Language contained in their own claims manuals might void policy exclusion provisions insurers have used to deny Chinese drywall homeowners claims, according to an insurance law expert.

Charles Miller, a principal at 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, during the regulator group's Winter National Meeting.

Mr. Miller raised questions about whether various exclusions apply by drawing upon language in the Fire, Casualty & Surety Bulletins, part of Summit Business Media, which also publishes National Underwriter.

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; corrosion of pipes, coils and wiring; damage to furniture, fixtures and jewelry; as well as health problems that include respiratory ailments, headaches, coughing and fatigue.

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

However, according to Mr. Miller, "the release of gases inside of a residence is not normally considered to be traditional environmental damage."

Regarding the latent defect and inherent vice exclusions some insurers have cited, Mr. Miller said FC&S states 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, Mr. Miller again cited language from the June 2009 FC&S, 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."

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

Both Mr. Snyder and Mr. Detlefsen rejected one coverage idea put forth by Amy Bach of United Policyholders–an NAIC-funded consumer representative. Ms. 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.

But Mr. Snyder said that 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.

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

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

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

Mr. 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.

The full extent of how or why Chinese 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 has been examining the matter and has found that homes containing the material had hydrogen sulfide gas, which was deemed the "essential component that causes copper and silver sulfide corrosion found in the complaint homes."

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