Chinese Drywall Crisis

During the housing boom from 2004 to 2009, approximately 309 million sq. ft of Chinese drywall was imported into the United States. Since then, more than 600 lawsuits have been filed alleging that the imported drywall contains sulfur compounds which when exposed to heat and moisture release sulfurous acids causing a noxious smell and the corrosion of metals. Most significantly the corrosion has been noted on copper components, such as wiring, refrigerator coils and the coils of air handling units. The lawsuits also allege a variety of health issues. Although the majority of the litigation is in the Southeast United States, reports indicate that Chinese drywall may have been used in construction across the United States.

Claims involving Chinese drywall typically are product defect claims. The claims allege that drywall was defectively manufactured as opposed to improperly installed. Initially, claims focused on the drywall manufacturers with homebuilders getting a pass. This trend has changed and suits against homebuilders have become common. Builders therefore must be prepared for the possibility of litigation and should take measures to reduce their exposure.

How successfully builders will be in quickly recovering repair costs, among other costs, from insurance carriers will depend in part on the law of the state in which the insurance policy is construed. Insurers in some jurisdictions are relying on their policies’ pollution exclusion in refusing to extend coverage for losses incurred as a result of Chinese drywall. The pollution exclusion, contained in most commercial general liability policies, typically provides that bodily injury or property damage caused by the discharge, dispersal, seepage, migration, release or escape” of a “pollutant” is not covered. The term “pollutant” is generally defined as “any solid, liquid, gaseous or thermal irritant or contaminate, including smoke, vapor, suit, fumes, acids, alkaloids, chemicals and wastes.”

The primary issue in obtaining coverage in face of such an exclusion is whether the alleged contaminate constitutes a “pollutant” as contemplated by the policy.

On June 15, 2009 a special panel on multi-district litigation issued an order consolidating all Chinese drywall lawsuits currently pending in the federal courts (more than 600) in the Eastern District of Louisiana, to be heard by Judge Eldon F. Fallon. Multi-district litigation is a federal court system procedure that allows the consolidation of cases that share common questions of fact. Such a consolidation authorizes one judge to oversee all pretrial discovery matters, hearings and motions and to get the cases ready for trial and ripe for settlement. If after all pretrial matters have been resolved, there remain issues to be tried, each case is then remanded to its home district where the trials are conducted independently.

Judge Fallon, with the help of plaintiff and defense steering committees, is selecting five (5) test cases to be tried by year end. This accelerated time table undoubtedly will encourage settlement, as the outcome of these five cases will in large measure define the results of all others.