Amid the rebuilding efforts after the 2004-2005 hurricane seasons, and in the midst of a housing boom, domestic drywall was in short supply. Imports from China filled the gap, and that decision has apparently created more problems than it solved.

Homeowners–particularly in Florida, Louisiana and Virginia–have been complaining about health problems, foul odors, damage to furniture and electrical woes in homes built from 2004 to 2007. The culprit seems to be Chinese drywall.

Over 550 million pounds of Chinese drywall imported between 2004 and 2007 was installed in up to 100,000 U.S. homes, according to a fact sheet from the National Association of Insurance Commissioners.

The Consumer Product Safety Commission has recorded over 2,091 reports of defective drywall in 32 states, the NAIC noted, with the most common complaint being the smell of rotten eggs.

Federal agencies have conducted studies and appealed for patience as the science behind the problem is worked out. Results released in October showed homes with Chinese drywall had elevated levels of sulfur and formaldehyde, but not high enough to explain home degradation and health woes. In November, a study found hydrogen sulfide gas in affected homes.

For the insurance industry, the Chinese drywall liability debate is in its early stages, and it is not yet known how many claims will come of it.

A situation in Florida involving the state's insurer of last resort, Citizens Property Insurance Corp., caused a stir amid reports the carrier threatened to nonrenew a home because it contained Chinese drywall.

John Kuczwanski, public information manager for Citizens, said the nonrenewal was not because the house had Chinese drywall specifically, but rather the resulting degradation was thought to have damaged the house to the point where it no longer met the insurer's underwriting standards.

Upon further inspection, he noted, it was determined the damage had not progressed to a significant degree to cause concern, and the nonrenewal was rescinded.

Will insurers for homeowners and contractors have to cover claims arising from Chinese drywall? Industry associations are saying that will be determined on an individual policy-by-policy basis.

Some, such as Mike Barry, a representative for the Insurance Information Institute, told NU Chinese drywall claims fall under pollution or builder's defect exclusions. Mr. Kuczwanski said Citizens has inspected 24 claims related to Chinese drywall, and none have resulted in payment.

But in testimony to the NAIC, Charles Miller, a principal of the Insurance Law Center in Berkeley, Calif., cited the Fire Casualty & Surety (FC&S) bulletins–a publication affiliated with NU–to question whether those exclusions apply.

On the pollution exclusion in homeowners policies, for example, Mr. Miller said FC&S–a resource for insurers for interpretation of both commercial and personal lines coverages–noted that many courts have found the exclusion only applies to “traditional environmental damage,” which would not include the release of gasses inside a residence.

He said insurers have tried to use latent defect and inherent vice exclusions as well, but FC&S states those exclusions apply 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.”

For commercial insurers, liability is uncertain as well. Lennar Corp., a home building company based in Miami, stated in a 10-Q filing it will seek reimbursement for Chinese drywall-related losses from, among other parties, its insurers.

The good news for insurers is that the Chinese drywall exposure will not likely become the dreaded “next asbestos.”

David Golden, director of commercial lines for the Property Casualty Insurers Association of America, said Chinese drywall is a “limited universe” in that only a limited number of homes were built with the material over the course of three years.

How liability shakes out will likely be a matter for the courts to decide.

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