Chinese Drywall: Background, Scope And Insurance Coverage Implications - Part 1

Originally published September 16, 2009

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INTRODUCTION This article is intended to provide a general overview of what has been termed the "Chinese drywall problem," and the insurance coverage issues that will likely emerge therefrom. The first section provides a general background of the Chinese drywall problem and includes an overview of the litigation which has arisen from the issue. The second section provides a discussion and analysis of the key insurance coverage issues which are likely to arise in connection with potential first party and third party Chinese drywall claims.

BACKGROUND In the years 2004 through 2006, the housing boom and the rebuilding efforts necessitated by Hurricanes Katrina, Rita, and Wilma, led to a shortage of construction materials. As a result of this shortage, U.S. builders and suppliers began to import significant amounts of Chinese-manufactured drywall ("Chinese drywall"), estimated by some sources to be enough to construct approximately 100,000 homes.

Starting around 2006, homeowners located in southwest Florida began to complain about the Chinese drywall that had been installed in their homes, asserting that the drywall was emitting a "rotten egg-like" odor and that gases released from the drywall were causing the corrosion of certain metals (specifically, copper, copper alloys and silver) located within their homes. Additionally, homeowners complained about health problems as a result of the "off-gassing."

The odor and corrosion are generally believed to be caused by the emission of gases from the drywall when certain environmental conditions are present. The specific mechanism and potential dangers related to the Chinese drywall, however, are still being investigated by governmental entities, among others.

The Making Of Drywall Drywall is a widely used construction material that is also commonly known as gypsum board, wallboard, plasterboard, sheetrock, and gyproc. A drywall panel is composed of a layer of hardened gypsum plaster sandwiched between two layers of paper liner. The gypsum used to make drywall can be created both naturally and synthetically.

Mined gypsum is the traditional raw material for drywall. The mineral gypsum is a common sedimentary rock found in abundant deposits throughout the world. Gypsum is a hydrated calcium sulfate, composed of two molecules of water (H2O) and one of calcium sulfate (CaSO4). The color of gypsum is transparent to white, although due to impurities, it can sometimes look gray, brown, or pink.

Synthetic gypsum is of the identical chemical structure as the mineral gypsum, and is produced as a byproduct of coal combustion power plants. In most coal combustion power plants, the burning of coal produces undesirable emissions of sulfur. Through the industrial process known as flue gas desulfurization (FGD), synthetic gypsum is created. FGD is a chemical process that utilizes various scrubber systems to remove sulfur oxides from the flue gas of power plants burning fossil fuels. The capture and removal of the sulfur gases is accomplished by combining the sulfur gases with a calcium containing sorbent, generally lime (CaO) or limestone (CaCO3). The chemical reaction between the calcium containing sorbents and the sulfur dioxide produces calcium sulfate, or gypsum.

When gypsum is crushed and heated to remove approximately seventy-five percent (75%) of its water content, it becomes a fine white powder, known as "Plaster of Paris." When water is added to this white powder, it results in a paste-like material or slurry. Certain additives are blended with the paste or slurry to form the core of the drywall. Fabrication of the drywall consists of placing this gypsum core material between two sheets of manufactured paper. The core is set, dried, and cut into appropriate sizes.

While gypsum in both its synthetic and natural form has the same basic chemical makeup, CaSO4 and 2H2O, the amount and types of trace materials and unreacted sorbents found in the source material can vary among power plants and among mines.

The Chinese Drywall Lawsuits Commencing in January of this year, numerous lawsuits, both individual and class action, have been filed involving the allegedly defective Chinese drywall. With the exception of a few actions initiated by homebuilders, all of the lawsuits have been brought by homeowners. The lawsuits have been filed primarily in Gulf Coast states, with the great majority in Florida and Louisiana.

Generally, the complaints allege that the problem with the Chinese drywall, which was composed of both naturally mined gypsum and synthetic gypsum manufactured from coal combustion byproducts, is that it contains excessive levels of sulfur. As a result of these excessive sulfur levels, when the drywall is subjected to certain environmental conditions, the product emits hydrogen sulfide gas and other sulfide gases. These gaseous emissions (a/k/a "offgases") allegedly create a noxious "rotten egg-like" odor reported in many homes, and cause damage and corrosion to home structural and mechanical systems such as air conditioner and refrigerator coils, copper tubing, faucets, metal surfaces, and electrical wiring. Additionally, the chemical compounds are alleged to cause various health problems in individuals including allergic reactions, coughing, respiratory problems, sinus problems, throat infection, eye irritation and nosebleeds. Thus far, the health problems appear to only be temporal issues.

The target defendants in the complaints are various manufacturers, suppliers, and builders. The complaints allege that the defendants' actions in manufacturing, exporting, importing, distributing, supplying, inspecting, selling, and installing the defective drywall, which was unreasonably dangerous and unsafe, has caused the aforementioned damage to the class plaintiffs' homes, other property, and has caused the health problems described above. The causes of action asserted against the defendants include negligence, strict liability, breach of express and implied warranties, breach of contract, fraudulent misrepresentation, fraudulent concealment, violation of unfair trade practices statutes, private nuisance, unjust enrichment, and equitable and injunctive relief.

The plaintiffs seek recovery for the costs of inspection, removal and replacement of the drywall, the repair and replacement of other damaged property or items in the homes, and any other materials contaminated or corroded by the drywall. The plaintiffs also seek recovery for the costs associated with moving while their homes are undergoing repairs, the renting of comparable housing during the repair period, loss of use and enjoyment of real property, and the loss in the value of the homes due to the stigma attached to having defective drywall in the home. Additionally, many of the class action complaints that allege health problems seek equitable relief in the form of environmental and medical monitoring for the class.

Manufacturers The target manufacturers in the lawsuits are Knauf Gips KG, a German building materials manufacturer, and its affiliates, Knauf Plasterboard (Tianjin) Co., Ltd., Knauf Plasterboard (Wuhu) Co., Ltd., and Knauf Plasterboard (Dongguan) Co., Ltd., which are Chinese companies that manufacture gypsum drywall, and Taishan Gypsum Co., Ltd. (f/k/a Shandong Taihe Dongxin Co., Ltd.), a Chinese manufacturer of gypsum drywall.

Distributors And Suppliers The complaints name a variety of suppliers that have distributed and sold the defective drywall, including Chinese exporter Rothchilt International Ltd., and the leading producer of gypsum wallboard in North America, Chicagobased USG Corporation, as well as USG Corporation subsidiary L&W Supply Corporation, d/b/a Seacoast Supply. Additional named suppliers include: Miami-based company, Banner Supply Company; Florida corporations, La Suprema Trading, Inc., La Suprema Enterprise, Inc., and Black Bear Gypsum Supply, Inc.; Louisiana company, Interior & Exterior Building Supply; Georgia corporation, Rightway Drywall, Inc.; and a member owned buying organization, Independent Builders Supply Association, Inc.

Builders The builders named in the complaints that allegedly used and installed the defective Chinese drywall in the construction of homes include large regional homebuilders, such as: Lennar Corporation, a Miami, Florida headquartered builder that builds homes in 17 states, and its affiliates Lennar Homes, LLC f/k/a Lennar Homes, Inc. and U.S. Home Corporation; Taylor Morrison, Inc. f/k/a Taylor Woodrow, Inc.; Tousa Homes, Inc., f/k/a Engle Homes, which operates throughout Florida, the Mid-Atlantic, Texas, and the West; and WCI Communities, Inc., a Delaware corporation. One complaint also names a smaller Florida homebuilder, South Kendall Construction Corporation.

On June 15, 2009, the Judicial Panel on Multidistrict Litigation (JPML) ordered ten federal actions involving liability for Chinese drywall consolidated in the U.S. District Court for the Eastern District of Louisiana under MDL No. 2047. It was also ordered that another 67 related actions pending in numerous federal districts, as well as any other related action be treated as potential tag-along actions. The consolidation allows one federal judge to manage, inter alia, pretrial procedures, discovery, and dispositive motions. Judge Eldon E. Fallon has been appointed to oversee coordination of pre-trial proceedings. Judge Fallon is best known for managing the federal Vioxx products liability litigation proceedings. Following all discovery and pretrial rulings, if issues remain to be tried, the cases will be remanded back to the courts where they were originally filed for trial.

Reported Chinese Drywall Testing In 2008, environmental consulting firm, Environ International Corp. ("Environ"), hired by a builder Lennar Corporation, conducted tests on some of the Florida...