horst said. "Personally, I believe we will see many different attempts to shift liability back and forth between manufacturers, suppliers, builders and even architects, planners and home inspectors."

Parties to contracts will seek to enforce hold-harmless agreements and raise defenses pointing to design problems such as inefficient ventilation and improper placement of air conditioners, Mr. Horst speculated.

Ms. Meyer explained generally how a drywall manufacturer's product liability problem can become a contractor's liability issue, agreeing that a complicating factor in this case is the problem of suing a foreign manufacturer.

The manufacturer is responsible if the drywall is defective and causes bodily injury or property damage, and it is required to make sure that the product is appropriately labeled to indicate its fitness for use in certain settings or climates, she explained.

For example, she noted that only a certain type of drywall that doesn't hold moisture (greenboard) can be used in bathrooms. It's up to the contractor to heed the labels–selecting the appropriate type of drywall and following instructions for installation, hammering and taping over seams, among other things, she said.

While several Florida press reports have indicated that the Chinese drywall manufacturing operation was not insured, Ms. Meyers was not surprised and suggested that it might not matter.

Noting that Markel's Singapore office insures Asian product manufacturers, she said the only reason some Chinese manufacturers exporting to the United States might have insurance is because a large U.S. vendor, like a Target or Walmart, require it.

In general, she said, Chinese insurers won't come to the United States to defend claims, and there's no way for U.S. plaintiffs to have judgments enforced in China. "The Chinese government and Chinese insurers do not recognize the jurisdiction of the United States. Therefore, they will not respond, and it is very costly to go to Asia and bring a lawsuit," she said.

Michael Hamilton, chair of the national insurance coverage group of Nelson Levine deLuca & Horst, agreed that it would be difficult for plaintiffs to recover from a foreign corporation.

"However, in light of the fact that the complaints that have been filed include allegations of strict products liability, any entity in the chain of distribution, including installers and other contractors, could be found liable and end up absorbing the exposure for the original manufacturer," he told NU.

COVERAGE ISSUES

So far subcontractors and builders have not been frequent targets of the filed lawsuits. Besides the Lennar case naming drywall installers, Mr. Hamilton pointed to two other class actions brought by homeowners filed in the Southern District of Florida–Vickers v. Knauf Gips, et al., which names a construction company, and Foster v. Northstar Holdings Inc., which names as "John Doe" defendants installers and developers/builders.

"From articles and reports available, we understand that up to 550 million pounds of [Chinese] drywall may have been imported. In addition, one report indicated that it has been identified in 41 states and installed in at least 100,000 homes," Mr. Hamilton said.

"If these reports are correct, there is no question that a large number of claims will arise from its installation," he said.

Responding to the potential threat, builders associations have warnings on their Web sites. "What To Do If You Installed or Supplied Chinese Drywall…Get Prepared…Put your insurance companies on notice. It is important that you put all of them on notice going back several years, as there will be some debate as to which policies are liable," one such Web site says.

Mr. Hamilton said "trigger of coverage" is just one of the insurance issues that will come up, pointing to concurrent-cause-of-loss debates on first-party policies, and exclusion language in both the first- and third-party context, among other things.

So far, the insurance industry itself has been relatively silent on the potential coverage implications of Chinese drywall.

One broker has been quoted saying that insurers may start putting drywall exclusions on contractor policies, and suggesting that contractors and suppliers should start seeking enhanced forms of coverage combining liability and environmental insurance under a single policy. (See related article.)

However, a half-dozen insurers that write contractors, products liability and environmental policies declined NU's invitation to comment for this article.

Mr. Hamilton doesn't think "drywall-specific" exclusions are necessary. "We certainly have seen that for asbestos," but asbestos exclusions became necessary, he added, because insurers "were on the losing end" of court battles as to whether asbestos falls under the pollution exclusion.

In this situation, "early reports on what the litigation is all about"–gas emissions from the drywall–suggest "the insurance industry has a potentially good argument for [the pollution] exclusion to apply."

He did note, however, that some courts will continue to hold that the exclusion applies only to traditional environmental losses, such as Superfund sites and spills, rather than indoor pollution.

Markel representatives, who noted that the company writes contractors, architects and engineers, products liability and environmental policies, said they see no need for underwriting changes.

Noting that the company will simply continue with careful and consistent underwriting practices, Ms. Meyer said Markel North America will share information with the Singapore office on drywall claims developments.

Ms. Meyer, who focuses on product liability, said Markel has no reported products claims arising from drywall to date.

In addition to pollution exclusions, Jeanette McDonough, claims counsel for Markel, said mold exclusions are generally included in Markel's contractors, architects and engineers policies written in coastal areas. She speculated that mold exclusions might be raised by insurers in coverage actions, "because these are basically water intrusion-type claims."

While the science is developing, Mr. Hamilton saw this as less likely. An insurer would have to assert that emissions were occurring via a mold or fungi, rather than simply because of the chemical makeup of the drywall, he noted.

To date, Mr. Hamilton said he is aware of only one actual drywall-related coverage case, which is a battle over the pollution exclusion in a first-party context.

In the case–Baker v. American Home Assurance filed in Florida's Middle District–a homeowner is seeking coverage under a homeowners policy, saying the drywall emitted gases that interfered with the use and enjoyment of his property.

According to the complaint, the carrier verbally denied coverage based on an exclusion for "damage from a pollutant." In the policy at issue, "pollutant" was a defined as a contaminant, and "contaminant" (using a "Black's Law Dictionary" definition) as an "impurity" resulting from "mixture or contact" with a foreign substance.

While the plaintiff claims that gases emitted from the drywall did not mix or come in contact with a foreign substance, negating the exclusion, Mr. Hamilton said some courts would take a different view of this type of situation.

In a case in Alabama dealing with pesticides, a court did apply the pollution exclusion, finding that indoor air became "impure through contact" with pesticide vapors, he noted.

One key issue to be decided for third- party property damage or construction-defect claims will be whether claims for faulty workmanship–claims that the insured must come in to repair the drywall or work done–give rise to an occurrence under a general liability policy.

Some courts reason that "this is not really an accident" and that repairs don't "fall under the normal understanding of an occurrence–that the insurance policies are not performance bonds," guaranteeing the performance of a contractor doing installation. Insureds will counter, however, that "there was no expectation that damage would occur," Mr. Hamilton said.

The lawyer also pointed to the potential application of "your work, your product" exclusions. In addition, referring to the possibility that federal legislation will be passed calling for a ban and ultimately a recall of Chinese drywall, he said a recall might implicate the "sistership" exclusion of liability policies.

The sistership exclusion "provides that coverage does not apply to damages caused by the repair or replacement of a product when it has been withdrawn from the market," he said.

In late March, Sens. Bill Nelson, D-Fla. and Marry Landrieu, D-La. in the U.S. Senate, and Congressman Robert Wexler, D-Fla., in the House, introduced bills calling for the joint study of Chinese drywall samples by the Consumer Product Safety Commission and the Environmental Protection Agency, and for the Commission to order manufacturers, distributors and retailers to cease distribution of hazardous drywall.

Rep. Wexler also wrote a letter to Florida Gov. Charlie Crist asking him to declare a state of emergency to make Florida citizens with Chinese drywall in their homes eligible for relief through the Federal Emergency Management Agency. The governor instead reached out to the EPA for assistance in developing chemical testing strategies.

NOT ASBESTOS REDUX

Despite the outcries, for Mr. Hamilton, the bottom line for the insurance is that "this is unlike asbestos…where you realize years later there are health problems" and exposure goes back for decades.

"While I'm not suggesting that for Chinese drywall there will be a short period of litigation, there is a limited window of time when most of the drywall was imported into the United States," he said, contrasting the more uncertain lifespan of asbestos claims.

Ms. Meyer agreed. "I would have to believe that many companies that write drywall write it on a claims-made basis for one year, where you can't really stack the policies," she said.

Ms. McDonough, contrasting the greater difficulty in establishing causation of bodily injury in mold cases versus asbestos cases, suggested that drywall cases would have similar problems. In addition, on the property damage side, she speculated that remediation is easier for drywall.

"It doesn't seem like they have to put on pollution suits and masks and air exchangers. The cost of asbestos removal is escalated greatly by the procedures that you have to put in place to contain the contaminants," she said, noting that in this instance, the drywall itself doesn't seem to be a contaminant. Rather, the way it was manufactured made it susceptible to moisture problems, she noted.

See related article: Chinese Drywall Shows Need For Enhanced Contractor Coverage