Topics: Drywall Effects Scope Coverages Action Legal aspects Loss control

Drywall

 While everyone has heard of drywall, not much thought is given to exactly what it is. Drywall is plaster made out of gypsum that is mixed with other materials, formed into boards, and dried. Gypsum is a common mineral often found in sedimentary environments, and when used in drywall provides a noncombustible core. Cotton, fiberglass, or paper is added to the gypsum powder in order to make it stronger and less likely to crack over time. Starch is added in order to help the drywall adhere to the backing paper. Once the mixture is completed, it is pressed between thick paperboard. This is true of all drywall. Gypsum naturally contains sulfur compounds.

 With regard to the Chinese drywall, testing has shown that sulfur compounds are released from both the gypsum core and the outer drywall paper. It is possible that before entry into the United States the drywall was treated with insecticide or that the adhesive binding the paper to the drywall contained contaminants. Another possibility is that the Chinese drywall remained on ships at sea for months awaiting approval to enter the country (note that the Gypsum Association recommends that gypsum board not be exposed to high levels of moisture for extended periods of time). The exposure of the drywall to humid sea air and the process of evaporation of that moisture once the drywall was on land could be responsible for the off gassing (off gassing is simply the emission of gasses from a particular substance, such as drywall or carpet).

 Chinese drywall is made of naturally mined gypsum—it appears to have a higher than normal density and to have a higher than normal tendency to off gas sulfur compounds. Much of the drywall that predates 2006 came from a particular mine in the ShanDong province, and tests show that an unusually high amount of sulfur compounds is present there. Both Chinese and American drywall products have been tested to determine the cause of the problem. The Consumer Product Safety Commission (CPSC) is working with the Environmental Protection Agency (EPA) and the Centers for Disease Control (CDC)/Agency for Toxic Substances and Disease Registry (ATSDR) to coordinate a united action plan to address the health hazards posed by Chinese drywall. The approach includes import investigations; field measurements of affected homes; gauging corrosion to electrical, fire and safety systems; and studies of gypsum and environmental release from disposal sites. The CDC/ATSDR will assist in developing a health awareness program in the future.

 Effects

 The off gassing of these vapors has resulted in illness of the residents and damage to property. Reported health issues include headaches, sore throats, nosebleeds, respiratory issues, and dry eyes. The Florida health department has received over 140 complaints concerning the drywall, and the Consumer Product Safety Commission (CPSC) has received 608 reports from residents of twenty-one states about health and property conditions that the residents believe are due to the drywall. The first report to the CPSC was received December 2008.

 Damage to property consists of corroded piping and wiring, causing electronics or appliances to fail—copper components are particularly susceptible to damage. A deteriorated connection between a circuit breaker and a panel board could become a hot spot and start a fire. Any wiring or piping is at risk—from the gas service components to the smoke alarm components. Air conditioners seem to be particularly susceptible to damage from these vapors. Air conditioning coils that should last ten years or more are corroding in just a few years. Ground wires are more susceptible to damage because they are not insulated.

 Personal property such as jewelry and silverware of the residents show evidence of corrosion as well.

 Scope

 The scope of this issue is still being determined. The Gypsum Association states that 300 million square feet of Chinese drywall was imported in 2006-07. A construction consultant estimates that between 2006 and the first two months of 2007 enough drywall was imported to produce at least 50,000 homes of 2,000 square feet each. However this may not be where the drywall issue starts; some experts believe that defective drywall was installed as early as 2004, which would increase the number of homes exposed. It is estimated that Florida alone has 36,000 homes containing the problem drywall, and national estimates range from 60,000 to 100,000 homes. The issue is widespread enough in Florida that real estate agents are adding disclosures to forms advising the buyers that they have the right to have the home inspected in order to ascertain whether or not the drywall is problematic. New homes are not the only issue–renovated or remodeled homes may also contain tainted drywall. While many states are affected, the majority of complaints are originating in Florida, Louisiana, and Virginia .

 Coverages

 There are many coverage issues that may develop. Claims may fall under homeowners, commercial liability, or commercial property policies. Homeowners will be at the front of such claims, whether making a first party claim under their homeowners policies or making a third party claim against the home builder. Homeowner insurers may deny coverage for the claims but if forced to pay for the drywall damage, the insurers will no doubt seek reimbursement from the home builders. The builders will file actions against the suppliers of the drywall, and on and on.

 Whether and how insurance policies will respond to these claims and lawsuits will depend on the wording of the particular policy and on the interpretation of that wording by the particular court in which the action is brought.

 Homeowners

 The ISO HO 00 03 10 00 clearly excludes pollution, and the definition of pollutant is “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes.” If the vapors from the drywall are corroding metal, then the pollution exclusion may apply. However, there is an exception to the exclusion for ensuing loss to property that is not precluded by any other provision. Therefore, if corroded metal such as that found on wires and pipes lead to leaks or fires, damage from those perils would be covered.

The pollution exclusion may or may not stand. Some courts will still hold that the pollution exclusion applies to traditional environmental contamination losses, spills, superfund, and similar exposures and that gasses from drywall didn't discharge, disperse, or escape onto land, water, or atmosphere (atmosphere generally being construed to mean the external atmosphere, and not the air inside a building). This exclusion did not hold up through the past lead paint and asbestos suits, and it may not withstand the drywall litigation. The exclusion was intended to limit or exclude coverage for environmental contamination, not product liability claims. The damages from the drywall aren't environmental pollution but, rather, bodily injury or damage caused by products containing the sulfur compounds.

 Another applicable exclusion is the one for faulty “repair, construction, renovation, remodeling…materials used in repair, construction, renovation or remodeling…” Again, there is an exception to this exclusion for ensuing losses stemming from these causes that are not excluded elsewhere. So while there is no coverage for the replacement of the drywall, there is at least coverage available for ensuing losses.

 Medical payments coverage is not available to the insured, and there is no exception. Medical payments coverage on the typical homeowners policy is intended for those who are not insureds.

 Homeowners may also file claims against the builder who constructed the dwelling. This brings the commercial policies into view.

 Commercial General Liability

 If a CGL form is brought into a claim based on the effects of Chinese drywall, a review of the form's exclusions shows that the pollution exclusion and the business risk exclusions need to be checked.

 Under the ISO commercial general liability policy CG 00 01 12 07, pollution is a major exclusion. Coverage is excluded for BI or PD arising out of the discharge, dispersal, seepage, or escape of pollutants under certain conditions. One of these conditions is that the dispersal or escape be at or from any premises or location that is or was at any time owned or occupied by any insured. Presuming that the drywall vapors are pollutants, if the insured contractor, for example, owns the location where he constructs a house or building in which he installs Chinese drywall, a case can be made that the exclusion prevents coverage. Of course, if the contractor has never owned the premises or location, this part of the pollution exclusion is moot.

 As for the other parts of the pollution exclusion, it should be pointed out that some coverage applies for bodily injury and property damage arising out of the named insured's products and completed operations. This is so because the standard pollution exclusion does not contain language explicitly excluding products and completed operations exposures; some coverage is therefore inferred. So, if the insured contractor has finished his work and the building owner later complains about pollution damage from drywall vapors, the pollution exclusion cannot be used to deny the claim.

 The exception for completed operations claims under the pollution exclusion is significant because, presumably, the claims against the contractor will be made after the work has been completed. However, there are parts of the pollution exclusion that do refer to ongoing operations. For example, coverage is excluded for injury or damage arising out of the discharge or escape or release of pollutants at or from any premises or location on which any insured is performing operations if the pollutants were brought on to the premises in connection with such operations. So, if the insured brings defective drywall onto the premises in order to install it and the drywall vapors sicken the occupants of the building or cause corrosive damage to property in the building, any claims are excluded, right? A closer look at the exclusion reveals an exception exists for injury or damage sustained within a building and caused by the release of vapors, fumes, or gases from materials brought into that building in connection with operations being performed. Construction of the dwelling or building is certainly an operation being performed, so even if the vapors are considered to be a pollutant, there is coverage because of this exception.

 In short, insurers should not count on the pollution exclusion barring any and all claims arising out of Chinese drywall. Moreover, many courts today are limiting the scope of the pollution exclusion to environmental damage which generally would not include claims based on injury or damage occurring inside an individual building or home.

 The business risk exclusions (these do not apply to BI claims) consist of several parts, not all of which would be applicable to a Chinese drywall claim. For example, the part referring to “that particular part of real property” on which the named insured is performing operations is not applicable to completed operations; thus, any PD claim would have to be made while the insured contractor is still installing the drywall, and this is not the usual scenario. Another example would be the damage to “your (named insured) product”. Drywall that the insured sells or handles is the insured's product, but, by definition, “your product” does not include real property and once the drywall is installed in the building, it is real property.

 This leaves the “damage to your work” exclusion and the “damage to impaired property or property not physically injured” exclusion.

 The “damage to your work” exclusion would prevent coverage for PD to the drywall itself if the drywall corroded or fell apart (just, for example, as the exclusion would prevent coverage for the collapse of a wall that the insured had built). Moreover, the exclusion would prevent coverage for damage to pipes and electrical work done by the insured since the exclusion applies to PD to “your work” arising out of it or any part of it.

 For those insured contractors concerned with this exclusion, the key to bypassing it is the subcontractor exception. The exclusion does not apply to damage to work performed by a subcontractor, or to damage to the named insured's own work arising out of the subcontractor's work. So, if a subcontractor has installed the defective drywall, any resulting PD claim against the general contractor (GC) will be covered by the GC's CGL form.

 The damage to impaired property exclusion is not one to be overlooked when it comes to Chinese drywall claims. The purpose of the exclusion is to prevent coverage for PD to property that has not been physically injured arising out of a defect or dangerous condition in the named insured's product or work. In other words, if the drywall makes the building uninhabitable, this exclusion would prevent coverage for the PD claim against the named insured. Note, however, that this exclusion applies only if the building can be restored to use by the replacement or removal of the named insured's product or work. This means that if the building can be again made habitable by the removal of the defective drywall, the exclusion will apply. But, if the building cannot be used again even after the drywall has been removed and replaced by non-defective drywall, the impaired property exclusion is not applicable to the PD claim.

 One last exclusion should be discussed—exclusion (n), the recall of products, work, or impaired property exclusion. This exclusion prevents coverage for damages claimed for any expense incurred by the named insured or others for the recall, inspection, repair, replacement, removal, or disposal of the named insured's product or work if such product or work is withdrawn from use because of a known or suspected defect or dangerous condition. In other words, if the claimant has his building gutted and the drywall removed, the expenses for such action will not be paid by the named insured's CGL form.

 As for coverage C medical payments under the CGL form, this coverage applies only to bodily injury claims, so med pay coverage would not come into play for a property damage claim. Med pay claims are subject to all of the coverage A (BI and PD liability) exclusions (such as the pollution exclusion). Also, any bodily injury expense included within the products-completed operations hazard is excluded; and, since most, if not all, Chinese drywall injury claims will be included in this hazard, medical payments coverage should not be a factor.

 There also are products liability exposures for manufacturers and sellers of the drywall that could be handled by the CGL form.

 The manufacturers are responsible if drywall is defective and causes injury or damage and also must make sure the product is labeled for fitness of use. However, in this situation, if the responsibility for the injury and damage is upon a Chinese manufacturer, it may be impossible for a claimant to collect since, in general, Chinese companies won't come to the United States to defend suits, and judgments made here cannot be enforced in China . Of course, this point does not dissuade some claimants and courts. For example in Germano v. Taishan Gypsum Company, 2010 WL 1445684 (E.D.La.), the United States District Court for the Eastern District in Louisiana consolidated several lawsuits filed by homeowners based on bodily injury and property damage claims due to Chinese drywall. The court found that the manufacturer of the drywall, Taishan Gypsum, legally responsible for the injuries and damages, and concluded that Taishan owed the plaintiffs compensation totaling $2,609, 129.99. Of course, this was a default judgment since Taishan did not timely respond to the complaints or enter an appearance in this litigation. How the judgment can be enforced is open to question.

 The sellers of the drywall can be held responsible for selling a defective product. There would be no coverage for the damage to the drywall itself, but damages and injuries caused by the defective product are items covered by the standard CGL form, subject to any applicable exclusions.

 Commercial Property

 If the insured property is a commercial structure, the commercial property causes of loss form needs to be reviewed. The basic causes of loss form and the broad causes of loss form are based on named perils coverage, so damage caused by defective drywall has to be seen through that lens; if the listed causes of loss on these two forms do not mention damage caused by defective drywall, there is no coverage for the damage claims. The special causes of loss form is another matter.

 The special causes of loss form will pay for loss or damage caused by any cause unless there is an applicable exclusion. The special causes of loss form (CP 10 30) does contain a standard pollution exclusion with an exception granting coverage if the pollution is caused by or results in a specified cause of loss. Specified causes of loss are fire; lightning; explosion; wind or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire-extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of ice, snow, or sleet; and water damage. So, there is no covered cause of loss for damage caused by vapors emitted from drywall, as long as the vapors are considered to be pollutants.

 Another applicable exclusion is hidden or latent defect. The chemicals in the drywall that are causing the problem vapors are not visible and they are an integral part of the product. Therefore, they can be seen as a latent defect, and in fact, the drywall itself is defective.

There is one more exclusion to consider. CP 10 30 excludes coverage for damage caused by or resulting from defective materials used in repair, construction, renovation, or remodeling of part or all of any property on or off the described premises. The current weight of evidence suggests that Chinese drywall is defective so the damage it causes will not be covered by the commercial property form.

 Action

 Steps to correct the problems may lead to the drywall, wiring, and piping needing to be removed and/or replaced. The interior of the building may also need to be cleaned. Another issue is just which drywall is the offending Chinese drywall and which drywall is safe. One of the problems is that once the drywall in a house is painted, it is difficult if not impossible to tell if the problem is all the drywall in the house or just a few walls. The drywall may not be clearly labeled, which could result in the entire house having to be gutted if a distinction cannot be made.

 As mentioned previously, the CPSC is heading up the task force to study the issue and make recommendations. The Environmental Protection Agency and Centers for Disease Control are conducting studies on the effects of Chinese drywall. The studies are not yet completed, although a recent advisory from the U.S. Department of Housing and Urban Development (HUD) and the CPSC advises homeowners that the drywall should be replaced along with other components that the drywall may have corroded. HUD and CPSC said studies up to now have shown a connection between Chinese drywall and corrosion in homes, with a link that suggests hydrogen sulfide is causing the corrosion. Note also that the National Association of Insurance Commissioners (NAIC) is studying the issue and plans to release a draft white paper on the Chinese drywall problems.

 Disposal of the drywall is going to be another issue. Many landfills will not take the material and guidelines for where it may be dumped are still being developed. For example, the Florida state environmental department does not consider Chinese drywall a hazardous waste, yet when tons of drywall were sent to waste sites after the 2004 and 2005 hurricanes, problems with severe hydrogen odors developed. The environmental department is recommending that suspect drywall be sent to landfills that are lined with clay or other material and that have gas collection and control systems. Additionally, the drywall should be covered daily with several inches of soil.

 Legal Aspects

 Lawsuits have been filed against builders or manufacturers; many of these suits have been consolidated into one action (see, for example, the Germano case noted previously) since they share factual questions regarding the drywall, its importation and use, and the emission of smelly, corrosive gases. Some lawsuits target the manufacturer while others target the construction companies.

 The Drywall Safety Act of 2009 is a bill that was introduced in the U. S. Senate. The bill calls for the CPSC to study Chinese drywall imported between 2004 and 2007, determine whether or not a safety standard for the material is necessary, designate drywall with more than 5 percent organic compounds to be considered hazardous, and order manufacturers, distributors, and retailers of such drywall to cease and desist distribution of the product. A companion bill has been filed in the House. Should these bills pass, both the construction and insurance industries may be greatly affected.

 Loss Control

 Medical advice should be sought immediately if an insured experiences symptoms similar to those discussed here. Symptoms often clear when a person is away from the home and return when the person returns home. If the insured has electrical or fire issues, he should contact an electrician and the utility service provider. The CPSP should also be notified. They can be contacted at: www.cpsc.gov/cgibin/incident.aspx

Signs of Potential Electrical Issues

 ·Circuit breaker that needs to be reset frequently for no reason; ground fault circuit interrupter trips frequently

·Dim/flickering lights for no reason

·Arc/sparks anywhere in system

·Sizzles/buzzes from electrical systems/devices

·Overheating—switch plates, dimmer switches, cords, and plugs that are discolored or painful to touch

·Odors—smells as if from overheating plastic or electrical insulation material

·Shocks, even a mild tingle