Amid the rebuilding efforts after the 2004-2005 hurricaneseasons, and in the midst of a housing boom, domestic drywall wasin short supply. Imports from China filled the gap, and thatdecision has apparently created more problems than it solved.

Homeowners–particularly in Florida, Louisiana and Virginia–havebeen complaining about health problems, foul odors, damage tofurniture and electrical woes in homes built from 2004 to 2007. Theculprit seems to be Chinese drywall.

Over 550 million pounds of Chinese drywall importedbetween 2004 and 2007 was installed in up to 100,000 U.S. homes,according to a fact sheet from the National Association ofInsurance Commissioners.

The Consumer Product Safety Commission has recorded over 2,091reports of defective drywall in 32 states, the NAIC noted, with themost common complaint being the smell of rotten eggs.

Federal agencies have conducted studies and appealed forpatience as the science behind the problem is worked out. Resultsreleased in October showed homes with Chinese drywall had elevatedlevels of sulfur and formaldehyde, but not high enough to explainhome degradation and health woes. In November, a study foundhydrogen sulfide gas in affected homes.

For the insurance industry, the Chinese drywall liability debateis in its early stages, and it is not yet known how many claimswill come of it.

A situation in Florida involving the state's insurer of lastresort, Citizens Property Insurance Corp., caused a stir amidreports the carrier threatened to nonrenew a home because itcontained Chinese drywall.

John Kuczwanski, public information manager for Citizens, saidthe nonrenewal was not because the house had Chinese drywallspecifically, but rather the resulting degradation was thought tohave damaged the house to the point where it no longer met theinsurer's underwriting standards.

Upon further inspection, he noted, it was determined the damagehad not progressed to a significant degree to cause concern, andthe nonrenewal was rescinded.

Will insurers for homeowners and contractors have to coverclaims arising from Chinese drywall? Industry associations aresaying that will be determined on an individual policy-by-policybasis.

Some, such as Mike Barry, a representative for the InsuranceInformation Institute, told NU Chinese drywall claims fallunder pollution or builder's defect exclusions. Mr. Kuczwanski saidCitizens has inspected 24 claims related to Chinese drywall, andnone have resulted in payment.

But in testimony to the NAIC, Charles Miller, a principal of theInsurance Law Center in Berkeley, Calif., cited the FireCasualty & Surety (FC&S) bulletins–apublication affiliated with NU–to question whether thoseexclusions apply.

On the pollution exclusion in homeowners policies, for example,Mr. Miller said FC&S–a resource for insurers forinterpretation of both commercial and personal linescoverages–noted that many courts have found the exclusion onlyapplies to “traditional environmental damage,” which would notinclude the release of gasses inside a residence.

He said insurers have tried to use latent defect and inherentvice exclusions as well, but FC&S states thoseexclusions apply to “a loss due to any quality in the property thatcauses the property to damage or destroy itself that results fromsomething in the property itself.”

The drywall, he noted, is not destroying itself but rathercausing ensuing damage to its surroundings, which should becovered.

On construction defect exclusions, Mr. Miller again citedlanguage from the June 2009 FC&S, which states: “Anyensuing loss as a result of the faulty drywall would be covered–forexample, if the drywall caused corrosion damage to wires orpipes.”

For commercial insurers, liability is uncertain as well. LennarCorp., a home building company based in Miami, stated in a 10-Qfiling it will seek reimbursement for Chinese drywall-relatedlosses from, among other parties, its insurers.

The good news for insurers is that the Chinese drywall exposurewill not likely become the dreaded “next asbestos.”

David Golden, director of commercial lines for the PropertyCasualty Insurers Association of America, said Chinese drywall is a“limited universe” in that only a limited number of homes werebuilt with the material over the course of three years.

How liability shakes out will likely be a matter for the courtsto decide.