After Katrina: The Chinese drywall debacle

Insurers invoke pollution exclusion

By Phil Zinkewicz

In the years after Hurricane Katrina’s devastation in 2005, home owners in Louisiana, Florida and other flood-damaged states began the formidable process of rebuilding their houses. The first step was to dry out the structures, and to do that they had to rip everything out, including the drywall.

After the drying-out process was completed, home owners had to replace the old drywall with new. Because American manufacturers were unable to meet the demand, many contractors used drywall imported from China. Eventually the work was completed, and people had their houses back once more. All was right with the world.

Well, not exactly. First, air conditioners began to break down. The insides of the units began to corrode, and no one knew why. So people went out and bought new air conditioners, and the same thing happened. Plumbing in kitchens and bathrooms also began to corrode, resulting in a flow of rusty water, and then other appliances broke down because the wiring in the walls began to corrode as well.

Finally someone realized that there was a correlation between the breakdowns and a pollutant in the Chinese drywall. Now many home owners will have to start all over again: rebuild the house, install new plumbing and wiring, and buy new appliances. Or just let the house go forever.

Wayne Forest Sr., of Louisiana-based Forest Insurance Facilities, says that these scenarios are becoming more frequent in the states hit by Katrina. Forest, who is also president-elect of the American Association of Managing General Agents (AAMGA), told Rough Notes that the Chinese drywall controversy is “not going to go away anytime soon.”

Insurers denying claims

Says Forest: “My son and I were lucky. We were flooded out by Katrina, and began to rebuild the same as others. But we were able to purchase Sheetrock® from U.S. firms. When that supply dwindled, contractors had to look to the Chinese drywall. You can’t blame them. That was all that was available to help folks rebuild.

“Contractors didn’t know the product contained a pollutant. Now it appears that insurers are denying claims from home owners, saying that the pollution was not accidental and sudden, but gradual and so not covered by the homeowners’ policies,” Forest explains. “Litigation has begun in the form of class action suits, and we’re only at the beginning stages of the controversy.”

Not only home owners but also builders may have to argue with insurance companies to get them to provide coverage for legal defenses. Recently a Florida online news organization quoted Richard Caligiuri, division manager for Bouchard Insurance, who said: “From everything I hear from behind the scenes, the insurance companies are going to rely on the pollution exclusion. I think you’re going to see a lot of denials on the strength of the pollution exclusion.”

Many lawsuits already have been brought. Recently a panel of federal judges ruled that lawsuits filed around the country against home builders, as well as suppliers and manufacturers of Chinese drywall, will be moved to New Orleans, where U.S. District Judge Eldon Fallow will preside over discovery and pre-trial hearings. The panel said it is trying to ensure that lawyers for both the plaintiffs and defense will not have to duplicate their efforts in multiple courts during discovery. The panel also wants to prevent judges in different districts from handing down inconsistent rulings.

The transfer order brings a total of 10 suits originating in Louisiana, Florida and Ohio into Fallon’s court. An additional suit filed in federal court in Virginia could also be moved to New Orleans.

Toxic elements

Over the past year, owners of newer houses in South Florida and Louisiana have been complaining of drywall that smells like rotten eggs. In several cases they were forced to leave their houses because the smell was so bad.

In Florida, where drywall complaints first surfaced, tests conducted by the state health department found that samples of Chinese drywall contained higher levels of sulfuric acid organic compounds than an American-made sample. The Chinese samples contained elements of strontium sulfide, while the American samples did not. Strontium sulfide is a gray powder that emits a hydrogen sulfide or “rotten egg” odor when exposed to moist air. The Chinese samples also contained higher levels of hydrogen sulfide, carbonyl sulfide and carbon disulfide than the American drywall. All of these compounds are potentially toxic, and carbon disulfide in liquid form is extremely flammable.

In addition to Louisiana and Florida, complaints about Chinese drywall have come from Mississippi, Alabama, Virginia and North Carolina. Awareness of the problem in southern states has emerged first because the warm climates encourage the emissions of sulfur fumes. In dryer, cooler areas of the country, it could be years before home owners begin seeing the problems associated with Chinese drywall.

Investigators are trying to determine how much Chinese drywall was imported during the building boom years that followed Hurricane Katrina. According to the Associated Press, during that period approximately 540 million pounds of Chinese drywall entered the United States. In 2006 alone, enough Chinese drywall was imported to build 34,000 homes.

So far, no one knows if people exposed to Chinese drywall face long-term health consequences. Investigators are looking into the issue, but the Associated Press has reported that the Centers for Disease Control and Prevention says that prolonged exposure to the compounds found in the drywall, especially high levels of carbon disulfide, can cause breathing problems, chest pain and even death. It can also affect the nervous system.

Flood of lawsuits

The AAMGA has recognized the extremely serious problems associated with Chinese drywall. Earlier this year the association hosted a Webinar on the subject. Joel S. Fass, a shareholder in the law firm of Colodny, Fass, Talenfeld, Karlinsky & Abate, led a discussion about Chinese drywall and the legal implications for insurers and others. Fass said that thus far 250 cases involving Chinese drywall have been filed in federal court and 187 filed in state courts. He said that the suits make a wide range of allegations: negligence, breach of warranty, fraudulent concealment and private nuisance. Fass also predicted that “there will be bad faith claims filed against insurers” for refusing to pay affected policyholders.

So serious is the problem that AAMGA officials say the association will host another Webinar on the subject later this year.