Editor's Note: This article originally appeared in National Underwriter, P&C.

SAN FRANCISCO--Language contained in insurers' own claim manuals may void policy exclusion provisions insurers have used to deny homeowners' Chinese drywall damage claims, an insurance law expert testified here.

Charles Miller, of the Insurance Law Center in Berkeley, Calif., made his remarks here at a hearing on drywall issues by the National Association of Insurance Commissioners Catastrophe Insurance Working Group at the NAIC's Winter National Meeting.

Miller drew upon language contained within Fire, Casualty & Surety (FC&S) bulletins, a publication within Claims' and National Underwriter's parent Summit Business Media, to raise questions about whether exclusions apply.

Drywall building material -- also called wallboard, gypsum board and plasterboard -- goes by such brand names as Sheetrock, Tablaroca, Gyprock and ToughRock.

Homeowners in 32 states -- but mainly in Florida, Louisiana, and Virginia -- living in houses built using drywall imported into the country from China between 2004 and 2007 have reported foul odors; failure of air-conditioning equipment; corrosion of pipes, coils, and wiring; damage to furniture, fixtures, and jewelry; and health problems that include respiratory problems, headaches, coughing, and fatigue.

Miller said FC&S -- a resource for insurers for interpretation of both commercial and personal lines coverages -- notes that many courts have found the pollution exclusion in homeowners' policies only applies to "traditional environmental damage."

Miller said, "The release of gases inside of a residence is not normally considered to be traditional environmental damage."

Regarding latent defect and inherent vice exclusions some insurers have cited, Miller noted the FC&S bulletin states that the exclusion applies to "a loss due to any quality in the property that causes the property to damage or destroy itself that results from something in the property itself."

The drywall, he noted, is not destroying itself, but rather causing ensuing damage to its surroundings, which should be covered.

On construction defect exclusions, Miller again cited language from the June 2009 FC&S bulletin, which states, "Any ensuing loss as a result of the faulty drywall would be covered, for example, if the drywall caused corrosion damage to wires or pipes."

Miller said regulators should look to protect consumers by conducting multistate market conduct exams to ensure proper investigations into Chinese drywall are being conducted. He said there is a "critically important relationship between a timely and thorough investigation and a proper evaluation of the coverages."

Bob Detlefsen, vice president of public policy for the National Association of Mutual Insurance Companies, said Miller's testimony relied largely on information in insurer manuals. He questioned whether that language is more relevant than case law, and indicated case law will likely be taken more seriously in the courts.

Dave Snyder, vice president and associate general counsel of the American Insurance Association, said overreliance on any one source for coverage should be avoided, and added coverage issues should be left to fact-finders.

He said there are still a lot of unknowns regarding Chinese drywall, and the Consumer Product Safety Commission should be allowed to continue its work to identify the problems and develop cost-effective remediation methods.

Both Snyder and Detlefsen rejected one coverage idea put forth by Amy Bach of United Policyholders, an NAIC-funded consumer representative. Bach indicated that insurers should assist policyholders and cover their claims now, and if they are found not liable later, they could then subrogate against those entities.

The full extent of how or why the drywall is causing odor, corrosion, and health problems is not yet fully known. But a group of federal agencies led by the U.S. Consumer Product Safety Commission (CPSC) has been examining the matter and has found that homes containing Chinese drywall had hydrogen sulfide gas, which was deemed the "essential component that causes copper and silver sulfide corrosion found in the complaint homes."

Insurance industry association representatives -- including David Kodama, director of policy analysis at the Property Casualty Insurers Association of America (PCI) -- said that questions of coverage in homeowners' policies depend on the individual insurance contracts and the language contained therein.

Michael Barry, spokesperson for the Insurance Information Institute, told NU Online previously that for homeowners, the policies generally exclude losses that would be associated with Chinese drywall. He said it is considered defective work or inadequate construction materials.

Bach said policyholders do not have the expertise or resources to tackle the problem themselves, and that many of them have been forced to leave their homes because of the problems arising from Chinese drywall.

Snyder said if insurers cover what they are not obligated to cover, that can be used against them by the responsible parties, who will argue they have no obligation to pay the insurance company. He added that insurance company shareholders expect the insurer to fulfill its legal obligations, but not to volunteer to pay claims it is not responsible for and that it may not be able to recover.

Detlefsen said the hearing had brought into "sharp focus" some of the issues that will be controversial and contentious going forward on the Chinese drywall issue.

Phil Gusman is associate editor of National Underwriter, part of Summit Business Media's P&C Magazine Group, which includes Claims.

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