Chinese Drywall Shows Need For Enhanced Contractor Coverage

Homeowner health complaints related to Chinese drywall products point up a need for contractors to obtain enhanced insurance coverage, but such protection may not be available, according to a brokerage expert.

Rod Taylor, managing director of Aon's Environmental Services Group, said what will likely happen is insurers will place another exclusion on contractor's general liability policies instead of expanding protection.

Homeowners have complained of odors and corrosion of electrical equipment and copper piping caused by drywall made in China. Mr. Taylor said it illustrates the necessity for expanding the coverage for contractors.

With the extent of the current problem undetermined at this time, however, insurers are more likely to place an exclusion on future policies until they know how extensive the problem is, he explained.

The problem appears to arise from the use of imported drywall that was needed from 2004 to 2007 in the wake of Hurricane Katrina and other hurricanes that caused a shortage of U.S.-manufactured product.

Homeowners, primarily in Florida, are complaining of headaches and illness from the smell they say is coming from the panels. There are also complaints of corrosion to copper products, allegedly caused by the product.

The Florida Department of Health said it had received 289 confirmed complaints about the drywall as of April 21, but so far has not made a determination that the material is the cause.

The department released the results of testing performed by an independent lab that concluded there is a difference between U.S. and Chinese drywall obtained through a German company.

The report concluded there were signs the Chinese-made drywall gave off odors when exposed to extreme heat and moisture. There was also evidence of corrosion to copper, the report said, but more testing is needed because some of the test samples may have been cross contaminated.

For contractors and homebuilders, the complaints may mean they will have to search for responsible parties as litigation grows because they are not currently covered under their general liability policies, Mr. Taylor said.

“This is more a product than a construction problem,” said Mr. Taylor, but attorneys who are beginning to file lawsuits are naming everyone involved in the construction of the home: contractors, suppliers and manufacturers.

For contractors, the incident points up the need for environmental coverage under their insurance programs and more attention paid to risk management issues, particularly who they are doing business with and who they are buying materials from.

In reality, he said, the drywall problems are not the fault of the contractors or homebuilders. However, until the issue is resolved, insurers will probably be reluctant to enhance contractor's general liability coverage and are more likely to place exclusion on policies.

The main reason for insurers taking this action, he said, is that there is currently uncertainty over how extensive the problem is. Mr. Taylor said it could be as few as 600 homes, or as many as 60,000. No one is sure how extensive the use of the product was, or if the problems will arise in areas outside of Florida, he noted.

Currently, Mr. Taylor said, one major homebuilder has taken the initiative and is replacing the drywall in homes, worrying about who will be liable for it later.

As far as finding responsible parties, the German company that sold the Chinese product said they have found no problems and the Chinese company that manufactured the product may no longer be in business, he said. There is also a major question whether U.S. courts would have any jurisdiction over a German company.

“People are in for quite a lengthy process of litigation before there is any resolution,” Mr. Taylor added.