The coverage questions regarding problems with Chinese drywall are becoming ever more frequent in our firm. I will caution everybody that I am not giving a definitive answer. I can say that the analysis is complex, depending on which state law you are applying. As usual, the policy and the factual problems associated with the particular drywall result in some of the loss covered, all covered, or none covered. Merlin’s Woody Isom and Mary Fortson have been tasked with keeping up on coverage and recovery efforts and particular questions should go to them. After considering a number of issues, the one thing I can tell you is that anybody who claims they have a guaranteed accurate answer is puffing something stronger than is legal.
I suggest that those with Chinese drywall problems read “Solving the Chinese Puzzle of Contaminated Drywall: Owners and Builders Seek Redress for Defective Drywall Installed in Homes” as a basic reference for the expected coverage issues.
Tens of thousands of residential structures are affected, as well as condominiums, apartments and commercial structures. Homeowner’s and commercial “all-risk” policies may have a number of triggers for damage, but the primary exclusions which may affect coverage are noted in this article:
“There are a number of exclusions, however, that can make the coverage for defective drywall claims problematic. For example, losses caused by the following perils are typically excluded:
• Wear and tear, marring, deterioration
• Inherent vice, latent defect, mechanical breakdown
• Smog, rust, mold, wet or dry rot
• Release, discharge or dispersal of contaminants or pollutants
• Settling, cracking, shrinking, bulging or expansion of pavements, patios, foundations, walls floors, roofs or ceilings.”
The discussion of the exclusions suggests that the authors believe homeowners all-risk policies will face significant coverage issues:
“Deterioration’ is a gradual decline or reduction in a property’s value resulting from a decline in physical condition. It can be caused by action of the elements or by ordinary wear and tear. A ‘latent defect’ is customarily one that cannot be discerned by a normal inspection of the property by its owner and must be identified by an expert’s investigation. It could be argued that this type of exclusion is applicable to the defective drywall claims, since the material appears normal to the layperson but can be identified as defective by a consultant’s investigation or by analysis of its composition. ‘Inherent vice’ is a condition in an insured property that has the potential to cause damage to portions of the property other than the part containing to portions of the property other than the part containing the inherent vice.
The Chinese drywall, it may be argued, exhibits this property since gases emitted from the drywall have been alleged to cause corrosion of metals, including the wiring, plumbing and air conditioning coils in homes where it has been installed. In some cases, the pollution exclusion in a homeowners policy may arguably apply to the release of harmful gases from the drywall that are damaging plumbing, wiring, heating and air conditioning systems, appliances, computers and electronic equipment. Even the odor may be regarded as a release of a pollutant or contaminant, although it is not clear that the incorporation of pollution exclusions in property damage policies was intended to apply to releases that are contained within the insured structure and involve non-industrial materials. Counterarguments can be made that the pollution exclusion should apply only to releases of hazardous materials that impact the environment, but not to damage to the structure, building materials or furnishings within a structure.
Some homeowners policies also contain exclusions for construction defects. This exclusion is included with the thought that an alternative course of action is available to the homeowner: an action for breach of warranty against the contractor and subcontractors that built the home. Even where this exclusion is not included in the policy, some courts have denied coverage for defective construction or materials claims, since damage to the drywall did not occur during the policy period – it was already defective when it was installed and is in the same condition when the problem is discovered. Other courts have concluded that there is no occurrence or event giving rise to the alleged loss where the defective material is unchanged from when it was installed. The damage to the plumbing, wiring, air conditioning, appliances and computers may be excluded as deterioration (e.g., gradual damage), or as rust or corrosion. There are, however, jurisdictions that regard the installation of the defective drywall as an ‘occurrence’ and consider the damage to be ongoing during the term of the policy even though the defective material itself may not be altered after its installation.
In summary, homeowners policies are not likely to respond to the costs of tearing out and replacing the defective drywall. And although they might pay for the ensuing loss to the wiring, plumbing, air conditioning and appliances, there is no guarantee, however, as these losses may also be impacted by exclusions for mechanical breakdown.“
The last sentence is discouraging. Many insurance defense attorneys have confided some concern regarding the “ensuing loss” provisions of some policies. “Ensuing loss” provisions are the Lazarus clauses in property insurance policies. I strongly suggest you read Water Loss Denied? Ensuing Loss Provisions May Provide Coverage and consider how the various Chinese drywall fact patterns may impact possible coverage. I also strongly suggest you determine what local building and safety codes apply, and then carefully read the Ordinance and Law coverage and endorsements of the policy at issue.
So, what is the answer? While I like to be certain rather than give wimpy answers, it depends on the policy, the law that applies, and the facts of the loss. Some Chinese drywall is not as bad as other Chinese drywall. The particular facts of each case and causation issues first determine what exclusions, limitations and exceptions may apply.
I suggest you ask these questions when making the analysis:
- What is the problem with the drywall?
- How will it be fixed and what non-drywall areas will be impacted?
- What problems from the drywall are causing damage to other areas of the structure and what are those damages to the non-drywall areas?
- What exclusions and ensuing loss provisions may apply?
- What laws or ordinances regulate the need to replace or affect the method of repair?
- What state law applies?
I do not want to give away too much of my analysis to the bright defense attorneys reading this post. However, for those who opine there is no coverage, we all know some attorneys who give opinions like that and then later blame judges when it turns out they were wrong.
One thing is certain–there are a lot of these cases and the insurance industry is not advertising for cliams to be turned in. There will be litigation on these issues.