Potential liability issues surrounding the installation of defective Chinese drywall in Southeastern homes is definitely a topic of conversation among insurance underwriters, but potentially impacted contractors and suppliers haven't seen their accounts moved out of the standard lines market, according to a wholesale broker.
Dean LaPierre, senior vice president and National Construction Practice leader for Mercator Risk Services in Andover, Md., spoke to National Underwriter a few weeks after E&S/Specialty Lines Extra published its first article on the growing Chinese drywall problem, headlining last month's issue.
Asked for a wholesaler's perspective on whether there have been any notable impacts on the specialty insurance market, he said the answer is yes and no.
"I haven't seen any business move," he said, referring to construction liability accounts for builders or contractors that installed drywall and product liability accounts for drywall suppliers that have been a standard markets' play in recent years. "It's still too early," he believes.
In recent months, problems caused by Chinese drywall imported to repair properties damaged by hurricanes in 2004 and 2005 have escalated, with reports that once focused on "a rotten egg smell" now fueling more than two dozen lawsuits, alleging property damage and health issues from emitted gases, the law firm reported.
Houses that have the drywall have seen corrosion in electrical wiring, air conditioning components and other appliances. In addition, homeowners are alleging health issues such as nosebleeds and respiratory problems.
While the science is still in its infancy, the Florida Department of Health has posted conclusions of a hygienist's initial report on its Web site stating that there is a "distinct difference" between Chinese and U.S. drywall, and that the Chinese drywall has a unique sulfur odor when exposed to extreme heat and moisture.
The report, however, noted that both the drywall outer paper and the gypsum core released sulfur compounds upon testing, suggesting there are possible causes of gas emissions and the observed aftereffects aside from the drywall itself. These include the treatment of the drywall or the outer paper with an insecticide before it entered the United States, or contaminants in the adhesive binding the paper to the drywall.
The department, which received 65 complaints about Chinese drywall in February, reported just over 150 in early April, with the figure vaulting nearly 400 late last week. (The DOH reported 386 complaints on May 21.)
"I can say [that] we just got a bid in for a huge job–a 45-story condo in Miami [where] the contract is to rip out all of this drywall. It's an $18 million contract," Mr. LaPierre said.
"So that's creating another job" on top of construction work that was already done, "and the question becomes who's going to pay for that," he said.
"But I think the bigger question out there is more about the bodily injury. Is this the next asbestos, the next tobacco? What are the long-term impacts of this?" he added. "Is it just a product defect where we have to go back and replace the product, or is somebody actually getting injured?"
There are "a lot of lawsuits flying around right now and a lot of people saying 'we have to wait and see where this goes,' but it's definitely got the potential to be very big," he concluded.
As to the question of whether insurance companies are talking about changing the language of their policies to exclude these types of claims, Mr. LaPierre said, "It's definitely a topic of conversation. Questions are now being asked."
"They fairly well know where this came from, [and] a lot of builders are filing suit against the [drywall] manufacturer"– Knauf Gips, a German company with Chinese operations known as Knauf Tianjin.
"Builders are trying to be proactive and are filing lawsuits to place the liability on the manufacturer, but the reality is it is their work," complicating questions of "how to delineate where the coverage is and where it may end," he explained.
Mr. LaPierre said he hasn't seen changes in the policy wordings "out there yet."
Would a homebuilder or a contractor have coverage under the liability policy as they're currently worded?
"It's tough to say that they would carte blanche," Mr. LaPierre replied. "Certainly any bodily injury that comes as a result of a contractors installation work would typically be covered under a general liability policy."
"The question becomes, what is the bodily injury? Is there subrogation potential? But yes, bodily injury arising from a contractor's installed work is typically something that you would buy coverage for under your general liability policy," he said.
Asked whether pollution exclusions might kick in to eliminate coverage related to gas emissions, Mr. LaPierre said the answer is not clear cut, noting that to enforce pollution exclusions in many situations, "you have to specifically name the pollutant."
Drywall is made of synthetic gypsum, which is created after coal is pulverized. "It could very well be" that the coal in this case had higher-than-usual sulfur content, but "is that necessarily a pollutant? It's a very intriguing question," he said.
When the gypsum gets warm and moist, as in South Florida, the byproduct is sulfuric acid, which could be causing the nosebleeds and respiratory problems, he continued. "That's a chemical reaction," he said. "I don't know if pollutants are the answer on this."
Summing up the entire situation from a wholesaler's perspective, he said that "people know the potential is big. I haven't seen any business move because of it."
He concluded that "the markets are certainly watching it very closely, but at this point, I have not seen any language developed specifically addressing this one issue."
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