Chinese Drywall Losses Could Be Significant

March 23, 3:45 p.m. EDT

Insurers' claims and litigation costs stemming from Chinese drywall problems are expected to be significant, property damage up to the $10 billion range by one estimate, a rating firm said.

But the costs will likely be managed within property & casualty insurers' earnings, the report from Moody's Investors Service states, because the drywall appears to have been imported over a limited timeframe, and incident reports have been geographically isolated, concentrated primarily in Florida and Louisiana.

Homeowners in 32 states-but mainly in Florida, Louisiana and Virginia-living in houses built using drywall imported into the country from China between 2004 and 2007 have lodged claims that the material created foul odors; corrosion of pipes, coils and wiring; damage to furniture, fixtures and jewelry; as well as health problems that include respiratory ailments, headaches, coughing and fatigue.

Insurer payments to date have been minimal, Moody's said in its report titled "Chinese Drywall Exposure Manageable for U.S. P&C Insurers," as personal insurers are mostly denying coverage based on standard pollution exclusions in homeowners policies.

But ultimate liabilities will be driven in part by precedents set in upcoming "bellwether" trials which will determine how courts interpret coverages and exclusions.

On the commercial side, insurers could face liability for property damage and potential claims under the products liability portion of commercial general liability policies, Moody's said.

The results of Consumer Product Safety Commission (CPSC) testing will also likely have an impact on bodily injury claims, depending on whether a conclusive link is established between Chinese drywall and health problems, Moody's explained.

With respect to construction defect liability, Moody's said most commercial insurers have modified their policies in order to address past construction defect claims, which may reduce exposure to Chinese drywall liability.

Moody's said Chinese drywall will not likely become another major liability for the industry like asbestos claims, but said the litigation process is expected to be long, with major legal expenses incurred by insurers as they defend their insureds.

For property damage, Moody's said costs related to loss of home use will be borne by the party found liable for property damage, while homeowners will probably bear the brunt of any loss of home value. Moody's cited one estimate of $8 billion to $10 billion, which appeared in a July 2009 National Underwriter article written by Towers Watson consultants.

Near-term events that could alter the Chinese drywall situation, Moody's said, include:

·The ruling on two court cases - Germano v. Taishan Gypsum Co. and Hernandez Family v. Knauf Gips - which involve manufacturers of Chinese drywall. "For insurers," said Moody's, "a speedy resolution to the trials and claims would be better than costly, drawn-out litigation."

·The results of CPSC testing, which could determine whether commercial insurers will be on the hook for bodily injury claims.

·Insurer responses, such as specific policy exclusions for Chinese drywall and not offering coverage to contractors in certain geographic areas.