Chinese drywall is back in the news with a recent Hillsborough County judge’s ruling that homeowners’ insurance should cover the damage caused by the tainted product. Judge Robert Foster ruled last week that he finds no exclusion in a homeowners’ policy issued by Teachers Insurance Co. of Springfield, Ill. Claimants in the case, Craig and Melissa Walker of Odessa, had sued the insurance company for not covering the damages when the tainted drywall was discovered in their home.

According to its website, Teachers was incorporated in 1971. It is a fire and casualty insurance company with assets of $275,127,531, capital of $3,000,000, and net surplus of $90,092,791.

An attorney for the carrier argued that a “wear and tear” exclusion and a defective material exclusion pertained to the corrosion of the drywall, a defense used successfully in other cases.

Judge Foster had an innovative take on the case. He said the drywall was not defective because it “serves its purpose and functions as drywall.” It does, however, emit a corrosive gas. The policy covered smoke damage, the judge said, and he interpreted smoke to be the same as gas, hence the favorable ruling for the Walkers.

In his order, Foster wrote, “The court finds that the ordinary meaning as found in a Merriam-Webster dictionary, defines ‘smoke’ as a ‘suspension of particles in a gas. The court has applied the definition that allows coverage, which is at least as reasonable as the definition that might exclude coverage.”

The amount of the award will be determined by a jury; a trial date has not yet been set.

Problem Emerged in 2006

The Hillsborough County judge’s ruling joins a collection of conflicting determinations from various state and federal courts, regulators, and legislatures. In a March 7 article at PropertyCasualty360.com, “Conflicting Rulings on Defects Leave Looming Questions Over Drywall Claims,” Dave Lenckus noted that this lack of consensus “is intensifying long-standing coverage disputes.” “Doing this on a state-by-state basis has caused a lot of confusion among buyers and sellers,” Jeffrey A. Segall, a Tampa-based senior vice president and the Florida Construction Practice leader at Willis of Florida, said in the article.

The Chinese drywall problem first garnered significant attention in late 2006 as reports from owners of newly built Florida homes began complaining of persistent sulfur odors. Florida was in the midst of a building boom, both from economic factors as the housing bubble kept rising and from repairs and remodeling necessitated by the multi-hurricane years of 2004-2005. As builders scrambled to meet demand, they turned increasingly to exported products, especially from China.

However, when homeowners moved in, many complained of health and breathing problems and noxious smells. They also reported black discoloration of metal fixtures, electrical components, and domestic water piping; black sulfide corrosion of HVAC components, they said, was causing equipment failure.

Reports of the problem soon were emerging throughout the Gulf states (Florida, Louisiana, Mississippi, Alabama, and Texas), and class action suits and individual claims boomed. Insureds and insurers have been battling in various courts for the past several years.

Slowly Reaching Settlements

 There has been some significant settlement news for major suits.

In late March, Lowe’s announced a Georgia state court-sanctioned settlement offering as much as $100,000 in cash to customers who can prove they bought drywall from the retailer and also prove that it caused at least $4,500 in damages. An attorney representing Lowe’s reported that more than 24,000 claim forms have already been submitted and there have been more than 100,000 hits on the settlement website.

Additionally, one of the major Chinese manufacturers, Knauf, recently agreed to an $8 million settlement with its primary southern U.S. supplier, Interior/Exterior Building Supply LP, of New Orleans.

“A settlement has been reached with a major party to the litigation,” U.S. District Court Judge Eldon Fallon announced in late April. The agreement calls for the supplier’s two primary insurers, Arch Insurance Co. and Liberty Mutual Fire Insurance Co., to each put the $4 million limits of their policies into an escrow account. The fund available to homeowners could grow; the carriers plan to go to trial against Interior/Exterior’s excess insurer, North River Insurance Co., which has another $72 million in coverage.

The class action lawsuit involving the roughly 10,000 cases was consolidated in Judge Fallon’s court in New Orleans. The deal was the first monetary settlement in that nearly two-year-old case.