If an underwriter stopped by the office a few years ago andproposed that drywall leads to significant pollution liabilities,you probably would have laughed. Yet it turns out thatdrywall–pulverized limestone sandwiched between paper–isn't asinnocuous as one would assume.

While all limestone contains sulphur, for reasons unknown, thesulphur levels in the now infamous Chinese drywall aresignificantly higher–so much so that, when moisture hits thesulfur-rich drywall, sulphuric gases are emitted.

The results are claims of failing electrical and plumbingsystems, the foul odor of hydrogen sulphide, and emerging concernsover adverse health effects.

Dozens of lawsuits have been filed in various jurisdictionsaround the country against those who handled defective drywall, andthe number is likely to grow.

In a July 8 report, the U.S. Consumer Product Safety Commissionnoted that defective Chinese drywall has so far been reported in 21states and Washington, D.C., with most reports coming from Florida,Louisiana and Virginia. (For a recent report about the effectsChinese drywall from the CPSC, see related article, page 14.)

What many believe will follow is some of the most complicatedand expensive litigation involving products pollution in the pastdecade. Factors complicating this litigation include the difficultyof suing foreign manufacturers and the reoccurring question ofwhether sulphuric gases are "pollutants" as defined in typicalcommercial general liability insurance policies. These gases areindeed likely to be treated as "pollutants" and, in many cases,subject to the pollution exclusion common in most CGL policiestoday.

Environmental liability isn't new.

MTBE (methyl tertiary butyl ether), a gasoline additive, enablescleaner combustion and lower emissions. Widespread usage began in1980. But by 2000, many concerns arose over adverse effects on thenation's water supplies.

Just as the use of MTBE was phasing out, toxic mold explodedonto the scene in 2003. A jury in the case of Ballard v. FireInsurance Exchange (part of the Farmers Insurance Group)initially awarded the Ballard family $32 million, includingpunitive damages, mental anguish and lawyers' fees. Thousands oflawsuits alleging various damages and ailments from toxic mold havefollowed.

So what are the next potential environmental landmines?

While it's impossible to predict, several issues have beensmoldering over the past few years, including silt runoff fromconstruction sites, green construction and evolving environmentalregulations.

SILT REGULATION

Environmental regulators recently have focused on silt runofffrom construction sites. When rain washes exposed soil atconstruction sites downstream, sedimentation, or silt, may pollutethe receiving waters.

Silt runoff has been regulated under the Clean Water Act since1987, and subject to National Pollutant Discharge EliminationSystem (NPDES) permissions since 1991. Until recently, enforcementof these regulations was lacking. In 2008, however, U.S. EPAannounced a $4.3 million settlement against four home builders forthe discharge of silt at construction sites.

Many states have followed the EPA's lead. In Minnesota, nearly100 enforcement actions and $700,000 in penalties related tostormwater controls at construction sites were levied between 2007and 2009.

Regulatory scrutiny hasn't been limited to contractors. HomeDepot was fined in excess of $1 million for silt runoff from siteswhere new stores were being constructed. And while these penaltiesare no small potatoes, defining sedimentation as a "pollutant"creates perhaps the most drastic ramifications from an insurancecoverage standpoint. Claims concerning pollutants are likely to fitsquarely in crosshairs of the pollution exclusion in most CGLpolicies.

GOING GREEN

Like MTBE, green construction techniques were designed withenvironmental stewardship in mind. With promises of reducingimpacts to the environment, creating healthier spaces for buildingoccupants and lowering building energy costs, green construction israpidly building steam around the county.

But while green construction may be admirable, it doesn'tnecessarily equate to lower liability for those engaged in theprocess. New construction techniques carry a higher risk ofunforeseen liabilities. For example, the placement of gardens onrooftops may lead to water penetration into the building envelope,causing toxic mold.

Many industry observers also believe that some of the greenbuilding techniques begin to blur the line between traditionalprofessional activities and purely contracting operations. Such wasthe case in Shaw Development v. Southern Builders, wherean owner alleged hundreds of thousands of dollars in lost taxcredits as damages against the contractors resulting from notachieving green certification on time.

Shaw since has been dubbed the "first green buildinglitigation." However, neither professional services nor economicdamages are typically covered under many contractors' CGLpolicies.

MORE TO COME

Other emerging issues deserving mention include potential newregulations surrounding "e-waste" (discarded electronic equipment),nanotechnology and global warming.

(For a full discussion of nanotechnology risks, see NU,April 13, page 16.)

Environmental law and policy are likely to evolve rapidly in thenear future in these areas. And while it's impossible to predictwhat the next potential environmental liability landmine will be,the most prudent course of action is to include robustenvironmental decision-making in corporate risk managementpractices now, before the next environmental issue explodes.

Just ask those who manufacture, distribute and installdrywall.

Adrien T. Robinson, J.D., P.E., is theenvironmental practice leader for The Navigators Group Inc., aninternational specialty insurance company headquartered in NewYork. Mr. Robinson has more than 14 years of experience in theenvironmental industry, is licensed in Illinois as a professionalengineer and is admitted to the Illinois Bar. He may be reached at[email protected].

This article was originally published on Oct. 2, 2009 byAmerican Agent & Broker magazine, a member of SummitBusiness Media's P&C Magazine Group, which includesNational Underwriter. The original publication was a Webexclusive on American Agent & Brokers' Web site, www.agentandbroker.com.